This paper examines the accounting information system failures that enabled embezzlement at Greater Providence Deposit and Trust, focusing on weaknesses in loan disbursement controls, auditor oversight, and division of labor. The paper identifies the critical design flaw of allowing auditors to hold loan origination authority and proposes several corrective strategies: rotating loan clerks and auditors, implementing spot-check and random-sampling audits, verifying loan transactions directly with customers, and incentivizing auditors to detect fraud. The paper also addresses the institution's disconnect from Section 404 of the Sarbanes-Oxley Act of 2002, arguing that robust SOX compliance and internal control redesign are essential to restoring institutional integrity.
This study guide is drawn from PaperDue's library of 130,000+ paper examples across 47 subjects.
Greater Providence Deposit and Trust needed more effective control and audit procedures over the disbursement of loan funds, with greater oversight and validation to ensure that approved customers received loan amounts by check rather than by cash. A fundamental flaw in the processes Providence relied upon was allowing a person with audit control over the financial statements to also hold loan origination and decision-making authority for amounts up to $25,000. A fundamental design criterion for ensuring that audit employees do not gain access to loans and embezzle funds is to both rotate auditors throughout an organization and never allow anyone with audit clearances to also hold loan approval authority (Van Wijk & Holmes, 2007). Clearly, Providence Deposit and Trust violated this fundamental rule of sound risk management.
Creating an effective division of labor across auditing, accounting, and loan management can avert millions of dollars in embezzlement over time. Ensuring that auditing procedures track transactions by originator and require identification before disbursements are made is an essential component of this approach (Wells, 1998). When these functions overlap within a single employee's responsibilities, the risk of undetected fraud increases substantially.
Another strategy on which Greater Providence Deposit and Trust could concentrate to reduce fraud risk is rotating loan clerks and the auditors assigned to each type of loan over time. The continual rotation of loan clerks and auditors will eventually disrupt patterns of fraud and embezzlement, making them easier to discover and prosecute (Wells, 1998). Spot-check-based auditing of loans and the use of random sampling of transactions throughout any given loan clerk's tenure is also an excellent practice.
Going as far as calling customers directly to verify whether their loan transactions met expectations would not only provide insights into customer satisfaction, but would also confirm that loans were being originated by real customers. Another area in which the bank could significantly improve its loan review procedure would be to audit the deposit of each loan disbursement down to the individual account number of each patron. The bank could even implement an innovative marketing and customer service strategy — such as offering free lifetime checking if loaned funds are kept at the bank — which would immediately flag loans flowing outside the institution and provide greater insight into how customers were using funds over time.
Sound internal control frameworks consistently recommend layering multiple verification mechanisms, precisely because no single control is sufficient to prevent all forms of disbursement fraud.
"Reward-based approach to motivating auditors"
"SOX Section 404 gaps and remediation options"
Always verify citation format against your institution’s current style guide requirements.