Evaluation of Citigroup’s Internal Control Deficiencies and Recommendations

Evaluation of Citigroup’s Internal Control Deficiencies and Recommendations

The Securities and Exchange Commission (SEC) imposed penalties totalling $10.5 million on Citigroup Inc. and its subsidiaries for violating federal securities laws related to inaccurate books and records, inadequate internal accounting controls, and failure to supervise traders reasonably. This report aims to critique Citigroup’s internal controls, distinguish between operational and design control deficiencies, determine the reasons for the penalties, and recommend techniques to overcome the weaknesses in Citigroup’s internal control system.

Critique of Citigroup’s Internal Controls and their Purpose

Internal controls are procedures and processes specially designed to give sufficient assurance regarding the success of the organization’s objectives in the operations and efficiency of the organization, as well as reliable financial reporting and compliance with the laws and regulations (1).

Operational Effectiveness and Efficiency

The Bank Supervisory Body had to audit Citigroup’s Internal Controls for the trading activities that the Bank was involved in, and that met the criteria of effectiveness and efficiency. Supported by the failure to detect the position valuation inaccuracies created by illiquid positions and the trader record falsification for years, the dealers lost Citigroup $81 million, which was not accounted for properly. That entails the buck-passing of the authority and infringement of the supervision mechanisms to detect such misconduct promptly.

Reliable Financial Reporting

Crookedly marked warrants from Citigroup brokerage’s clients and fake invoices accepted by Banamex led Citigroup to make tottered financial documentaries. More independent approval of the prices of wrong inventory and controls to authenticate bills were needed to ensure the reliability of Citigroup’s financial report.

Compliance Laws and Regulations

Citi’s internal policies had to be set up in a way that they resolved legal and regulatory issues. Given by the SEC, CGMI failed to supervise its traders, which was prohibited by federal securities law. On top of that, the sub-unitary of Citigroup-Itself, Banamex, did not have the appropriate shields to identify and prevent fraud. It happened because of irregular loans, and the loss by fraud was about $475 million.

Distinguishing Between Operational and Design Control Deficiency

The lack of Citigroup’s internal controls could be categorized into design and operational gaps.

Operational Control Deficiency

The results point to a gap in operational control at the location where a control mechanism is supposed to work as intended. Still, the function needs to be improved due to human errors, or the control must be fixed. In Citigroup, the oversight gaps related to the fact that CGMI traders were not independently validating the prices of mislabeled assets and no proper control mechanisms for supervision and monitoring unauthorized trading have been put in place constitute operational control failures (2).

Design Control Deficiency

A control weakness arises when a weakness in control leads to the inability to correct and prevent the violation of the principles and laws. The evidence against Citigroup is the observed insufficiency of the validation controls to authenticate invoices before lending to Oceanografia S.A. (OSA), and the occurrence of unsupervised procedures and systems to coordinate exchanged investments at CGMI traders are reflected as design control deficiencies.

Reasons for the $10.5 Million Penalties

Some of the biggest reasons for the $10.5 million fine include concealing unethical activities, failure to disclose sufficient information on the contract, entangling the agreements with politics, inaccurate books and records, and inappropriate internal accounting controls

Inaccurate Books and Records

The falsification of business accounting records is considered the most damaging wrongdoing category, leading to misrepresenting the company’s financial statements and significantly harming the organization’s reputation ($5.75 million fine). In these cases, the CGMI property account trades were incorrectly booked with higher-than-normal bid rates, resulting in $81 million in losses not previously included in Citigroup’s or CGMI’s records (3). CGMI also failed to properly monitor the traders, which enabled the misconduct to continue for years, taking the necessary steps to supervise for a more extended period.

Inappropriate Internal Accounting Controls ($4.75 Million Penalty)

Citigroup’s unit, Banamex, would require robust internal accounting and verification processes before making loans to OSA. Such processes should be based on invoices and work estimates. What happened is indeed a shocking sign of lack of controls because, through it, OSHA could have committed fraud by providing fake invoices and magnitudes, and as a result, Citigroup lost $475 million (3).

Recommendations and Justifications

To overcome the weaknesses in Citigroup’s internal control system, several techniques are recommended.

