Financial institution fraud is a growing threat in today’s complex financial landscape. As transactions become more sophisticated, so do fraudsters’ methods. There is no single reason behind the occurrence of fraud. During my forty-year career, I have often found that fraud is committed due to weaknesses in a company’s operations. I have also seen that fraudulent activities usually begin small and continue to grow as the weaknesses that allowed them to start are confirmed. In other words, the fraud activity is not detected in a timely manner.
Strong internal controls are needed to complement an institution’s internal controls and financial information systems. These functions must be sufficiently detailed to help detect actual or potential conflicts of interest and other abuses. A sound internal control system is designed to minimize the possibility of significant irregularities or errors. In addition, they are designed to ensure the timely detection of irregular transactions. However, it is important to note that no system is 100% foolproof.
I have a favorite saying I use in my seminars when teaching a class on accounting and recordkeeping, internal controls, and auditing. I firmly believe that “good decisions begin with good information.”
I always tell my students that complete and accurate records are essential for evaluating an institution’s financial standing and health. This process involves obtaining satisfactory explanations of all material variances and other unusual entries. I tell my students they need to exercise a large degree of professional skepticism – trust but verify.
Vigilance is essential for identifying, investigating, and mitigating fraud. This is where financial institution fraud analysis comes into the picture.
Why is Fraud Committed?
In looking at fraud, it is necessary to consider numerous factors. As I have already noted, there is no single factor or reason for committing fraud; however, the Fraud Triangle is a model that tells us fraud usually results from a combination of three factors. These are:
- Motivation – Motivation is generally based on either greed or need;
- Opportunity – occurs where there are weak internal controls or poor security systems in place; and
- Rationalization generally occurs when the victim feels they deserve it, or the instigator feels justified because they were mistreated or the transaction was harmless. The victim is too large to feel the financial impact.
What Is Financial Institution Fraud?
Financial institution fraud is the intentional misrepresentation of material facts to secure an unfair advantage or unlawful gain at the expense of another. During my career, I have often observed that insiders often pose a greater threat than external criminals. The insiders’ transactions involve much larger sums than those lost in thefts or robberies.
For example, I just finished working in a bank receivership where the CEO manipulated the books and records and committed numerous lending frauds. The main culprit involved the fact there was no segregation of duties. He was in charge of approving the loans, booking the loans, and funding the loans. His actions were egregious and directly contributed to the financial institution’s demise.
Fraud analysis is a critical component of risk management for any financial institution. Our deep knowledge across multiple industries allows us to assist clients in avoiding expensive legal disputes and unsettling investigations. By identifying vulnerabilities within their financial systems, institutions can proactively address potential threats before they escalate.
Focus Areas in Financial Fraud
The Opportunity Group’s financial fraud investigation practice focuses on several key areas, including accounting, recordkeeping, and administrative controls.
Administrative Controls
- Administrative controls include determining the segregation of duties among departments and employees, deciding which departments are authorized to conduct particular activities, developing independent verification systems, and providing a system of checks and balances.
- Administrative controls also refer to an institution’s compliance with its internal policies and operating procedures.
Accounting Controls
- Accounting departments set different types of internal controls. These controls include policies and procedures that protect a company’s finances and financial records. Other controls determined by the accounting department provide financial review and appraisal through auditing and evaluating the company’s finances. Documents used for keeping financial records, including source documents for all invoices and expenses, are another control the accounting department determines.
Circumvention of Policies and Procedures
Fraud often occurs when individuals find ways to circumvent established policies and procedures. Our forensic analysts are skilled at identifying these breaches, ensuring institutions maintain robust internal controls and adhere to regulatory requirements.
Ensuring Regulatory Compliance
Financial institutions are subject to stringent regulatory enforcement actions. We help clients assess their adherence to these regulations. An adequate compliance system helps reduce the risk of running afoul of regulatory requirements, including regulatory enforcement documents and monetary penalties.
The End Note
Financial fraud is a pervasive issue that requires a proactive and thorough approach to investigation and analysis. The Opportunity Group’s expertise in financial institution fraud analysis provides clients with the tools they need to protect their assets, maintain compliance, and navigate the complexities of the financial industry.
The Opportunity Group continues to lead the charge in combating financial fraud through honesty, integrity, and a commitment to tangible results. Our team includes Certified Fraud Examiners, Certified Public Accountants, Former Certified Banking Regulatory Examiners, Regulatory Enforcement Attorneys, Experienced Expert Witnesses, and Forensic Analysts.
This diverse team of professionals brings a wealth of experience, ensuring comprehensive analysis and effective solutions customized to each client’s unique needs.
Prepared by Terry L. Stroud – January 2025
