NCUA needs to show up. Them not showing up provides the opportunity. When there is that opportunity, there will be more fraud. When there is more fraud, there will be more failures Hey everyone, this is Mark with a special Archive episode of With Flying Colors. I hope you enjoy. Do you want to maximize your success with NCUA? Join Mark Treichel as he shares with you the Insider's View on passing your exam with Flying Colors.
The With Flying Colors podcast is sponsored by Credit Union Exam Solutions by Mark Treichel. If you would like to work directly with the Credit Union Exam Solutions team and receive Support to optimize your results with NCUA, so you save time and money. Visit us@marktrico.com to find out more. Hey everyone, this is Mark Trico flying solo today on a short podcast on fraud, the Fraud Triangle, and how I believe that will mean NCUA. We'll always have some onsite exams and never be fully virtual.
At least that's what I would do if I was still there and let me explain why. So what triggered this is a board meeting last week, which was the quarterly share insurance update and chairman Todd Harper talked about the fact that travel was going to go up and talked about. Uh, some of the failures in credit unions over the last several quarters, and that there was fraud involved in those institutions.
So, and he made the point that while the budget's coming up, he believes that NCUA needs the extra. Travel costs because they need to have a presence on credit unions, particularly small credit unions, where the ability to segregate duties is, is less because they're just not the staff to do it.
So there's an article and see you collaborate David Bowman, quoting some things that chairman Harper said, but here's the article saying that examiners have discovered problems at credit unions as they return to on site exams. NCUA Chairman Todd Harper warned Thursday that the agency's travel budget must increase to accommodate the need for in person visits.
As examiners return on site, they have found an increase in record keeping deficiencies, problems with internal controls, and instances of fraud, Harper said at the agency's board monthly meeting. The NSUA staff has proposed an operating budget of 350 million next year, which represents a 9. 6 percent increase over this year's budget. The proposal includes a travel budget of 23 million, a 5 million boost.
As an aside, I did a previous Podcast on their budget, my take on that 9. 6 percent is it's essentially at or below inflation and and so we had essentially a flat budget, at least for 1 or maybe 2 years. So that I think there's some pent up demand there. I don't think they can get it much load or lower. And I doubt when they approve it, that it will be much lower. So see, you collaborate goes on to say responses from credit union groups.
Are that credit union trade groups have criticized the agency's budget, among other issues, they contend that the offsite exams that were conducted during the pandemic demonstrate that examiners can do an effective job remotely. However, Harper said that during the 1st, 3 quarters of this year, 4 credit unions failed, causing about 7 million dollars in losses. He noted that fraud was a contributing factor in all of the cases.
Saying, even though we learned during the pandemic that many more of our examination procedures can be completed offsite, it is important that examiners go into credit unions to examine documents, ask questions, interact with staff, and review internal controls. I 100 percent agree with Chairman Harper, and I'll go into that a little bit.
The article goes on to say, so as the insulate board considers the 2023 2024 budget, we must ensure that our efforts to be penny wise and examinations don't ultimately result in being pound foolish when it comes to the strength and stability of the share insurance fund while not commenting on the budget and to a board member Randy Rodney Hood agreed that it is important for examiners to return on site. The NCUA has not approved a 2023 budget yet.
It may be considered at the board's December meeting. So that's the end of the article citations I will have. So it will be decided at the December meeting. They have to have one while they, when I was at NCUA, we started doing a two year budget so that if the board couldn't vote and didn't vote, that we would have at least something to operate on to start the following January. And that was particularly important when we only had a two member board.
Because you could have a tie and that could have gotten pretty precarious. So while there is a budget that they could use, it's not enough money since they're asking for 10 percent more, that would not be a good position for staff to be in going into the year. So come hell or high water, they will approve a budget by the end of December. All right. So again, I re I agree with chairman Harper. There's a value. What happens when you are driving along and you.
You have an app you use to drive, I use Waze, you get a notification that there's a police reported ahead. What do you do? Well, I slow down and then you see the police car and you might slow down at least for a little while. That's what happens when NCOA shows up. There are psychological studies that show that there's a value to regulators showing up, to police having a presence, that it reminds people.
To do good and to follow the rules reminds them that the rules exist, which gets me to another thing I wanted to make reference to, and I referenced in some podcasts. NCUA does educate some of its staff to become certified fraud auditors. Certified fraud auditors, when you talk to them, they talk about the fraud triangle. Now, what is the fraud triangle? The fraud triangle is a concept that explains the reasons behind committing fraud by workers at a workplace.
And consists of three elements that are responsible for the fraud pressure, rationalization, and opportunity. According to this concept, fraud occurs when conditions for fraud are favorable to the fraud committer, and it is not a random occurrence. So the three elements. Pressure. The pressure is the motivation behind fraud committing, and that can be either personal financial pressure or pressure from superiors. Both the pressures give the motivation for committing fraud.
