The goal is to understand the offers of each fraud deterrent and to consider other approaches to lowering fraud risk.

Fraud Prevention Responsibilities

The supervisory committee's scope of influence includes management oversight, internal audit guidance and direction and reporting to the board.

Specific responsibilities relating to fraud prevention include:

• Assessing risks within the credit union to ensure they are part of the annual audit planning process;

• Creating a safe whistleblower program for financial suspicions and discrepancies to ensure confidentiality and a prompt resolution of complaints;

• Establishing strong and effective systems of internal control;

• Assuring that relevant accounting standards and effective controls along with solid policies and procedures are working;

• Directing an active and frequent oversight of the efforts of the internal audit to ensure transparency in financial and operational reporting;

• Implementing programs to ensure the ethical integrity of the credit union's goals and objectives;

• Assuring members and vendors that the credit union takes regulatory compliance seriously and a necessary obligation to the well-being of the organization; and

• Providing a trusted advisory role to the credit union board on all financial matters.

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Educational Requirements

It is not a surprise that many supervisory committee members fail to have formal knowledge, education or experience to actually handle their fraud detection responsibilities. However, there are several things a credit union can do to improve the knowledge level of the supervisory committee, including:

• The investment in educational programs focusing on key fraud risks, ethical issues and risk mitigation strategies; and

• Providing frequent training sessions to more effectively work with credit union employees and the management team.

Although it is desirable to have several members of the supervisory committee with a management accounting, auditing or management consulting background, often the supervisory committee chairman may be the only member with any significant experience. However, even with an accounting background, the supervisory committee chair may have had minimal fraud exposure.

Every supervisory committee member should work to increase their knowledge of ethics including heightened awareness of the potential for fraud within the organization, the organizational history relating to fraud and its prevention, and fraud concepts.

The Fraud Triangle

Opportunity, pressure and rationalization are the three key ingredients (points on the triangle) to every fraud and these provide a solid foundation for development of a fraud prevention program.

From discussion and oversight of the credit union operation, the supervisory committee can fulfill its role to reduce opportunities, place no undue pressure on people to produce impossible business results, and try with every means possible to hire only employees of integrity.

Assessing Your Current State

The supervisory committee should learn the credit union's history of fraud occurrence and prevention activities so that it can guide the internal audit department and fulfill its responsibilities for fraud prevention. If fraud has occurred in the past, it's important to understand the specifics of that incident, evaluate the ways it was handled and examine the safeguards that were added to prevent future occurrences. If the credit union is conducting annual fraud prevention assessments, the committee will want to review the findings from several previous assessments. If the credit union hasn't conducted such an assessment, the committee should initiate one to highlight potential areas of risk.

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Honest and Ethical Conduct

The code of ethics for any supervisory committee is that honest and ethical conduct is required. Rules include the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, and full, fair, accurate, timely and understandable disclosure in filed reports and documents. However, there are a large number of specific ethical issues that aren't directly addressed.

Discussions between two or three people of realistic situations can be the most effective forum in facing the challenges throughout the credit union. Case examples can be used to describe likely scenarios for a specific organization. These cases should be kept short to allow participants to interpret the situation to most closely fit their perceptions of the organization. The case study should also leave sufficient gray areas to allow participants to effectively grapple with the issues. If the credit union operates in a global environment, it's important to include unique cultural differences. After the small group reviews and discusses each case, the participants share their results with the larger group.

Signs of Internal Fraud

When it comes to internal fraud we may suspect it, suffer the consequences of it or anticipate it, but we may never see it unless we are looking for it.

There are six factors that may signal fraud, and by understanding them and looking for them, the supervisory committee can significantly improve the chances of detection:

Accounting anomalies. These involve countless red flags such as cash shortages, excessive loan delinquencies and accounts being out of balance.

Internal control weaknesses. These equate to opportunities for insiders to commit fraud. If you identify a weakness, chances are that someone will exploit it if he or she hasn't already done so.

Analytical symptoms. When a business function occurs at the wrong time or is conducted by the wrong person, or a similar operational anomaly occurs, chances are it is a sign of fraud.

Lifestyle symptoms. Employees living beyond their means is the most common. Smart internal fraudsters would steal and save but most steal and spend. When you notice signs of an extravagant lifestyle, you may likely be looking at a red flag of fraud.

Behavioral symptoms. People who stop looking you in the eye, come in earlier and/or stay later than usual without a valid reason may need to be monitored as potential fraudsters.

Tips and complaints. When employees report actual or suspected incidents of fraud among their co-workers or bosses, you've got good reason to undertake an investigation.

The supervisory committee should approach fraud prevention with a critical eye. Always take a questioning view to help guide the internal audit process in the utilization of a risk-based analysis and approach to probe broader and deeper into areas warranting closer scrutiny. A regular discussion of known fraud risk factors, management override of internal controls and fraud risk assessments, and results of employee surveys or hotline calls all lead to productive supervisory committee brainstorming sessions.

The credit union industry is changing by the minute and it is easy to spend hours searching for information for effective oversight and training. Check with your credit union league and other resources, such as NAFCU or CUNA, to see what training plans are in place that might fit your needs. From these sessions, you will gain credit union-specific information on regulations, risk management, the audit process, effective communication and much more. The oversight of the credit union is a big responsibility and it is critical the supervisory committee has the knowledge and expertise to perform at maximum efficiency.

Jay Slagel is vice president of risk managment at Allied Solutions, LLC. He can be reached at 

800-785-5527 or [email protected].