1. Using Kimmel et al.’s (2011) principles of control activities (described in Figure 6), identify the internal control weaknesses that contributed to the BOC fraud incident.
BOC has no independent internal verification. Bank managers had insider authority to make loans and transfer funds without controls. The former general manager at BOC Kaiping branch made loans and transferred fund to Ever Joint to pull in profits for himself. There is no second person to verify and supervise the manager’s authority. No permission to remit funds abroad was granted by a BOC senior branch manager. (source: case) The window companies have no separation of duties. Xu and his gang helped create two window companies as vehicles to invest BOC Kaiping funds. One company is Ever Joint. Hui’s wife were both directors and mangers of EJ and was the signatory of its bank account. (source: case)
2. As you reflect on the fraud triangle, what economic, organizational, institutional, or cultural factors of the fraud triangle helped foster the described fraud incident?
Rationalization: weak ethical values. Guanxi cultivates corruption. Family orientation leads to fraud. case Opportunity: Inadequate internal control and supervision over managers activities. case Incentives: personal gains of real properties and stocks case
3. Review Figure 5 and do additional research on COSO’s Internal Control—Integrated Framework. Focusing on ‘‘Effectiveness and Efficiency of Operations,’’ discuss how a bank manager would design an internal controls system to mitigate the risk of lending to nonperforming borrowers.
Control activities: Have independent personnel to limit and supervise managers’ authority, such as loan approval committees to assess lenders’ merit based on credit and business purposes. Case Control environment: integrity of top management is the most important control environment issue. Managers must demonstrate to their employees that they...
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