The Greater Providence Deposit & Trust could have evaded the fraud with the implementation of proper control procedures over the disbursement of loan funds and by improving upon the control procedures already in place. The control procedures that would allow the organization to minimize the risk of fraud include the following: • More than one person authorizing loans: There should be at least two different persons whose authorization is required for the disbursement of loan funds. In the case presented, Guisti’s sanction alone was needed for a loan to be given. This leads to greater chances of fraud and scams.
• Segregation of Duties: Different persons must be responsible for different duties related to loan disbursements. For instance, there should be a different person verifying the details of the loan applications, a different person authorizing the payments, another one signing the check and yet another person documenting the loan. This will reduce chances of fraud. • Ensuring identity of borrower: The identity and the creditworthiness of the borrower must be determined beforehand. Documents submitted must be original and certified. The creditworthiness of the borrower must be verified through an independent credit company.
This work must be undertaken by a specific department, and not by a single individual, as was the case with Guisti. • Documentation and Supervision: Bills, receipts and other documents supporting each loan disbursement must be present and suitably filed. Transactions related to loans must be supervised properly. Lack of supervision was one of the reasons for the fraud in Greater Providence Deposit & Trust. Improvement of supervision measures would have helped to avoid it. • Accountability: The various personnel involved in the process of disbursement of loans must be accountable to the management or the Board of Directors.
They must regularly report to them. It is observed that there was a dearth of accountability in Greater Providence and this led to the embezzlement of funds. • Periodical Internal Audit: A thorough and extensive internal audit must be conducted periodically to ensure that all accounts relating to loan disbursements are accurate, in compliance with the policies and there are no other discrepancies. 2. The Greater Providence Fund may adopt the following measures to improve its loan review procedures. • Competency of staff: Greater Providence must guarantee the competency and aptitude of the staff involved in the loan review process.
Adequate training must be provided to these staff members who will be solely responsible for loan reviews. No loans must be issued without their sanction. In the present case, Guisti, who was a branch manager, was allowed to sanction loans without such reviews. This practice ought to be prevented. • Independence from lending function: The function of loan review must not be connected to the function of lending. The personnel performing these two operations must be different. This was not the case with Greater Providence. • Proper Inquiry:
Adequate inquiries and investigations, regarding the eligibility and suitability of the applicant for the loan, are an essential step of the loan review procedure. Greater Providence ought to improve upon the process of such inquiries as these are found to be lacking. • Consent of the Loan Committee: Another imperative element that Greater Providence can incorporate in its loan review procedure is the approval of the loan by a special committee called the loan approval committee. The loan is approved after taking into consideration the qualification of the applicant for the loan. Only upon the committee’s consent should a loan be given.
• Appraisal of loan review procedure: Greater Providence must ensure that the loan review procedure is evaluated periodically to ensure that there are no inadequacies. Further the quantum of loans given out must be matched against the bank’s limit and it should be verified that the limit has not been exceeded. 3. The auditors of Greater Providence Deposit & Trust should have been able to detect the fraud. The audit procedures could and should have revealed discrepancies that would have alerted the auditors about some misappropriations that were present. For instance, it is stated that some loans had been rewritten five or six times.
This should have been detected by the auditors. The lending limit of the bank was $25000. Nonetheless Guisti was able to issue a loan for $63500. This too escaped the examinations of the auditor. It is seen that the bank’s auditors only examined loans for amounts that were larger than the ones in question. It is understandable if external auditors do not verify all loans. However, it would be a good practice for the organization to adopt the practice of inspection of all loans by the internal auditors. It is observed that more often than not, frauds are detected in case of loans of smaller amount than larger ones. 4.
The control environment in Greater Providence was definitely lacking as exposed by the various discrepancies seen in the case. Following are some instances that reveal this deficiency in the system. There was no verification of the social security number or phone number for one of the loans issued to a James Vanesse. These details and the identity of the person should have been validated before the loan was issued. Further, the cosigner on the checks was a subordinate of Guisti. This practice is also erroneous as both or all of the cosigners of a check should be placed at the same level of the organization, preferably at a higher post.
No credit note accompanied the loan applications submitted by Guisti. The review clerk failed to notice this and bring it to the notice of the concerned authorities. The discontinuation of the computer services arrangement with a local bank, in favor of an out of state bank resulted in compromising upon the efficiency of the bank’s control procedures. Such changes must be incorporated smoothly and Greater Providence failed to do so. No changes must be integrated into the operations of the organization without ensuring that such transformations will not affect the control process and environment.
The effectiveness of the control procedures must be maintained under all circumstances and Greater Providence did not value this fact. Moreover, frequent rotation of employees and review clerks took place in the corporation, which ought to be avoided. ? References Campion, A. (2000). Improving Internal Control: A Practical Guide for Microfinance Institutions. Washington, D. C. : Microfinance Network and GTZ. Churchill, C, and Dan, C. (2001). CARE Microfinance Risk Management Handbook. Washington, D. C. : CARE and Pact Publications, Inc.