How To Fight The Sad Consquence of Growth

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FT. LAUDERDALE, Fla. — There can be a downside to growth — all those loans and strained personnel resources can be just the recipe some employees need to steal.

Don Thompson, risk management consultant for Allied Solutions, told NAFCU's Growth Conference here that employee dishonesty accounts for 32% of all dollars lost by credit unions.

"There are consequences from growth," said Thompson. "With the increased numbers of employees comes the ability to improve controls. Many continue the 'we we have always done it this way' approach. But increased assets and services equal increased risk."

Every act of employee dishonesty follows the same pattern, said Thompson, who during his career has confronted numerous employees with evidence of theft: need, opportunity and rationalization.

Need can be anything from addiction to spending habits to lifetstyle changes. Opportunity can range from poor internal controls to lack of separation of duties to an inactive supervisory committee (most committees are really not that skilled at doing audits, Thompson observed) to inadequate background checks. Of the latter, he noted he had encountered one employee who had stolen nearly $800,000 from a credit union after having earlier done prison time for stealing from a bank.

When it comes to rationalization, there are some common lines of reasoning, said Thompson, including "I'm overworked and overpaid," "I will pay it back," and "I deserve it." During his career, said Thompson, he has seen only one employee who stole funds and paid it back prior to being discovered. So, how does a credit union go about discovering theft that is taking place. Thompson offered this advice:

How to Find it: Cash

Put in place frequent surprise cash counts that should be random and at least monthly for each cash supply, and count currency in straps. "The best and most effective way to do a cash count is completely random. The people who work for you are not stupid; if you do quarterly cash counts they know they have three months. Count the money in the straps."

Have exclusve control of teller cash supplies. "Key control cannot be sloppy."

With the vault, have exclusive control or STRICT dual control.

There should be dual control of spare keys to cash supplies/drawers.

How To Find It: Loans

1. Monitor new loan reports by loan officer.

2. Monitor delinquency/charge-of report by loan officer.

3. Compare the new loan report with the loan officer reports.

4. To have effective loan audit reports, make sure your reports include credit cards.

"More and more credit unions are doing the one-stop operation for your member," said Thompson. "They take the application and send the member out the door with the check. It's fast and efficient and I understand why you do it, but you're taking a big risk. You better make sure there are a lot of audits on those loans. Just having someone else sign the check doesn't work; they're busy and know each other and sign quickly. If you are doing quality control review for all files. That's an excellent tool but make sure you have ALL the loans. Give whomever is doing the quality control review a copy of the new loans-every single one of them."

How to Find it: Employee Account Abuses

1. Review employee and family accounts for kiting, overdrawn accounts, Journal voucher transfers, and loan activity, including interest rate, payments and compliance with policy.

2. Prohibit employees from performing transactions on their own family member accounts. Have employees disclose family member accounts annually. Monitor payment of 'on-us' checks at the teller line, and don't' forget they can still perform transactions through the ATM.

How it Happens: Expenses

1. Overpayment of salaries, or salary advances.

2. Fictitious employees

3. Payment of personal items. "You'd be amazed at how often this happens," said Thompson.

4. Double-payment of authorized expenses. "It's important that the people in accounting know that if something doesn't look right they can go to someone."

5. Payment of personal items on corporate credit card.

6. Alteration of legitimate invoices.

How to Find It: Expenses

1. Review corporate credit card statements. "Verify all expenses are supported by receipts," said Thompson, "and verify the receipts are for business purposes."

2. Review invoices: Are they for business purposes.

3. Make sure the company exists?

4. Look for signs of alteration.

"Clarify and identify who has approval authority," recommended Thompson. "Do not allow subordinates to approves expenses for supervisors. Set limits and require approval from the next level of authority for exceptions."

How to Fix Problems

"Before talking to the employee, be certain of your facts!," stressed Thompson. "Organize you're your documentation. Discuss the matter only with those that need to know. Include HR. Review the facts with your CPA or examiner. Make sure you know what you've got-if they don't mind stealing, they won't mind lying."

How To Interview A Suspect

When interviewing an employee, Thompson said it is important to make sure there are at least two people are present, but no more people than necessary.

"If you are a male interviewing a female, make sure there is another female in the room," advised Thompson. "Avoid accusations, present the documentation and ask for an explanation. Request the explanation in writing, and avoid threats of prosecution and prison."

Thompson reminded that once an act of employee dishonesty has been discovered, bond coverage for that individual terminates, so it's important the credit union move quickly.

"Your fraud policy must set the tone from management," said Thompson. "Make sure the employee signs it and it's updated annually, and that everyone knows there is zero tolerance."

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