Requirements:

Use the Lakeshore Bank case to design a spreadsheet risk monitoring model. Your model should have the components included in the template we have been using in class. These components are also listed on pages 174 and 255 of the Cendrowski and Mair text with further explanations. You should model at least three problems. For each problem:

Model at least three inherent risk factors, five control environment factors, 5 prevention controls, 6 detection controls, and 4 correction controls.

Make your inherent risk and control environment factors non-deterministic, that is, make them probabilistic so that they will drive a Monte Carlo simulation. Use @RISK to implement the simulation.

For at least one problem, determine what the success (incident reduction) needs to be and perform a success probability and success tolerance analysis of that problem. Comment on the results.

Comment on the overall spreadsheet design, its usefulness and limitations. Does it represent a control system or the evaluation of a system of controls?

Requirements: Use the Lakeshore Bank case to design a spreadsheet risk monitoring model. Your model should have the components included in the template we have been using in class. These components are also listed on pages 174 and 255 of the Cendrowski and Mair text with further explanations. You should model at least three problems. For each problem: 1. Model at least three inherent risk factors, five control environment factors, 5 prevention controls, 6 detection controls, and 4 correction controls. 2. Make your inherent risk and control environment factors non-deterministic, that is, make them probabilistic so that they will drive a Monte Carlo simulation. Use @RISK to implement the simulation. 3. For at least one problem, determine what the success (incident reduction) needs to be and perform a success probability and success tolerance analysis of that problem. Comment on the results. 4. Comment on the overall spreadsheet design, its usefulness and limitations. Does it represent a control system or the evaluation of a system of controls? Case No. 2000-01: Lakeshore Bank 1 AICPA Case Development Program LAKESHORE BANK: e-BUSINESS STRATEGY AND BUSINESS PERFORMANCE MEASUREMENT ASSURANCE SERVICES Mark L. Frigo, Professor DePaul University, Chicago, Illinois George W. Krull, Jr., Partner Grant Thornton LLP, Chicago, Illinois Paul G. Pustorino, Partner Grant Thornton LLP, Boston, Massachusetts Case Overview The setting for the case is Lakeshore Bank, a $300 million (total assets) community bank located in Chicago, Illinois. On June 18, 2000, a CPA client service team met with executive management of Lakeshore Bank (the Bank) to discuss: (1) the strategy of the Bank including Internet banking strategies and (2) performance measures used at the Bank. The team consisted of an assurance partner and a management consultant. The assurance partner had recently attended an in-house workshop on strategic performance measurement that included strategic assessment tools and the balanced scorecard framework. The workshop focused on the role of the assurance partner, as a business advisor, in the area of business performance measurement and assisting clients in developing business strategies, including e-business strategies. The objective of the engagement was to introduce the executive committee of the Bank to strategic assessment tools and to assist the client in developing and refining its strategy. Another goal of the engagement was to present the Balanced Scorecard framework (Kaplan and Norton, 1996) to assess the existing performance measures at the Bank and to develop recommendations for improvement of the Bank's performance measurement system. The Balanced Scorecard is an approach to performance measurement that includes non-financial and financial performance measures linked to the organization's mission and strategy. It generally includes strategic objectives and performance measures in the following areas: Financial Customer Internal processes Innovation and growth Copyright 2001 by the American Institute of Certified Public Accountants (AICPA). Cases developed and distributed under the AICPA Case Development Program are intended for use in higher education for instructional purposes only, and are not for application in practice. Permission is granted to photocopy any case(s) for classroom teaching purposes only. All other rights are reserved. The AICPA neither approves nor endorses this case or any solution provided herein or subsequently developed. The authors would like to acknowledge the diligent work of George P. Anagnost, graduate research assistant at DePaul University, who assisted us in preparing this case. AICPA Case Development Program Case No. 2000-01: Lakeshore Bank 2 BACKGROUND Lakeshore Bank has exhibited superior performance in profitability and efficiency compared to its peer group, as shown by the benchmarking data in Appendix A. Profitability