 Strengthening Trader Supervision and Monitoring

Citigroup deals with the issues by introducing several supervision and monitoring mechanisms (one will detect unauthorized trades and misrepresent the positions). This can be achieved through a combination of, implementing adequate trader supervision arrangements, which include periodic reviews and assessments of our traders’ activities and positions. In addition, surveillance and informative systems should be set up to notify of any abnormalities or ignored guidelines or standards. Finally, the common practice here is to periodically audit the positions and engage third parties to provide an independent valuation of illiquid assets to ensure they reflect their book value.

Justification

Trader supervision and monitoring involve executing rules, timely identifying unapproved behaviors, and ensuring the integrity of records (4).

Strengthening Invoice Verification Controls

To avoid exposure to false or distorted information, Citigroup should design a system that verifies the authenticity and precision of invoices and work estimates prior to extending loans or credits. This can include ensuring a multi-tier check procedure for critical transactions is present and referring to documents outside of institutions that prove ownership. Second, conducting background checks on counterparties, enter into contracts for theft deterrent measures, and oversee their financial health and earlier records. Finally, the efforts regarding invoices and transactions aim to implement data analytics and fraud detection tools to identify anomalies or red flags.

Justification

Consequent verification processes are a sure way to seal leaks that point to unethical practices. The use of multi-level reviews, thorough due diligence, and fraud detection tools can help to prevent the occurrence of fraud by way of the submission of invalid invoices or fraudulent transactions.

 Implementation of Internal Control Monitoring and Evaluation

The internal control monitoring and evaluation process that Citigroup needs to build up should be robust enough to pinpoint and remedy the inefficient controls without delay. This can involve continuously conducting control deficiency and risk identification risk assessments to detect gaps and changing circumstances. Second, an ongoing supervision program using live analytics will be designed to monitor the performance of the controls. Also, launching an in-house internal audit requiring it to segregate responsibilities on internal controls’ design and operating effectiveness. Finally, training and necessary awareness programs are conducted at regular intervals so that organization members are well aware of their responsibilities and duties, which contribute to attaining efficient internal control.

Justification

One key step is continuous monitoring and assessment of internal controls to bring any breakages in controls to the surface and address them on time. This makes the company confident in the reliability of generated reports and in compliance with the laws and rules.

Conclusion

Citigroup’s operational and design-related deficiencies within the internal controls lead to significant financial losses and a costly regulatory penalty. The SEC has pinpointed gaps like weak auditor supervision and monitoring of traders, deficient invoice verification protocols, and ineffective internal control assessments. Citigroup will make its internal control system more effective by allotting increased attention to the abovementioned areas. Such actions will ensure the precise posting of the financial reports, the law, and other criteria are followed, and the overall effectiveness and efficiency of Citigroup’s organizational processes.

References

Force, C. T. (2019). Committee of Sponsoring Organizations of the Treadway Commission.

Murdock, H. (2020). Association of Certified Fraud Examiners (ACFE). Auditor Essentials, 7-10. https://doi.org/10.1201/9781315178141

S. Securities and Exchange Commission (U.S. SEC) (2018). Citigroup will pay over $10 million for book and record violations and inadequate controls [Press release]. https://www.sec.gov/news/press-release/2018-155

Ottenstein, P. (2021). Empirical investigations into corporate reporting in Europe. https://slub.qucosa.de/api/qucosa%3A77276/attachment/ATT-0

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Overview
In the United States, the management and auditors of publicly held companies must evaluate their internal controls annually. The purpose of the evaluation is to look for any control deficiencies. Doing so will help avoid any penalties such as the $10.5 million that the SEC imposed on Citigroup Inc. as a result of its internal controls failures. See the article from SEC.gov, Citigroup to Pay More Than $10 Million for Books and Records Violations and Inadequate ControlsLinks to an external site..

You are an external auditor hired by Citigroup to perform an audit. You will be reporting to Citigroup’s audit committee.

Instructions
Write a 2–3 page report for the audit committee in which you:

Critique Citigroup’s internal controls and the purpose they serve.
Distinguish between operation and design control deficiency.
Determine the reasons that led Citigroup Inc. to pay $10.5 million in penalties.
Recommend techniques that will overcome the weaknesses of Citigroup’s internal controls; justify the recommendation.
Use three sources to support your writing. Choose sources that are credible, relevant, and appropriate. Cite each source listed on your source page at least one time within your assignment. For help with research, writing, and citation, access the library, or review library guides.
This course requires the use of Strayer Writing Standards (SWS). The library is your home for SWS assistance, including citations and formatting. Please refer to the Library site for all support. Check with your professor for any additional instructions.