Credit Union Exam Solutions Presents With Flying Colors

NCUA needs to show up.

Them not showing up
provides the opportunity.

When there is that opportunity,
there will be more fraud.

When there is more fraud,
there will be more failures

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Hey everyone, this is Mark Trico
flying solo today on a short podcast

on fraud, the Fraud Triangle, and
how I believe that will mean NCUA.

We'll always have some onsite
exams and never be fully virtual.

At least that's what I would do if I
was still there and let me explain why.

So what triggered this is a board meeting
last week, which was the quarterly

share insurance update and chairman Todd
Harper talked about the fact that travel

was going to go up and talked about.

Uh, some of the failures in credit
unions over the last several

quarters, and that there was fraud
involved in those institutions.

So, and he made the point that
while the budget's coming up, he

believes that NCUA needs the extra.

Travel costs because they need to have a
presence on credit unions, particularly

small credit unions, where the ability
to segregate duties is, is less because

they're just not the staff to do it.

So there's an article and see you
collaborate David Bowman, quoting some

things that chairman Harper said, but
here's the article saying that examiners

have discovered problems at credit
unions as they return to on site exams.

NCUA Chairman Todd Harper warned
Thursday that the agency's travel

budget must increase to accommodate
the need for in person visits.

As examiners return on site, they
have found an increase in record

keeping deficiencies, problems with
internal controls, and instances

of fraud, Harper said at the
agency's board monthly meeting.

The NSUA staff has proposed an
operating budget of 350 million

next year, which represents a 9.

6 percent increase over
this year's budget.

The proposal includes a travel budget
of 23 million, a 5 million boost.

As an aside, I did a previous Podcast
on their budget, my take on that 9.

6 percent is it's essentially at
or below inflation and and so we

had essentially a flat budget,
at least for 1 or maybe 2 years.

So that I think there's
some pent up demand there.

I don't think they can
get it much load or lower.

And I doubt when they approve
it, that it will be much lower.

So see, you collaborate goes on to say
responses from credit union groups.

Are that credit union trade groups have
criticized the agency's budget, among

other issues, they contend that the
offsite exams that were conducted during

the pandemic demonstrate that examiners
can do an effective job remotely.

However, Harper said that during
the 1st, 3 quarters of this year,

4 credit unions failed, causing
about 7 million dollars in losses.

He noted that fraud was a contributing
factor in all of the cases.

Saying, even though we learned during
the pandemic that many more of our

examination procedures can be completed
offsite, it is important that examiners

go into credit unions to examine
documents, ask questions, interact with

staff, and review internal controls.

I 100 percent agree with Chairman Harper,
and I'll go into that a little bit.

The article goes on to say, so as the
insulate board considers the 2023 2024

budget, we must ensure that our efforts
to be penny wise and examinations

don't ultimately result in being pound
foolish when it comes to the strength

and stability of the share insurance
fund while not commenting on the

budget and to a board member Randy
Rodney Hood agreed that it is important

for examiners to return on site.

The NCUA has not approved
a 2023 budget yet.

It may be considered at the
board's December meeting.

So that's the end of the
article citations I will have.

So it will be decided
at the December meeting.

They have to have one while they,
when I was at NCUA, we started doing

a two year budget so that if the board
couldn't vote and didn't vote, that we

would have at least something to operate
on to start the following January.

And that was particularly important
when we only had a two member board.

Because you could have a tie and that
could have gotten pretty precarious.

So while there is a budget that they
could use, it's not enough money since

they're asking for 10 percent more,
that would not be a good position for

staff to be in going into the year.

So come hell or high water, they will
approve a budget by the end of December.

All right.

So again, I re I agree
with chairman Harper.

There's a value.

What happens when you are
driving along and you.

You have an app you use to drive,
I use Waze, you get a notification

that there's a police reported ahead.

What do you do?

Well, I slow down and then you see
the police car and you might slow

down at least for a little while.

That's what happens when NCOA shows up.

There are psychological studies
that show that there's a value to

regulators showing up, to police having
a presence, that it reminds people.

To do good and to follow the rules
reminds them that the rules exist,

which gets me to another thing I
wanted to make reference to, and

I referenced in some podcasts.

NCUA does educate some of its staff
to become certified fraud auditors.

Certified fraud auditors, when you talk to
them, they talk about the fraud triangle.

Now, what is the fraud triangle?

The fraud triangle is a concept that
explains the reasons behind committing

fraud by workers at a workplace.

And consists of three elements that
are responsible for the fraud pressure,

rationalization, and opportunity.

According to this concept, fraud
occurs when conditions for fraud are

favorable to the fraud committer,
and it is not a random occurrence.

So the three elements.

Pressure.

The pressure is the motivation
behind fraud committing, and that

can be either personal financial
pressure or pressure from superiors.

Both the pressures give the
motivation for committing fraud.

If the pressure remains unsolved
by rational and legal means, then

individuals might go for irrational ways.

Some common examples of personal
financial pressure are non shareable

financial problems, Pressure to pay
loans and lifestyle maintenance.

