Marks will be awarded for:
1. Understanding and discussion of the topic (30 marks).
You are expected to answer each of the questions contained in the assignment. You’re answer should fully address the requirements of each question and be in your own words.
Simply restating the contents of the text book, study guide or PowerPoint slides does not show individual understanding of the topic.
Your answers should contain enough discussion on the question so as to clearly demonstrate your understanding of the topic area and provide sufficient detail which answers the questions to a satisfactory level.
There are no minimum word limits placed on assignment questions, however it is expected that most questions will require between a half page and full page of readable, logical and verifiable information.
2. The extent and depth of research undertaken (-2 marks)
Your answers should show wide reading related to the topic question being answered. This would extend beyond the textbook to other texts, newspaper and magazines. Specific resources from the Internet could also be used. Your assignment should also include a Reference List / Bibliography identifying the extent of the research undertaken. Failure to demonstrate extended research or provide a Reference list can result in the loss of up to 2 marks.
3. Presentation: overall look, format (including page breaks between questions), written content and the inclusion of title page stating your name, student ID, Assessment identification, and due date. (-3 marks)
Your assignment should have a professional presentation with appropriate use of headings and sections and appropriate use of spelling, grammar and referencing. Marks may be deducted for excessive incorrect grammar and spelling. Failing to include a Cover Sheet will result in lost marks.
Assessment Two – 30 marks
Tony Moss, president of Greater Queensland Bank, received an anonymous note in his mail stating that a bank employee was making bogus loans. Moss asked the bank’s internal auditors to investigate the transactions detailed in the note. The investigation led to James Guy, manager of a North Queensland branch office and a trusted 14-year employee who had once worked as one of the bank’s internal auditors. Guy was charged with embezzling $1.83 million from the bank using 67 phony loans taken out over a three-year period.
Court documents revealed that the bogus loans were 90-day notes requiring no collateral and ranging in amount from $10,000 to $63,500. Guy originated the loans; when each one matured, he would take out a new loan, or rewrite the old one, to pay the principal and interest due. Some loans had been rewritten five or six times.
The 67 loans were taken out by Guy in five names, including his wife’s maiden name, his father’s name, and the names of two friends. These people denied receiving stolen funds or knowing anything about the embezzlement. The fifth name was James Vane, who police said did not exist. The Social Security number on Vane’s loan application was issued to a female, and the phone number belonged to a North Queensland auto dealer.
Lucy Fraser, a customer service representative who consigned the cheques, said Guy was her supervisor and she thought nothing was wrong with the cheques, though she did not know any of the people. Marcia Price, head teller, told police she cashed cheques for Guy made out to four of the five persons. Asked whether she gave the money to Guy when he gave her cheques to cash, she answered, “Not all of the time,” though she could not recall ever having given the money directly to any of the four, whom she did not know.
Guy was authorized to make consumer loans up to a certain dollar limit without loan committee approvals, which is a standard industry practice. Guy’s original lending limit was $10,000, the amount of his first fraudulent loan. The dollar limit was later increased to $15,000 and then increased again to $25,000. Some of the loans, including the one for $63,500, far exceeded his lending limit. In addition, all loan applications should have been accompanied by the applicant’s credit history report, purchased from an independent credit rating firm. The loan taken out in the fictitious name would not have had a credit report and should have been flagged by a loan review clerk at the bank’s headquarters.
News reports raised questions about why the fraud was not detected earlier. State regulators and the bank’s internal auditors failed to detect the fraud. Several reasons were given for the failure to find the fraud earlier. First, in checking for bad loans, bank auditors do not examine all loans and generally focus on loans much larger than the ones in question. Second, Greater Queensland had recently dropped its computer services arrangement with a local bank in favour of an out-of-state bank. This changeover may have reduced the effectiveness of the bank’s control procedures. Third, the bank’s loan review clerks were rotated frequently, making follow-up on questionable loans more difficult.
Guy was a frequent gambler and used the embezzled money to pay gambling debts. The bank’s losses totalled $624,000, which was less than the $1.83 million in bogus loans, because Guy used a portion of the borrowed money to repay loans as they came due.
The bank experienced other adverse publicity prior to the fraud’s discovery. First, the bank was fined $50,000 after pleading guilty to failure to report cash transactions exceeding $10,000, which is a felony. Second, bank owners took the bank private after a lengthy public battle with the State Attorney General, who alleged that the bank inflated its assets and overestimated its capital surplus to make its balance sheet look stronger. The bank denied this charge.
1. How did Guy commit the fraud, conceal it, and convert the fraudulent actions to personal gain?
2. Good internal controls require that the custody, recording, and authorization functions be separated. Explain which of those functions Guy had and how the failure to segregate them facilitated the fraud.
3. Identify the preventive, detective, and corrective controls at the Greater Queensland Bank and discuss whether they were effective or not.
4. Explain the pressures, opportunities, and rationalizations that were present in the Guy fraud.
5. Discuss how Greater Queensland Bank might improve its control procedures over the disbursement of loan funds to minimize the risk of this type of fraud. In what way does this case indicate a lack of proper segregation of duties?
6. Discuss how Greater Queensland might improve its loan review procedures at bank headquarters to minimize its fraud risk. Was it a good idea to rotate the assignments of loan review clerks? Why or why not?
7. Discuss whether Greater Queensland’s auditors should have been able to detect this fraud.
8. Are there any indications that the internal environment at Greater Queensland may have been deficient? If so, how could it have contributed to this embezzlement?