If the pressure remains unsolved by rational and legal means, then individuals might go for irrational ways. Some common examples of personal financial pressure are non shareable financial problems, Pressure to pay loans and lifestyle maintenance. And some examples of pressure from superiors are window dressing of accounts, teaming and lading inventory, pilferage and selling, sharing secret information with competitors to earn money, et cetera.
When a person cannot see the apparent path of achieving personal. Or work goals by honest means they may adopt dishonest alternatives. I can tell you, I recently chatted with a client who had a staff member leave, who had been hiding things from them so that they appeared to be in compliance with goals and appeared to be in compliance with policy. Number two, opportunity. When pressure is present, the employee looks for an opportunity to commit fraud.
For example, if there is no internal control over the inventory room, then the employee finds the chance to pilferage it and sell it in the market. There are some cases out there where that happened that were reported in all the trades, you know, 4 years back, but it happens. It can be done by abusing the position, for example, pressure by superior to subordinate to show accounts by, again, window dressing what the reality is. Number 3 is rationalization. It is the last stage.
In the fraud triangle, this stage requires fraudsters to justify fraud acceptably. Most fraud committers do not see themselves as criminals. Instead, they explain the situation of committing fraud. Similarly, fraud by management gives reasons for performance and pressure from shareholders for dividends to all. So that doesn't apply.
But because credit unions, shareholders are their members, so that last sentence is a little incongruent with credit unions, but rationalization, you know, I was passed over for a raise. I should have got that promotion. I'm not paid enough to compared to, you know, the 4 other people who've been here longer than me. The rationalization allows them to believe that what they're doing has has good intent, but in reality, it doesn't.
So, you know, this article goes on to talk about how you can mitigate it with strong internal controls, favorable employee policies, strong fraud, deterrent policies. And ethical training auditing, which is an important element. The fraud triangle has three elements, pressure, opportunity, and rationalization. And the most crucial factor is an opportunity. It is so because the opportunities available for committing the fraud, motivate the fraudster to commit the fraud. So let me repeat that.
The opportunities available for committing the fraud motivate the fraudsters to commit the fraud. So here's the deal. NCUA needs to show up. Them not showing up provides the opportunity. When there is that opportunity, there will be more fraud. When there is more fraud, there will be more failures. And the industry will expect NCUA to have dealt with those. But if they're not on side and can't do some procedures, Particularly in the smaller credit unions, uh, to mitigate the potential for fraud.
Not that NCOA does fraud audits and that they're going to, that they're going to catch all fraud. But again, the actual presence mitigates the opportunity and then the steps that are taken can catch it sooner. Then later, heaven forbid, we, you know, you're finding a situation where there's one of the large frauds that happen in credit unions. How can the Fraud Triangle help to identify fraud and avoid it? The motivation for fraud can vary from financial to non financial.
To prevent fraud, companies must implement strong internal controls. As an organization with strong internal control, experience lower frauds and quickly identify frauds. Strong fraud deterrence policies also help prevent fraud as employees fear its consequences like losing their jobs and not getting a job anywhere. In audits, management audit and operational audits are motivated so that management fraud can be detected. So there we go.
NCOA doesn't do an audit, they do an exam, but that is part of how. The opportunities can be limited in the case of the statutory audit. There's a clause where the auditor has to report whether fraud is committed by employees, management or a third party. So if you are a credit union that has a CPA opinion on it, you are probably asked several questions as it relates to that. Are you aware of any fraud? I was asked those questions as the executive director when we had our opinion audits.
Another way to mitigate fraud. Potential of fraud. The article also says the fraud triangle comprises these components, pressure, opportunity and rationalization. It helps in preventing the fraud. If there are zero tolerance, surprise visits and audits and a code of ethics. So let's focus on surprise visits and audits. It says top management must have a system of surprise checks and visits and auditors should also do surprise audits to ensure that no frauds are committed. By or on the company.
All right. So NCWA has mostly gotten away from surprise visits. They will do surprise visits on occasion. Back right before I started, they actually, when, when the exam started, they would walk in, they would put red tape on all the loan files. They would count cash. And it was more of an audit and it was more of a surprise. If you can't do surprise. audits, you should do audits where you are present in the building and, uh, taking some steps that can only be done on site.
So these notes came from a website called the wallstreetmojo. com. When I Googled fraud triangle, that one caught my eye because it did a really good job of summarizing. So I want to give them credit for that. So again, in summary, in my opinion, we'll never do fully. Virtual exams. They always need to make some onsite presence. There are no absolutes where you can say, Hey, stay away, never come back on site. And I think it would be unwise for NCUA to take that position.
And I believe the NCUA board will continue to operate in that fashion. All that being said, there should be less of a footprint moving forward because the COVID pandemic taught the world and taught NCUA that more can be done offsite. That's it. Mark Treichel signing off with Flying Colors. Okay. Thank you for joining us on this episode of With Flying Colors.
Subscribe on your favorite podcast app to hear future episodes where subject matter experts of all varieties will provide tips on how to achieve success with NCUA. If you would like to learn more about how we assist credit unions, check out our services at marktreichel. com.