Question

Why is the employee not given the responsibility to grant the loan?

AIP 5.3 Separation of Duties LO 1 In a bank, the employee interacting with someone seeking a loan does not have the authority to grant the loan. Why is the employee not given the responsibility to grant the loan

Answer 1

IT IS THE PART OF BANK'S INTERNAL CONTROL THAT THE PERSON ADVISING THE CLIENT FOR LOAN IS DIFFERENT THAN THE PERSON GRANTING THE LOAN. THERE MAY BE MORE NUMBER IN THE HEIRARCHY DEPENDING UPON THE COMPLEXITY OF BANK'S PROCESS AND OPERATIONS.

THE DISBURSEMENT OF LOAN IS A BANK OPERATION. AND AS PER BANK'S POLICY AND PROCEDURES THERE WILL BE A SEPRATE PERSON ADVISING THE CLIENT ON LOAN PRODUCTS AND ANOTHER PERSON WILL SEE THE FORMALITIES OF DISBURSEMENT OF LOAN. THIS IS A CLASSICAL EXAMPLE OF SEPRATION OF DUTIES VIA INTERNAL CHECK IN THE INTERNAL CONTROLS OF THE ORGANISATION. INTERNAL CONTROLS ARE DEFINED AS POLICY AND PROCEDURES DESIGN, IMPLEMENTED AND CONTROL BY THOSE CHARGED WITH GOVERNANCE, MANAGEMENT OR OTHER PERSONNEL TO PROVIDE REASONABLE ASSURANCE WITH REGARD TO

1) EFFICIENCY OF OPERATIONS

2) RELIABILITY OF FINANCIAL REPORTING

3) SAFEGAURD THE ASSETS

4) COMPLIANCE WITH APPLICABLE LAWS AND REGULATIONS.

IF THERE IS NO INTERNAL CONTROL IN PLACE IN THE GIVEN SCENARIO AND THE PERSON ADVISING THE CLIENT OVERSSES LOAN DISBURSEMENT AS WELL IT COULD LEAD TO POSSIBLE FRAUD COMMITTED BY THAT PERSON. HE CAN QUOTE MISLEADING TERMS AND CONDITIONS TO THE SEEKER, HE COULD MISAPPROPRIATE BANK FUNDS BY DISBURING LARGER FUNDS THAN REQUIRED OR KEEPING EXCESS AMOUNT WITH HIMSELF AND MANY OTHER THINGS. THE PRESENCE OF ANOTHER PERSON IN THE CONTROL PROCESS SEGREGATES THE DUTIES BETWEEN THE PERSONS THEREBY NO PERSON HAS COMPLETE AUTHORUTY OVER A PROCESS. IN CONCLUSION INTERNAL CONTROLS ARE DESIGNED TO ENSURE THAT THE ABOVE MENTIONED GOALS ARE MET AND THE RISK OF FRAUDS AND ERRORS ARE MINIMISED.

HOWEVER IT CAN'T BE SAID THAT HAVING CONTROLS IN PLACE IS DEFINITELY GONNA HELP REDUCE THE RISK OF FRAUD. BY NATURE INTERNAL CONTROLS ARE ALWAYS PRONE TO COLLUSION BY PARTIES INVOLVED AND HENCE POSSIBILITY OF FRAUD WILL BE THERE AND OFCOURSE THIS WILL ALSO CALL THE ETHICS AND MORALS OF A PERSON DEALING. THERE MAY BE MORE STRICTER CONTROLS DEPENDING UPON THE COMPLEXITY OF TRANSACTIONS AND WHAT MANAGEMENT FEELS APPROPRIATE.

HENCE, SEGREGATION OF DUTIES IN THIS PROCESS IS REQUIRED.