and efficiency have always been a hallmark of the Bank. However, the successes achieved by the Bank in efficiency and profitability may be in conflict with long-range performance and growth. Like a rubber band stretched to its limits, if an organization's resources, measured in both human and capital are stretched too taut, the organization will not have the ability to move and grow in new directions. There are situations when short-term profitability must be sacrificed to ensure there is sufficient infrastructure to support new strategic initiatives. This is a concern the management of the Bank wanted to address. The Chairman of the Board of Lakeshore Bank has emphasized the importance of superior profitability and efficiency and has mentioned that Lakeshore Bank, with $300 million of assets, earns profits equal to that earned by banks that are three times larger. The Chairman believes that growth is an important goal for the Bank, but it must be \"profitable growth\". After the initial meeting with the client, the client service team summarized the following observations: The Bank did not have a formal strategic plan or mission statement. The Bank had a growth target to attain $500 million in assets in two years, but did not have any specific growth strategies. The Bank has set a target to implement Internet banking by December 31, 2000. The infrastructure required to support Internet banking was not in place as of June, 2000. The Bank had been performing well in terms of profitability and efficiency. Management of the Bank focused primarily on lagging financial performance measures. The Bank did not have in-house training programs or support for outside training. The senior members of the Bank's management team work well together on operational matters. The management team was not always in agreement about strategic issues, i.e., outside training, growth strategies, etc. The management is internally focused. The Bank was very lean in resources. Management was always trying to accomplish too many strategic goals at once; this was extremely difficult to do with existing resources. PROCESS USED BY THE CPA CLIENT SERVICE TEAM At the beginning of the engagement, the client service team established the following goals to assist the client in: Developing and refining its strategy, including its Internet banking strategy. Developing an implementation plan for the Internet banking strategy. Using the Balanced Scorecard framework as a strategic management tool. To accomplish the first two goals, the team planned the following engagement tasks: Assess the strengths, weaknesses, opportunities and threats (SWOT analysis). Develop a mission statement. Develop key strategic themes from the SWOT analysis. Develop an Internet banking strategy and action plan. To accomplish the third goal, the team did the following tasks: Present the basic tenets of the Balanced Scorecard to management. Assess the existing performance measures using the Balanced Scorecard framework. The engagement involved a series of six planning sessions with the executive committee of the Bank. AICPA Case Development Program Case No. 2000-01: Lakeshore Bank 3 SWOT ANALYSIS The client service team led the executive committee through an analysis of strengths, weaknesses, opportunities and threats (SWOT analysis). The following is a summary of the SWOT analysis and discussion with the executive committee during the first two planning sessions: Strengths Primary: Strong capital position; highly profitable Quality/experienced management team Low turnover - senior management and management team commitment Strong customer relationships/loyalty by providing high touch/hands-on personalized service Chairman's business contacts and knowledge Secondary: Low cost core deposits (commercial deposits) Strong loan portfolio - quality size and mix Branch locations Culture (profit oriented, entrepreneurial) Management team (executive committee) works well together (democratic); strong committee structure Business intelligence and business experience Weaknesses Primary: No strategic or technology plans Lack of formal marketing program Knowledge of competition needs improvement Lack of brand image Management team stretched to capacity Customer relationship/management systems No infrastructure to support sales organization Need to develop a sales culture Lack of outside perspective/internal focus Secondary: Customer profile - lack of demographics Do not measure customer profitability Customer relationships beyond top customers Weak internal communications Subchapter S status (may limit mergers or acquisitions) Outcome focused Need to foster innovation Low involvement in trade association/industry organizations Reluctance to \"make investments\" because of impact on short-term bottom line Employee career path; more education and training needed Compensation system AICPA Case Development Program Case No. 2000-01: Lakeshore Bank 4 Opportunities