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Wahoo Mann, Managing Director of Satire Deposit & Trust (SD&T), received an anonymous note in his mail

stating that a bank employee was making bogus loans. Wahoo asked the bank's

internal auditors to investigate

the transactions detailed in the note. The investigation led to Johnny B Good, manager of a North State branch

office and a trusted 14

-

year employee who had once worked as one of the bank's internal auditors. J.B. Good

was

charged with embezzling $1.83 million from the bank using 67 fake or bogus loans taken out over a three

-

year period.

J.B Good was authorised to make consumer loans

, originally up to $10,000

limit without loan committee

approvals, which is a standard indus

try practice. The dollar limit was later increased to $15 000 and then

increased again to US$25 000. Some of the loans, including the one for $63 500, far exceeded his lending limit.

W

hen each

loan

matured, he would take out a new loan, or rewrite the old

one, to pay the principal and interest

due. Some loans had been rewritten five or six times.

The 67 loans were taken out by J.B. Good in five names, including his wife's maiden name, his mother's

maiden name, and the names of two friends. These people

denied receiving stolen funds or knowing anything

about the embezzlement. The fifth name was Jimmy Wiseguy, who police said did not exist. The

Medicare

number on Wieseguy's loan application was issued to a female, and the phone number belonged to a southe

rn

state auto dealer.

The loan taken out in the fictitious name would not have had a credit report and should have

been flagged by a loan review clerk at the bank's headquarters.

Lucy Innocenti, a customer service representative who co

-

signed the cheques

, said J.B Good was her

supervisor and she thought nothing was wrong with the cheques, though she did not know any of the people.

Marcia Kwon, head teller, told police she cashed cheques for J.B Goode made out to four of the five persons.

Asked whether she

gave the money to JB Goode when he gave her cheques to cash, she answered, "Not all of

the time," though she could not recall ever having given the money directly to any of the four, whom she did not

know.

J.B Good was a frequent gambler and used the em

bezzled money to pay gambling debts. The bank's losses

totalled US$624 000, which was less than the US$1.83 million in bogus loans, because J.B Good used a

portion of the borrowed money to repay loans as they came due. The bank's bonding company covered th

e

loss.

The bank experienced other adverse publicity prior to the fraud's discovery. First, the bank was fined US$50

000 after pleading guilty to failure to report cash transactions exceeding US$10 000, which is a felony.

Second,

State regulators and the

bank's internal auditors failed to detect the fraud. Third, in checking for bad loans,

bank auditors do not examine all loans and generally focus on loans much larger than the ones in question.

Fourth

, the bank's loan review clerks were rotated frequently,

making follow

-

up on questionable loans more

difficult.

Required

1.

How did J.B Good commit the fraud, conceal it, and convert the fraudulent actions to personal gain?

2.

Good internal controls require that the custody, recording, and authorisation functions

be separated.

Explain which of those functions J.B Good had and how the failure to segregate them facilitated the fraud.

3.

Identify the preventive, detective, and corrective controls at

S

D&T and discuss whether they were

effective.

4.

Explain the pressures,

opportunities, and rationalisations that were present in the J.B Good fraud.

5.

Discuss how SD&T Deposit & Trust might improve its control procedures over the payment of loan funds to

minimise the risk of this type of fraud. In what way does this case indica

te a lack of proper separation of

duties?

6.

Discuss how SD&T might improve its loan review procedures at bank headquarters to minimise its fraud

risk. Was it a good idea to rotate the assignments of loan review clerks? Why or why not?

7.

Discuss whether SD&T'

s auditors should have been able to detect this fraud.

8.

Are there any indications that the internal environment at SD&T may have been deficient? If so, how could

it have contributed to this embezzlement?

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