Circumventing Internal Control Take a look at the press release. We dont know anything other than what is reported in the press release, so lets take the press release as an adequate representation. Required: 1. Why might the executives be reluctant to record a loan as impaired? Which is to say, what pressures might the executives have felt to keep the loans listed as performing loans? 2. Did the bank have a set of processes in place to trigger review of how loans are classified? If they did (and they did) how does an internal control get overridden or bypassed? 3. What sort of sanctions do the individuals face? 4. Did the bank support the individuals or did the bank cooperate with the prosecutors? Press Release SEC Announces Fraud Charges Against Three Former Regions Bank Executives in Accounting Scheme FOR IMMEDIATE RELEASE 2014-125 Washington D.C., June 25, 2014 The Securities and Exchange Commission today announced fraud charges against three former senior managers of Regions Bank for intentionally misclassifying loans that should have been recorded as impaired for accounting purposes. As a result, the banks publicly-traded holding company overstated its income and earnings per share in its financial reporting. The SEC also entered into a deferred prosecution agreement with Regions Financial Corp., which substantially cooperated with the agencys investigation and undertook extensive remedial actions. Regions will pay a total of $51 million to resolve parallel actions by the SEC, Federal Reserve Board, and Alabama Department of Banking. According to the SECs orders instituting administrative proceedings against the three former managers, Thomas A. Neely Jr. was the principal architect of the scheme while serving as head of Regions Banks risk analytics group in 2009. Along with the banks head of special assets Jeffrey C. Kuehr and chief credit officer Michael J. Willoughby, Neely took intentional steps to circumvent internal accounting controls and improperly classify $168 million in commercial loans as performing so Regions could avoid recording a higher allowance for loan and lease losses. Kuehr and Willoughby agreed to settle the SECs charges by paying penalties of $70,000 apiece and consenting to bars from serving as officers or directors of public companies. The SECs Division of Enforcement will continue to litigate its case against Neely. Our enforcement actions against three senior executives coupled with the deferred prosecution agreement with Regions demonstrate that we will aggressively pursue individual responsibility while rewarding extraordinary cooperation and remediation by companies, said Andrew J. Ceresney, director of the SECs Division of Enforcement. The bank helped us bring a case against culpable individuals while remediating the misconduct by restructuring its processes and putting new management in place, among other things. According to the SECs orders and the deferred prosecution agreement, Regions Bank tracked and recorded its non-performing loans (NPLs) for internal performance metrics and regular financial reporting. NPLs typically were placed on non-accrual status when it was determined that payment of all contractual principal and interest was 90 days past due or otherwise in doubt. Once a loan was placed in non-accrual status, uncollected interest accrued during that current year was reversed and Regions Banks interest income would be reduced. Non-accrual status also served as a trigger for Regions Bank to consider whether the specific loan was impaired and to determine an allowance for loan and lease losses in accordance with U.S. Generally Accepted Accounting Principles (GAAP). The SECs Division of Enforcement alleges that when personnel within Regions Banks special asset department initiated procedures to place approximately $168 million in NPLs into nonaccrual status during the first quarter of 2009, Neely arbitrarily and without supporting documentation required the loans to remain in accrual status. By failing to classify the impaired loans in accordance with its policies, Regions financial statements for the quarter ended March 31, 2009, were materially misstated and not in conformity with GAAP. In furtherance of the scheme, Neely and Willoughby knowingly provided understated NPL data for the quarter to the Regions CFO and other senior executives during a meeting in late March. The SECs order against Neely charges him with violations of the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws. Kuehr and Willoughby consented to the entry of a cease-and-desist order finding that they violated or caused violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 as well as the reporting, books and records, and internal controls provisions of the federal securities laws. Without admitting or denying the findings, Kuehr and Willoughby agreed to pay their respective $70,000 penalties plus be prohibited from serving as officers or directors of public companies for a period of five years. The deferred prosecution agreement with Regions relates to the banks failure to maintain adequate accounting controls at the time. The agreement credits the companys extensive remedial efforts, including the creation of a new problem asset division with entirely new management and significantly enhanced procedures. The agreement credits the substantial cooperation by Regions during the SECs investigation, and imposes a $26 million penalty that will be offset provided that the company pays a $46 million penalty assessed in the Federal Reserves action. Regions also will pay a $5 million penalty to the Alabama Department of Banking. The SECs investigation was conducted in its Atlanta Regional Office. The SEC appreciates the assistance of the Federal Reserve.