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NCUA IG: Management, Internal Control Issues Brought El Paso FCU's Demise
ALEXANDRIA, Va. (9/5/13)--Following up on potential fraud risk factors, and more aggressive identification of excessive fee income, internal control and record keeping issues could have helped the National Credit Union Administration avoid National Credit Union Share Insurance Fund losses created by the failure of El Paso's FCU, El Paso, Texas.

These recommendations came in the form of a NCUA Office of the Inspector General (OIG) material loss review on the $5 million-in-assets, 1,035 member credit union.

El Paso's FCU was liquidated in fall 2012 when the NCUA determined the credit union had no prospect to restore operations.

The NCUA OIG examination of the credit union's practices found that senior management of the credit union "displayed a lack of integrity and did not manage the credit union in the best interest of its members." Some senior staff also lacked the competence needed for their positions, the NCUA said.

Fee income that far exceeded that of similar credit unions was one factor that the NCUA uncovered in its examination of the credit union. Other forms of mismanagement are listed in the OIG report, but they are redacted in the public version released by the agency.

NCUA examiners and an external accounting firm also "routinely reported poor internal controls, record keeping errors, and a lack of segregation of duties in critical areas," the OIG report added. However, the report said, "specific recurring issues related to errors in call reports, cash, and bank reconciliations were not identified by examiners as potential fraud risk indicators."

To better address these issues in the future, the OIG report recommended that the NCUA:
  • Implement a more comprehensive strategy for identifying and responding to fraud risk triggers;
  • Revise the Red Flag Questionnaire to capture emerging trends in credit union fraud as well as those that persist in the industry; and
  • Require third party confirmations for all accounts where the balance or activity is significant to the operations of the credit union.
The OIG report also encouraged NCUA examiners to attempt to identify root issues, and to not clear findings or document of resolution items until a credit union's management has corrected issues in a manner that provides lasting results. The agency should also monitor the effectiveness of NCUA final rule 701.4 to determine whether the rule is increasing the financial sophistication of directors, the OIG report added.

For the full report, use the resource link.
Other Resources

NCUA Material Loss Review
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