Primary: Internet banking/use of technology Acquisition/merger Financial Modernization Banking Act - new allowable activities for banks (insurance, brokerage, CDCs, travel agencies) Increase share of customers Expansion to new markets Growing markets Secondary: Size allows personal service Retail banking Expand commercial lending - small business lending Threats Primary: Competition from all directions Internet banks Ownership succession Technology revolution Tight market for labor services Possible economic downturn Secondary: Ability to grow Decreased cost to change banking relationships The executive committee discussed how SWOT analysis is used to develop strategic objectives. The executive committee next drafted a mission statement and developed key strategic themes. MISSION STATEMENT One goal of the client was to develop a mission statement. After two planning sessions, which included a discussion of the Bank's strengths, weaknesses, opportunities and threats (SWOT analysis), values, and characteristics, the following mission statement was drafted: Lakeshore Bank is a leading, independent community bank that specializes in serving small and medium-size businesses in Chicago. By applying vigilance and utilizing superior business intelligence, we seek to create, identify and serve niche markets consistent with our expertise. We are committed to provide personalized service beyond the expectations of our customers by developing and leveraging close, long-term relationships. We will optimize shareholder value. We retain a knowledgeable employee base and strive to provide a fulfilling and supportive environment. This mission statement captures the essence of Lakeshore Bank and reflects some of the characteristics that have led to the Bank's successes: Personalized services Close, long-term customer relationships Superior business market intelligence The challenge was to develop strategies that would leverage existing strengths and harvest emerging opportunities. AICPA Case Development Program Case No. 2000-01: Lakeshore Bank 5 KEY STRATEGIC THEMES The executive committee used the SWOT analysis to develop key strategic themes. Their goal was to leverage strengths, address weaknesses, harvest opportunities and attack threats. Based on the SWOT analysis, the executive committee developed the following four strategic themes. 1. Establish Corporate Direction: a. Develop a strategic plan: The strategic plan will address growth, marketing and the organizational structure. The strategic plan will include: mission statement, statement of values, strategic themes, strategic objectives and initiatives. The strategic plan will be the base for developing a Balanced Scorecard framework. b. Develop a technology plan: This plan will leverage the value of technology and incorporate technology into its banking processes (credit scoring, imaging, etc.) as well as Internet banking. 2. Establish a Growth Strategy: There were many ideas on how Lakeshore Bank can grow (i.e., niche markets, acquisitions, mergers, new branches, retail banking, etc.) This is an area the strategic plan and the Balanced Scorecard would address. The growth strategy will require investments and the consideration of how short-term profitability will likely be affected. 3. Establish a Marketing Strategy: a. Corporate Identity, Branding and Marketing: Establish a corporate identity and brand. The bank also needs to develop a marketing strategy, which would include cross-selling to accomplish its goals. b. Customer Knowledge and Business/Competitor Intelligence: Improve the knowledge base about customers. Customer profitability for example is an area to address in the strategic plan and Balanced Scorecard. Business/competitor intelligence is also important to monitor. 4. Refine Organizational Strategy: a. Organizational Structure: Develop strategies to address ownership succession, employee retention, corporate structure, communication issues and negative employee perceptions. The corporate culture needs to be considered in the strategic plan. b. Human Resources: Efficient allocation of human resources to all niche markets also needs to be addressed. The strategic plan can refine the executive compensation plan. Training and professional and industry association networking are important strategic goals. The strategic plan and Balanced Scorecard can incorporate external conference and association networking and learning as well as internal seminars to foster learning. Training goals should also be established. There were several strategic themes. The executive committee decided that since Internet banking was of paramount importance to their customers, they would focus their efforts in this area. The successful implementation of the Internet banking solution also encompasses many of the strategic themes. INTERNET BANKING PLAN OF LAKESHORE BANK The plan for Internet banking outlined the steps of the implementation process to