Have a question? During all my previous money order audits, I determined that several debits are clearing before the corresponding credits have been entered on the books. Needless to say I'm still seeing this again, this time several of the debits were issued in Jan. and the credits are still outstanding. The majority of these transactions are for loan proceeds. I've had this as a finding in all my audit reports, and it continues to happen. Does anyone have any suggestions, on resolving this issue.

Who is responsible for seeing that these credits (especially the loan ones) are entered on the books. I know that we run our credits through the same day they are issued, and it is not unusual for the debit to show up in the same day. I guess my question is who issues the MO's that are so frequently missing, is it different people or the same one all the time.

My first question would be is why do you use money orders for loan proceeds? I've never heard of this - doesn't mean it can't happen, but wouldn't an official check be better?

Also, if debits are clearing months before credits then that is a major problem...maybe once in a while if someone forgets to process a credit, but if you have credits from January that have not cleared and the debits already have - BIG RED FLAG!

Sorry, I didn't make it clear. These are actually official checks, which we refer to as bank money orders. I agree way too much time for any credit to remain outstanding, and it is raising red flags.

You may just uncover some fraud. I would review the money orders to see who they are made payable to. How big of an impact is the amount? We had some fraud on the cashier check side once with this type of scenario.

I agree with MM, is there someone reviewing the reports to make sure items are processed timely? Do they have follow up procedures?

It might be time to take this to the President or Board once you have all of your ducks in a row.

The loan assistants issue the money orders for loan proceeds. Loan adm dept. run the credits when the loans are put on the books, however this can't be done until they have been given the loan files from the loan officer. Our loan policy states, "loans should be processed on the same day as the proceeds are disbursed or no later than the following day." Having this many credits outstanding is a direct violation of the loan policy. As auditor all I can do is report, management is responsible for compliance with policy, and loan officer accountability.

I have traced the loan proceeds to the customer checking account, so I really don't feel any fraud is involved. I'm thinking it's just a case of this loan file getting put on the back burner( or under a stack of papers)for some reason, just loan officer neglect, plain & simple. Another twist, this loan actually matured before it was even put on the books! Yikes.

Shouldn't the reconciliation department be catching this and reporting to management??? I mean a five month old reconciling item would seem stale to me...

msboo, AuditGuy is correct. This should have been caught in reconcilement. How often are your official checks reconciled?

I have to agree with AuditGuy, ours are reviewed by several different people at various times, so this should have been caught or a red flag raised before now. It seems that there may need to be some tighter procedures in place to keep what is happening to continue. I mean we all make mistakes from time to time, but this seems like either lack of controls and/or procedures or a sign of a problem.

auditguy & ziggy......official checks are reconciled monthly, and the reconciliations are reviewed by a supervisor. So you're right this should have been reported to management long ago.

I also want to add that I think you, as internal audit, did your job and found a control weakness and now you just must move in the right direction with your findings to make sure it stops from happening - both on the lending side and "reconciling department" side.

Thanks for all the input. Will see what takes place after my audit report goes to AC.

I would definietly report this as a SIGNIFICANT REPEAT FINDING. This is just exactly what tipped me and co-worker that a MAJOR fraud by CEO was going on. Do not hesitate, get the attention of your board!

Would that "loan proceeds" be the DEBIT portion that is clearing before the credit's that you say have been outstanding too long? Where have the credits been sitting all that time? Just a thought, I'm not in the GL Department, just confused about where the credits have been.

Yep, those are the loan proceeds debits. I haven't been told where the credits have been all this time, just assuming they are with the loan file that hasn't been processed.

If the credits are sitting somewhere in a loan file on someone's desk does this also mean the that the loan is not set up on the books as well? This could be a big problem.

I agree, and it is being reported.

It's a sloppy procedure, but it's rarely a problem. Whoever reviews (balances) official check postings daily should have immediately reported the exception, in case the debits were forgeries/counterfeits.

We used to have this problem. We had a negative balance in our Official Loan Checks account. I brought it up at the loan committee meeting. It was just sloppy bookeeping; the loan officers would give the customer their loan check, which they would immediately cash, but the officers kept the files on their desk and not run the loans on the books for several days, then do a bunch at once. So, the next loan meeting, I brought it up again, with names of officers and loan amounts. All were embarassed and cleaned up their procedures, save one. I brought it up again at the next meeting and offered my opinion that he could make the loans, but he could not give the customer the check, a loan secretary would have to be called in for that. Otherwise, we were in violation of inaccurate and misleading accounting and ficticious statements.

A little humiliating for the loan officer, but we defused a situation before fraud occured.

FWIW, the FDIC has a "Risk Management Manual of Examination Policies", and considers that to be a red flag for insider fraud:

"16. Insider “forgets” to process credit entry for official bank checks causing the account to be out-of-balance because checks are sometimes paid (debited) before the credit is posted, sometimes several days later."

If the amount is ever material, you could be under-reporting loans if this is an outstanding issue over a reporting period.