Credit unions have a “watchdog” looking out for their interests, overseeing operations and ensuring their records are maintained with honesty and integrity: the supervisory committee. The committee has a host of tools at its disposal to carry out its purpose. Among them is an annual audit of the credit union. Information gleaned from this audit assists the committee in evaluating credit union operations and in making recommendations to the board. The supervisory committee may also perform surprise cash counts, review non-financial transactions or reconcile credit union accounts with an eye toward compliance with laws and regulations. All these activities place the committee in a prime position to catch suspicious transactions or behaviors that may indicate fraud. Jay Slagel is vice president of risk management and claims for Allied Solutions, LLC. He regularly performs risk assessments for credit unions partnering with Allied. Read his entire "Inside NAFCU Services" column from the January/February 2012 issue of The Federal Credit Union magazine. More information from Allied Solutions is available at http://www.nafcu.org/allied

1. Inside NAFCU Services
The Supervisory Committee:
Focusing on Fraud Detection
By Jay Slagel
C
redit unions have a “watchdog” looking out for
their interests, overseeing operations and ensur-
ing their records are maintained with honesty and Detection requires vigilance
integrity: the supervisory committee. The commit- Credit union executives, managers or other employees may
tee has a host of tools at its disposal to carry out its purpose. anticipate internal fraud, suspect it or even suffer the conse-
Among them is an annual audit of the credit union. quences of such schemes, but they may never actually detect
Information gleaned from this audit assists the committee it unless they are looking. There are many factors that may
in evaluating credit union operations and in making recom- indicate fraud. By understanding and watching out for those,
mendations to the board. The supervisory committee may credit union supervisory committees can significantly improve
also perform surprise cash counts, review non-financial trans- the chances of detection.
actions or reconcile credit union accounts with an eye toward
compliance with laws and regulations. All these activities The top fraud factors involve:
place the committee in a prime position to catch suspicious Accounting anomalies — these entail countless red flags
transactions or behaviors that may indicate fraud. such as cash shortages, excessive loan delinquencies, accounts
being out of balance and more.
Fraud prevention is part of the job internal control weaknesses — these become opportunities
The supervisory committee’s scope of influence includes for insiders to commit fraud.
management oversight, guidance and reporting to the board. Analytical symptoms — when a business function occurs at
Its specific responsibilities relating to fraud prevention entail: the wrong time or is conducted by the wrong person, chances
are it indicates fraud.
n ensuring risk assessments are part of the annual audit Lifestyle symptoms — employees living beyond their
planning process; means is the most common red flag of fraud.
n creating a “safe” whistleblower program; Behavioral symptoms — people who stop looking you in
n establishing strong and effective internal control systems; the eye, come in earlier or stay later than usual without a valid
n ensuring that appropriate accounting standards, controls reason may need to be monitored as potential fraudsters.
and procedures are in place and working effectively; tips and complaints — when employees report actual or
n directing active and frequent oversight of the internal suspected incidents of fraud among their co-workers or super-
audit to ensure transparency in reporting; visors, you’ve got good reason to investigate.
n ensuring the credit union’s goals and objectives are
ethical; The committee should approach fraud prevention with
n assuring members and vendors that the credit union a critical eye. While guiding the internal audit process, the
takes regulatory compliance very seriously; and committee should always probe deeper into areas that warrant
n providing a trusted advisory role to the credit union closer scrutiny. A regular discussion of known risk factors,
board. management override of internal controls, fraud risk assess-
ments, results of employee surveys or hotline calls, and publi-
education is vital cized fraudulent activities from other companies all lead to an
Supervisory committee members are required to have the effective supervisory committee.
formal knowledge, education or experience to handle their NAFCU provides training for directors with credit union-
fraud-detection responsibilities. Investment in educational specific information on regulations, risk management, the
programs focusing on key fraud risks, ethical issues and risk- audit process, effective communication and much more. s
mitigation strategies is key.
Every member of the committee should work to increase Jay Slagel is vice president of risk management and claims for
their knowledge of: 1) ethics, including heightened aware- Allied Solutions, LLC. He regularly performs risk assessments for
ness of the potential for fraud; 2) the organizational history credit unions partnering with Allied.
relating to fraud and its prevention; and 3) fraud concepts.
54 The Federal Credit Union January/February 2012