increase the value of this decision to make the process more effective, efficient and thorough. According to the executive committee, the following reasons were behind implementing Internet banking: To support our customer relationship focus, we need Internet banking to expand convenience and meet customer expectations. Lack of Internet banking was not an option. The question was when and what products would be offered. AICPA Case Development Program Case No. 2000-01: Lakeshore Bank 6 Management believed that implementing Internet banking in the current year was important for two reasons: It shows customers that the Bank will provide products they want to make their jobs/lives easier. The products may reduce our service delivery costs over time, although upfront costs are significant. According to the executive committee, the strategic plan for Internet banking should adequately address each of the following areas: 1. 2. 3. 4. 5. 6. 7. 8. Target customers Marketing and imagebranding Training Communications Operational issues Customer support/service Resources neededdollars and manpower Legal and compliance issues CONSULTANTS' COMMENTS ON INTERNET BANKING STRATEGY Lakeshore Bank determined that it needs to offer electronic banking services to its customers to keep its position as a leading and highly profitable community bank serving the needs of commercial banking customers in the Greater Chicago area. Its customers must make greater use of technology themselves in order for them to continue to be competitive. They (the bank's customers) will associate themselves with service providers (the Bank) who can provide them with the most cutting edge tools, for example, electronic banking services. Lakeshore Bank has little choice in offering these services if it wishes to remain competitive in the marketplace. In addition, the strategy of \"cannibalizing your markets\" (see p.88, Downes and Mui, Unleashing the Killer App Digital Strategies for Market Dominance) is a motivating factor for Internet banking. A major issue is there must be adequate infrastructure in place to support the Internet banking initiative. The consultants made the following observations: The Bank does not have sufficient internal or external marketing skills in place to support an Internet banking initiative. The bank has no internal marketing resources to help in the implementation of its eStrategy. Experience has shown that marketing is critical to establishing an eStrategy. Since there are no \"bricks and mortar\" for people to see and visit, a virtual business relies on marketing and advertising to get its message to its customers. Additionally, as with any new initiative, electronic or otherwise, communications within the organization are critical. The Bank lacks a \"sales culture\". First, there is a need for general sales training for the entire management team. What has been successful in developing new business in the past will not work without formal training. A coordinated effort is required. There is no system of internal training in place to support a training initiative. The Bank has devoted few resources to the continued development of its management team and staff. Training (Learning) is a critical tenet of the Balanced Scorecard philosophy as it drives superior performance. Unless people are trained, they cannot be expected to execute strategic initiatives. Training is needed in several areas to ensure the success of the Bank's eStrategy. The Bank has historically focused on results rather than strategic drivers. The Bank has been an organization that focuses on profitability. This is typical of an organization that has achieved success by stretching itself to maximum capacity. The implementation of eCommerce initiatives is no different from any other strategic business implementation. Basic management skills and training are needed to carryout the strategy. AICPA Case Development Program Case No. 2000-01: Lakeshore Bank 7 The discussion with the client generated the following ideas for tasks that need to be completed to implement the Internet banking strategy: Assign a project leader and team members. Develop project tasks. Assign duties, target dates, and a meeting schedule. Build/strengthen infrastructure and training. Determine eCommerce Products Develop marketing strategy. Develop web site and testing. ASSESSMENT OF PERFORMANCE MEASURES AT LAKESHORE BANK Lakeshore Bank has focused primarily on lagging, financial performance measures as discussed below. The Bank has been very successful in profitability and efficiency performance. However, to set the strategic direction of the Bank, the executive committee believes they need to also focus on leading, strategic performance measures that will drive future profitability and growth. The client service team introduced the Balanced Scorecard framework as a management tool. The following lagging financial performance measures were the focal point of Bank