And some examples of pressure from
superiors are window dressing of accounts,

teaming and lading inventory, pilferage
and selling, sharing secret information

with competitors to earn money, et cetera.

When a person cannot see the
apparent path of achieving personal.

Or work goals by honest means they
may adopt dishonest alternatives.

I can tell you, I recently chatted
with a client who had a staff member

leave, who had been hiding things from
them so that they appeared to be in

compliance with goals and appeared
to be in compliance with policy.

Number two, opportunity.

When pressure is present, the employee
looks for an opportunity to commit fraud.

For example, if there is no internal
control over the inventory room,

then the employee finds the chance to
pilferage it and sell it in the market.

There are some cases out there
where that happened that were

reported in all the trades, you
know, 4 years back, but it happens.

It can be done by abusing the position,
for example, pressure by superior to

subordinate to show accounts by, again,
window dressing what the reality is.

Number 3 is rationalization.

It is the last stage.

In the fraud triangle, this stage requires
fraudsters to justify fraud acceptably.

Most fraud committers do not
see themselves as criminals.

Instead, they explain the
situation of committing fraud.

Similarly, fraud by management gives
reasons for performance and pressure

from shareholders for dividends to all.

So that doesn't apply.

But because credit unions, shareholders
are their members, so that last sentence

is a little incongruent with credit
unions, but rationalization, you

know, I was passed over for a raise.

I should have got that promotion.

I'm not paid enough to compared
to, you know, the 4 other people

who've been here longer than me.

The rationalization allows them to
believe that what they're doing has has

good intent, but in reality, it doesn't.

So, you know, this article goes on
to talk about how you can mitigate

it with strong internal controls,
favorable employee policies,

strong fraud, deterrent policies.

And ethical training auditing,
which is an important element.

The fraud triangle has
three elements, pressure,

opportunity, and rationalization.

And the most crucial
factor is an opportunity.

It is so because the opportunities
available for committing

the fraud, motivate the
fraudster to commit the fraud.

So let me repeat that.

The opportunities available for
committing the fraud motivate the

fraudsters to commit the fraud.

So here's the deal.

NCUA needs to show up.

Them not showing up
provides the opportunity.

When there is that opportunity,
there will be more fraud.

When there is more fraud,
there will be more failures.

And the industry will expect
NCUA to have dealt with those.

But if they're not on side and can't
do some procedures, Particularly in

the smaller credit unions, uh, to
mitigate the potential for fraud.

Not that NCOA does fraud audits
and that they're going to, that

they're going to catch all fraud.

But again, the actual presence mitigates
the opportunity and then the steps

that are taken can catch it sooner.

Then later, heaven forbid, we, you
know, you're finding a situation

where there's one of the large
frauds that happen in credit unions.

How can the Fraud Triangle help
to identify fraud and avoid it?

The motivation for fraud can vary
from financial to non financial.

To prevent fraud, companies must
implement strong internal controls.

As an organization with strong
internal control, experience lower

frauds and quickly identify frauds.

Strong fraud deterrence policies also
help prevent fraud as employees fear

its consequences like losing their
jobs and not getting a job anywhere.

In audits, management audit and
operational audits are motivated so

that management fraud can be detected.

So there we go.

NCOA doesn't do an audit, they do
an exam, but that is part of how.

The opportunities can be limited
in the case of the statutory audit.

There's a clause where the auditor has
to report whether fraud is committed by

employees, management or a third party.

So if you are a credit union that has a
CPA opinion on it, you are probably asked

several questions as it relates to that.

Are you aware of any fraud?

I was asked those questions
as the executive director when

we had our opinion audits.

Another way to mitigate fraud.

Potential of fraud.

The article also says the fraud triangle
comprises these components, pressure,

opportunity and rationalization.

It helps in preventing the fraud.

If there are zero tolerance, surprise
visits and audits and a code of ethics.

So let's focus on surprise
visits and audits.

It says top management must have a
system of surprise checks and visits and

auditors should also do surprise audits
to ensure that no frauds are committed.

By or on the company.

All right.

So NCWA has mostly gotten
away from surprise visits.

They will do surprise visits on occasion.

Back right before I started, they
actually, when, when the exam started,

they would walk in, they would put
red tape on all the loan files.

They would count cash.

And it was more of an audit
and it was more of a surprise.

If you can't do surprise.

audits, you should do audits where you are
present in the building and, uh, taking

some steps that can only be done on site.

So these notes came from a
website called the wallstreetmojo.

com.

When I Googled fraud triangle, that
one caught my eye because it did

a really good job of summarizing.

So I want to give them credit for that.

So again, in summary, in my
opinion, we'll never do fully.

Virtual exams.

They always need to make
some onsite presence.

There are no absolutes where you can say,
Hey, stay away, never come back on site.

And I think it would be unwise
for NCUA to take that position.

And I believe the NCUA board will
continue to operate in that fashion.

All that being said, there should be less
of a footprint moving forward because

the COVID pandemic taught the world and
taught NCUA that more can be done offsite.

That's it.

Mark Treichel signing
off with Flying Colors.

Okay.

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