11.06 Cashing In With Company Credit Cards

CASHING IN WITH COMPANY CREDIT CARDS

The Standard-Times (San Angelo, Texas) reports that a former water district manager has pleaded guilty to a federal charge of theft for charging nearly US $63,000 worth of personal purchases to his public utility credit cards for about five years. A new auditor for the water district, after requesting credit card records from the former manager, uncovered the misuse of the district’s credit card. The auditor’s work ultimately led the fraudster to confess.

Although the former manager has sent a restitution check for the full amount to the district, he awaits sentencing from a federal judge overseeing the case. The man could be facing 10 years in prison and a US $250,000 fine.

Lessons Learned

Two fundamental ingredients can contribute to this type of massive fraud in U.S. financial institutions: fraudsters who take advantage of their position within the financial institutions and key systemic deficiencies in the design, oversight, and controls over these mortgage incentive programs.

In this case, a 2005 internal audit revealed that 83 percent of loans approved by now-defunct Washington Mutual’s Montebello, Calif., office were fraudulent. While it may seem shocking that audit results were neither detected earlier nor addressed promptly enough to prevent the bank’s collapse, auditors can learn several lessons from this case to help reduce the risk of these types of fraud.

A fraud risk assessment, conducted by audit staff, can bring forward issues that — if addressed — may prevent this type of mortgage fraud, including:

Clear differentiation between the bank’s role of promoting versus reviewing and approving subprime mortgages.
More rigorous application of the criteria for approving loans.
Regular, independent reviews and audits of the loan approval process.
Stronger performance incentives that emphasize executive bonuses based on the validity and viability of the approved loans rather than the number of approved loans.

Although intentions around the various subprime mortgage programs were valid, banking, financial, investment, and government oversight/regulatory bodies, as well as investors, involved with subprime lending programs might have fared better by asking for and listening to the advice of their auditors regarding the soundness of the controls and risk mitigations in place.

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