management: Efficiency ratio - noninterest expenseet interest income plus noninterest income Return on assets (ROA)- Net income/Assets Net earnings Total assets Personnel to asset ratio These measures are excellent short-term indicators of a bank's success, but they can hold an organization back from building the infrastructure necessary to support growth if they are not balanced with a long-term perspective. The Bank considered the following performance measures: Training hours per quarter in strategic topics. Number of hours spent by senior management team discussing strategic issues. Dollars spent on electronic network infrastructure supporting Internet initiatives. Number of internal and external marketing events held. Building detailed timeline for Internet bank implementation. Number of training hours spent introducing Internet banking product to employees. Having senior officers participate as test subjects during trial phase. Survey customers' preferences for \"design and feel\" of Internet banking website. Review and compare competitors' websites for \"best practices\". The characteristics of the Balanced Scorecard framework were used to develop the following questions for developing recommendations for improving the performance measurement system: Do the performance measures include non-financial measures and financial performance measures? Do the performance measures include leading indicators (performance drivers) and lagging indicators (outcome measures)? Are there cause and effect linkages between performance measures and goals? One of the basic characteristics of the Balanced Scorecard framework is there should be a balance between performance drivers (leading indicators) and outcome measures (lagging indicators). Kaplan and Norton (1996, p.150) provide a good summary of their point as follows: \"A good Balanced Scorecard should have a mix of outcome measures and performance drivers. Outcome measures without performance drivers do not communicate how the outcomes are to be achieved. They also do not provide an early indication about whether the strategy is being implemented successfully. Conversely, performance drivers (such as cycle times and part per million defect rates) without outcome measures may enable the business unit to achieve shortterm improvements, but will fail to reveal whether the operational improvements have been Case No. 2000-01: Lakeshore Bank 8 AICPA Case Development Program translated into expanded business with existing and new customers, and, eventually, to enhanced financial performance. A good Balanced Scorecard should have an appropriate mix of outcomes (lagging indicators) and performance drivers (leading indicators) that have been customized to the business unit's strategy.\" The following shows the Balanced Scorecard framework: Balanced Scorecard Framework Financial Perspective \"To succeed financially, how should we appear to our shareholders?\" Customer Perspective \"To achieve our vision, how should we appear to our customers?\" Internal Bus. Process Perspective Vision and Strategy \"To satisfy our customers, what business processes must we excel at?\" Innovation and Growth Perspective Adapted from R. Kaplan and D. Norton, "Using the Balanced Scorecard as a Strategic Management System," Harvard Business Review. January-February 1996, p. 76. \"To achieve our vision, how will we sustain our ability to change and improve?\" The Balanced Scorecard includes strategic goals and related performance measures within four categories: financial, customer, internal process and learning and growth. The client service team wanted to use this framework to assess existing performance measures and to make recommendations for improving the performance measurement system at Lakeshore Bank. CLIENT SERVICE TEAM OBJECTIVES After the first series of meetings with the Bank executives, the client service team set four objectives: Summarize the strengths, weaknesses, opportunities and threats of Lakeshore Bank using the attached SWOT matrix. Evaluate the Internet banking strategy at Lakeshore Bank. Is it consistent with the strengths, weaknesses, objectives and threats of Lakeshore Bank? Evaluate the strategic impact of the Internet banking strategy by using the Balanced Scorecard framework to show how the Internet banking strategy can drive return on assets and profitable growth. Using the following Balanced Scorecard worksheet, develop strategic goals and performance measures within the four dimensions of the Balanced Scorecard that Lakeshore Bank could use. Develop a recommendation for Lakeshore Bank on improving their performance measurement system, using the following: Observation Recommendation Benefits of the recommendation Case No. 2000-01: Lakeshore Bank 9 AICPA Case Development Program Appendix A: Benchmarking Data for Lakeshore Bank vs. Peer Groups L AKESHORE B ANK BALANCE SHEET: Total Assets (000) Change in Assets, Year-to-Date Tier 1 Capital/Avg. Assets (Leverage Ratio) Tier 1 Capital/Risk Weighted Assets Total Capital/Risk Weighted Assets C HICAGO M ETROPOLITAN P EER G ROUP I LLINOIS P EER G ROUP 295,000 4.54 10.15 12.76 14.02 245,432 5.64 8.14 12.10 13.28 244,675 5.21 8.76 13.34 14.46 PROFITABILITY: Return on Average Assets Return on Average Equity Capital Net Interest Margin Provision for Loan Losses/Average Assets Non-interest Income/Average Assets Non-interest Expense/Average Assets Dividends/Net Income 2.51 25.64 5.12 0.18 0.94 3.33 57.76 1.22 14.77 3.74 0.15 0.84 2.80 61.79 1.18 13.20 3.61 0.14 0.86 2.75 56.46 ASSET QUALITY: Nonper. Loans+ORE/Total Loans+ORE Nonperforming Assets/Equity+LLR Loan Loss Reserve/Total Loans Loan Loss Reserve/Nonperforming Loans Net Charge-offs/Average Loans 1.40 9.01 2.02 144.58 -0.02 0.96 6.51 1.21 142.88 0.15 0.89 5.72 1.14 147.73 0.15 LIQUIDITY: 100+ Time Deposits/Total Deposits Loan to Deposit Ratio Int. Earnings Assets/Int. Bearing Liabilities Average Earning Assets/Avg. Total Assets 19.03 84.41 152.65 93.85 15.79 70.06 119.74 93.37 14.73 70.91 118.68 93.47 KEY EXPENSE RATIOS: Efficiency Ratio Salaries and Benefits/Average Assets Number of Full Time Equivalent Employees Occupancy Cost/Average Assets Total Number of Branches 54.70 1.79 97 0.66 5 59.36 1.39 76 0.43 3 59.36 1.39 81 0.40 3 Peer Groups: Thirty-seven and fifty-three banks in these Peer Groups, respectively, with assets between $200 and $300 million. AICPA Case Development Program Case No. 2000-01: Lakeshore Bank 10 REFERENCES Assurance Services American Institute of Certified Public Accountants Assurance Services Web Site (www.aicpa.org/assurance) Elliott, R. and D. Pallais. 1997. \"Are You Ready for New Assurance Services?\" Journal of Accountancy (June), 47-51. Elliott, R. and D. Pallais. 1997. \"First: Know Your Market,\" Journal of Accountancy (July), 56-63. Elliott, R. and D. Pallais. 1997. \"Build on Your Firm's Strengths,\" Journal of Accountancy (August), 53-58. Stone and Frigo. 1995. Advisory Comments for Growth and Profitability: A Guide for Accountants and Consultants (AICPA and Irwin Publishers) Pallais, D. 1996. \"Identifying New Service Opportunities,\" Journal of Accountancy (July), 10. Primary: Strategy and Business Performance Measurement Frigo, M. L., et al, \"Boston Community Bank: Business Performance Measurement Assurance Services\" AICPA Professor/Practitioner Case Program (1999). Frigo, M. L., P. G. Pustorino and G.W. Krull, Jr., \"The Balanced Scorecard for Community Banks: Translating Strategy into Action\" Bank Accounting and Finance (Spring 2000) Kaplan, R.S., and D.P. Norton. (1997) \"Why Does a Business Need a Balanced Scorecard?\" Journal of Cost Management (May/June), 5-18. Kaplan, R.S., and D.P. Norton. (1996) \"Using the Balanced Scorecard as a Strategic Management System,\" Harvard Business Review (January/February), 75-85. Pallais, D., et al. Steering Client Services Through Performance Measurements 1999, Practitioners Publishing Company, Inc. Secondary: Strategy and Business Performance Measurement Downes, Larry. and Mui Chunka. Unleashing the Killer App Digital Strategies for Market Dominance, 1998. Harvard Business School Press. Frigo, Mark L. and K. Krumwiede. 1999. \"Balanced Scorecards: A Rising Trend in Strategic Performance Measurement,\" Journal of Strategic Performance Measurement (February/March), 42-48. Kaplan, R.S., and D.P. Norton. 1992 \"The Balanced ScorecardMeasures that Drive Performance,\" Harvard Business Review (January/February), 71-79. Kaplan, R.S., and D.P. Norton. 1996. The Balanced Scorecard: Translating Strategy into Action (Harvard Business School Press) Kaplan, R.S., and D.P. Norton. (1993) \"Measuring Corporate Performance: The Balanced Scorecard: Managing Future Performance\" (Video) Harvard Business School Publishing. Kaplan, R.S., and D.P. Norton. (1993) \"Putting the Balanced Scorecard to Work,\" Harvard Business Review (September/October), 134-142. Kaplan, R.S., and D.P. Norton. (1996) \"Linking the Balanced Scorecard to Strategy,\" California Management Review, Vol. 39, No.1, (Fall), 53-79. AICPA Case Development Program Case No. 2000-01: Lakeshore Bank 11 General Questions on Assurance Services 1. What are assurance services? Why is business performance measurement considered an assurance service? 2. Describe business performance measurement assurance services. 3. Performance measurement systems in organizations will vary in their degree of development. Describe the spectrum of assurance services that CPAs can perform for clients that have (or do not have) performance measurement systems. Questions Related to Lakeshore Bank 1. Summarize the strengths, weaknesses, opportunities and threats of Lakeshore Bank using the attached SWOT Matrix. Evaluate the Internet banking strategy at Lakeshore Bank. Is it consistent with the strengths, weaknesses, opportunities and threats of Lakeshore Bank? 2. Evaluate the strategic impact of the Internet banking strategy by using the Balanced Scorecard framework to show how the Internet banking strategy can drive return on assets and profitable growth. 