Audit and Internal Control – The Case of Citigroup

Audit and Internal Control – The Case of Citigroup

Critique Citigroup’s Internal Controls and the Purpose They Serve

The fraud at Citigroup brings to light internal control and audit deficiencies at the company. On the one hand, Citigroup can be blamed for not having sufficient control measures to prevent fraud. Also, the company can be applauded for noticing the error and acting quickly. Hire our assignment writing services to save yourself tons of time and energy required for your assignment papers.

One cannot fail to applaud the treasury department at Citigroup for noticing a fraud that happened some time back. In one of the fraud cases, the company lost $81 million in trader mismarking (US SEC, 2018). The discovery was a result of a review of the transactions at the company’s treasury department. While $81 million seems like a staggering figure to most people, it is just a drop in the ocean for a company like Citigroup. Citigroup transacts hundreds of millions daily, and it relies on its staff to perform the transactions. As such, the $81 million fraud can go unnoticed. Further, the staffer had worked for the company for quite some time; hence, they had already established trust.

However, the fraud laid bare a few weaknesses with the company’s internal control and audit measures. For instance, there seems to be no director-level approval for wire transfers for the fraudulent transfer to go through. Besides, if a banker were involved on the other side of the wire transfer to decipher the account’s legitimacy, the fraud would have been prevented. Citigroup would have prevented losses amounting to $475 million in fraudulently induced loans made by a Mexican subsidiary with such measures (US SEC, 2018).

The fraud also reflects Citigroup’s failure to set up effective risk management controls. In another instance reflecting the group’s deficient internal risk management controls, a staffer at Citibank sent $900 million to a beauty products company Revlon (Flitter, 2020). Citigroup is struggling to recoup the money to date. Such an embarrassing financial mistake will not have happened if the company has adequate risk management controls.

Distinguish Between Operation and Design Control Deficiency

A deficiency occurs when the operation or design control of financial transactions does not allow the employees to detect or avoid a fraudulent transaction on time. On the one hand, a design deficiency occurs when a control meant to meet a particular objective does not exist. A design deficiency can also occur when the control design fails to meet the objective it was designed to meet. Even if the design control operates as designed, it still fails to meet the purpose it came to be in the first place.

On the other hand, an operation deficiency occurs when a well-designed control fails to operate as designed. This can also be the case if the people charged with controls lack the necessary expertise or competence to effect the control. In other words, a business company may have sufficient internal control mechanisms, but its employees, either by commission or omission, violate the laid controls.

Determine the Reasons That Led Citigroup INC. To Pay $10.5 Million in Penalties

US Securities and Exchange Commission penalized Citigroup and its US-based broker Citigroup Global Markets Inc. (CGMI) a whopping $10.5 million due to multiple regulatory failures. At the heart of the scandal is a loan scheme that led to a loss of $475 million. The internal mishap also led to the firing of a few fraudulent traders associated with the company. Among other reasons, Citigroup was sued for multiple violations concerning its internal records and books, traders’ supervision, and internal accounting setbacks.

Another reason for the SEC’s actions against Citigroup is the failure to supervise its staff properly. Citigroup’s partner- CGM, had failed to monitor employee actions properly, leading to them mismarking illiquid trading positions from 2013 to 2016 (US SEC, 2018). This adds to two other cases in which the company lost money due to unauthorized trading. Following the allegation, the company fired the fraudulent traders and listed in its books a previously ignored $81 million loss. The main reason for the punishment is Citigroup’s failure to apply efficient market surveillance programs to detect fraudulent activities.

According to the US SEC (2018), Citigroup was also penalized $4.75 million for extending bogus loans. Citigroup’s penalization by the SEC is due to the advancement of fraudulent loans by the company’s Mexican subsidiary, Banamex. Banamex extended several loans to Mexican Oil Services Company on the pretext that a state-run organization, Pemex, secures the loans. The action put Citigroup’s shareholders in danger of losing the said loans in the case of default.

Recommend Techniques That Will Overcome the Weaknesses of Citigroup’s Internal Controls; Justify the Recommendation.

           Citigroup’s fraud incidents go way back, and it is time the bank acted to preserve its reputation and safeguard the shareholders’ interests. One way Citigroup can overcome prevent internal fraud is by establishing proper internal controls. This should be further coupled with internal checks and balances to ensure the established controls are working. The company should also explicitly show and train its employees to apply the safeguards to prevent loss.

Hamdani & Albar (2016) also recommend that banks hire different officials to conduct the audit function. Using the same officials to conduct fraud audits and control may lead to fraud regardless of the trust and expertise possessed by the said officials. Therefore, it is recommended that Citigroup hires external auditors to perform the same function performed by internal auditors simultaneously.

References

Flitter, E. (2020, October 7). Citigroup is fined $400 million over “longstanding” internal problems.. The New York Times. https://www.nytimes.com/2020/10/07/business/citigroup-fine-risk-management.html

Hamdani, R., & Albar, A. R. (2016). Internal controls in fraud prevention effort: A case study. Jurnal Akuntansi & Auditing Indonesia, 20(2), 127–135. https://doi.org/10.20885/jaai.vol20.iss2.art5

US SEC. (2018, August 16). SEC.gov | Citigroup to Pay More Than $10 Million for Books and Records Violations and Inadequate Controls. Www.sec.gov. https://www.sec.gov/news/press-release/2018-155-0

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Overview
In the United States of America, the management and auditors of public 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 control failures. See the article from SEC.gov, Citigroup to Pay More Than $10 Million for Books and Records Violations and Inadequate Controls.

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. For assistance and information, please refer to the Strayer Writing Standards link in the left-hand menu of your course. Check with your professor for any additional instructions.

The specific course learning outcome associated with this assignment is:

Evaluate internal control as an indicator of the effectiveness and accuracy of financial statements.