3. Using the following Balanced Scorecard worksheet, develop strategic objectives and performance measures within the four dimensions of the Balanced Scorecard that Lakeshore Bank could use. 4. Develop a recommendation for Lakeshore Bank to improve their performance measurement system. Use the following components in developing your recommendation: Observation Recommendation Benefits of the Recommendation Case No. 2000-01: Lakeshore Bank 12 AICPA Case Development Program 1. Summarize the strengths, weaknesses, opportunities and threats of Lakeshore Bank using the attached SWOT Matrix. Evaluate the Internet banking strategy at Lakeshore Bank. Is it consistent with the strengths, weaknesses, opportunities and threats of Lakeshore Bank? SWOT ANALYSIS Strengths: Weaknesses: 1. 1. 2. 2. 3. 3. 4. 4. 5. 5. Opportunities: Threats: 1. 1. 2. 2. 3. 3. 4. 4. 5. 5. Case No. 2000-01: Lakeshore Bank 13 AICPA Case Development Program 2. Evaluate the strategic impact of the Internet banking strategy by using the Balanced Scorecard framework to show how the Internet banking strategy can drive return on assets and profitable growth. Internet banking Scorecard Linkages Financial Perspective ROA Profitable Growth Customer Perspective Internal Bus. Process Perspective Innovation and Growth Perspective Case No. 2000-01: Lakeshore Bank 14 AICPA Case Development Program 3. Using the following Balanced Scorecard worksheet, develop strategic objectives and performance measures within the four dimensions of the Balanced Scorecard that Lakeshore Bank could use. 4. Develop a recommendation for Lakeshore Bank to improve their performance measurement system. Use the following form in writing your recommendation: Observation Recommendation Benefits of the Recommendation Balanced Scorecard Worksheet Strategic Objectives Financial F1 F2 F3 Customer C1 C2 C3 Performance Measures AICPA Case Development Program Internal Processes I1 I2 I3 Innovation and Growth L1 L2 L3 Case No. 2000-01: Lakeshore Bank 15 Quantitative Assurance Model Template Problems Sensitivity Factor Opportunities Unit of Measure 1 Problem 1 1000 Transactions Inherent Risk Factors Factor #1 Factor #2 Inherent Risk 0.03 0.02 0.05 Control Environment Tone at the top Reliability of personnel Competence of personnel Environment Risk 0.3 0.3 0.3 0.343 use the control invironment risk model i Preliminary Risk Potential Incidents Prevention Controls Control #1 Control #2 Control #3 Prevention Risk Actual Incidences Detection Controls Control #11 Control #12 Control #13 Detection Risk Detected Incidents Correction Controls Control #21 Control #22 Correction Risk Residual Risk Residual Incidences Control Ratings Loss Value Control Cost Consequence #1 Consequence #2 Total Exposure 0.01715 smaller than ER and IR, IR slips through 17.15 Design Effectiveness 0.9 0.7 0.4 0.8 0.4 0.99 0.12 2.09 use the model in PPT page 12. If acutal incidences is negative, it means 0.99 0.90 0.95 0.85 0.6 0.8 0.0175 use the model in PPT page 14. unsucces 2.05 correct the controls. 0.98 0.6 0.98 0.95 0.9 0.6 0.07552 0.011 0.191 17.15 0.989 100 55 0.1877 0.1819 0.3696 36.96 16.807 16.2925 33.0995 3309.95 3272.99 Exposure: if value of controls is to high, you can increase residual i ol invironment risk model in PPT page 8. R and IR, IR slips through the control environment. in PPT page 12. ences is negative, it means over control, doing too much. in PPT page 14. unsuccessful Value of controls ou can increase residual incidences and decrease prossibilites of pevention controls to see the results (value of co to see the results (value of controls). Quantitative Assurance Model Template Sensitivity Factor Opportunities Unit of Measure Inherent Risk Factors Nature of the system Physical location Degree of automation Nature of the transactions Nature of the information Rate of change Appeal to theft, fraud, or vandalism Interconnections/complexity Inherent Risk Control Environment Nature of business Tone at the top Influence of the audit committee Organizational plan and segregation of duties Task definition Formal standards Degree of technology Personnel Environment Risk Preliminary Risk Potential Incidents Prevention Controls IT is part of the organization's plan An IT plan exists The IT plan has been communicated to parties IT assesses current systems Prevention Risk Actual Incidences Detection Controls User questionnaire on IT strategy Evaluate assessment process Detection Risk Detected Incidents Correction Controls 0.8 0.9 0.88 0.98 0.98 0.97 Continuous user training Follow up on assessment improvement recs Correction Risk Residual Risk Residual Incidences 0.1 0.15 Control Ratings Loss Value Control Cost Consequences Enterprise goals not met Inefficeint use of IT resources Total Exposure 0.1 0.1 0 Strategic IT Plan Does Not Exist 365 Days 0.1 0 0.02 0 0 0.05 0 0.04 0.21 0.05 0.1 0.07 0.03 0.01 0.02 0.005 0.02 0.7297 Inherent Risk Factors Customer satisfaction Customer relationship Little customer base growth Inherent risk Control Environment Tone at top Organizational plan Task definition Personnel Customer base Environment Risk Preliminary Risk Potential Incidents 0.1532 55.9298 Design Effectiveness 0.85 0.9 0.93 0.99 0.0003 0.0184 0.99 0.99 0.0012 0.0184 Prevention Controls Good customer relationshi Expansion to new markets Branch locations Executive contacts Direct interaction with cus Prevention risk Actual Incidences Detection Controls Customer survey/questionn Customer increase speed Evaluate peer banks progr Evaluate marketing costs a Marketing department inte Supervisory review 0.9 0.6 0.95 0.85 0.85 0.8 0.95 0.8 0.5 0.85 0.8 0.3 0.05 0.9627 0.0003 0.0177 0.9997 0.0018 0.0018 0.0035 Loss per incident 200000 100000 $532 Detection Risk Detected Incidents Correction Controls Using 3rd party marketing Hire more resources in ma Develop marketing progra Change current market str Correction Risk Residual Risk Residual Incidences 0.7 0.7 0.5 0.4 Lack of marketing program Lack of training 365 Days 0.1 0.15 0.2 0.45 0.05 0.05 0.03 0.01 0.05 0.8233372125 0.3705017456 135.2331371531 0.85 0.9 0.95 0.7 0.9 0.0010 0.1357 0.7 0.9 0.95 0.8 0.9 0.8 365 Days Inherent Risk Factors Customer satisfaction Insufficient knowledge Inefficient/Incorrect working Employee development Inherent risk 0.15 0.2 0.1 0.05 0.5 Control Environment Tone at top Formal standards Nature of business Task definition Personnel Environment Risk 0.1 0.1 0.3 0.5 0.01 0.280665 Preliminary Risk Potential Incidents Prevention Controls Experienced managemen Low management turnov Business experience Hire knowledged applica Detailed task instructions Prevention risk Actual Incidences Detection Controls Employee survey Compare with peer Customer survey/questio Employee competency a Whistleblower call line Supervisory review 0.1403325 51.2213625 0.9 0.8 0.9 0.9 0.85 0.85 0.9 0.9 0.8 0.9 0.0008 0.0421 0.9 0.7 0.8 0.9 0.7 0.85 0.85 0.9 0.6 0.95 0.9 0.9 0.0018 0.0002396 0.6 0.6 0.7 0.6 0.1662 0.0002 0.0003 Detection Risk Detected Incidents Correction Controls Implement internal train Hire external trainer Follow up on Employee c Link training program t Correction Risk Residual Risk Residual Incidences 0.0024 0.0001022 0.7 0.7 0.3 0.4 0.8 0.6 0.5 0.5 0.1735 0.0001 0.0001 Weak internal communication 365 Days Inherent Risk Factors Inter-department miscommunica Weak morale Low productivity Inherent risk Control Environment Tone at top Formal standards Nature of business Task definition Personnel Environment Risk Preliminary Risk Potential Incidents 0.1 0.05 0.15 0.3 0.1 0.05 0.3 0.5 0.01 0.2962575 0.08887725 32.44019625 Prevention Controls Experienced manageme 0.9 Low management turnov 0.95 Management working tog 0.9 Shared goals/values/mis 0.8 Business intelligence 0.8 Prevention risk Actual Incidences 0.85 0.9 0.85 0.8 0.9 0.0008 0.0262 Detection Controls Employee survey 0.9 Whistleblower call line 0.9 Supervisory review 0.65 Miscommunication incide 0.9 Internal audit 0.7 Perodic reassessment 0.8 0.9 0.9 0.8 0.95 0.8 0.85 Detection Risk Detected Incidents Correction Controls Create communication p Set up periodically inte Follow up on internal c Incidence response tea Correction Risk Residual Risk Residual Incidences 0.0019 0.0000488 0.7 0.7 0.5 0.4 0.6 0.6 0.7 0.6 0.1662 0.0001 0.0001 Problem Parameters Problems 1 Economic factors 2 Business disruption/system failure 3 Non-compliance Inherent Risks (overall the case) 1 Global financial instability 2 Technological change 3 Regulatory change Control Environment (overall the case) 1 Org. plan & segregation of duties 2 Formal standards Prevention controls (for particular case) Quarterly review of forecasts Hire outside economic experts Perform regular audits of risky systems Strong maintenance programs Supervision of systems personnel Regulatory updates training Perform compliance audits All control implementation effectiveness here is at 90% Detection Controls Incidence detection systems Whistle-blower hotline User training on detection procedures All control implementation effectiveness here is at 90% Correction Controls Incidence response team Hotline response from IA and the AC Assignment of specific resposibilities All control implementation effectiveness here is at 95% Control Cost Cost per Occurrence Consequences Loss of market value (share price) Loss of revenues Loss of reputation Fines Opportunities/year Units of Measure 3 Major forecast revision 4 Failure costing > $4M 100 Reportable condition Problem 1 Problem 2 Problem 3 0.7 0.4 All normally distributed w 0.8 0.6 0.7 0.9 0.8 0.5 All normally distributed w 0.3 0.4 0.5 0.85 0.8 0.95 0.95 $50M $5M 0.3 0.1 $250K 0.8 0.4 Loss per Incident $10M $5M 0.2 $1M 0.7 $2M l normally distributed with STD of .2 l normally distributed with STD of .1 oss per Incident deterministic model