Case Study on Audit and Internal Control

Case Study on Audit and Internal Control

Citigroup’s Internal Controls

Citigroup was fined in the first enforcement action for keeping unreliable books and records and failing to monitor traders. The SEC discovered that Citigroup’s broker-dealer subsidiary’s supervision processes and systems were deficient, which prevented three traders’ misbehavior from being discovered earlier. The traders covered losses from illicit trading by incorrectly marking illiquid positions in their proprietary accounts (Chang et al., 2019). This oversight error emphasizes the significance of establishing reliable mechanisms and processes for identifying and avoiding wrongdoing, such as monitoring and verifying position values.

Citigroup was fined again because the SEC discovered that Oceanografia received a $3.3 billion loan from a Citigroup subsidiary based on false invoicing and project estimates (Washington D.C., 2018). The business missed many warning signs that should have indicated fraud and lacked the systems required to confirm the invoices before lending money to Oceanografia. This absence of controls highlights the need to implement an efficient system of controls and monitoring to find and stop fraudulent acts.

Deficiency

Operation control deficiency, as used in the context of the SEC’s enforcement actions against Citigroup, refers to Citigroup Global Markets Inc.’s (CGMI) insufficient supervisory procedures and systems that failed to identify the traders’ misconduct earlier, leading to inaccurate books and records and $81 million in losses from mismarked illiquid positions in some proprietary accounts (Mehta & Zhao, 2020). Contrarily, a design control deficiency is a failure to establish and maintain adequate internal accounting controls. Citigroup lost $475 million due to fraudulently induced loans from its Mexican subsidiary, Grupo Financiero Banamex S.A. de C.V. (Washington D.C., 2018). Therefore, the insufficiency of the system’s implementation is related to operation control deficiency, whereas the inadequacy of the system’s design is related to a design control deficiency.

Reasons for the Penalty

Citigroup Inc. has consented to pay $10.5 million in fines to resolve two enforcement proceedings regarding its books and records, internal accounting controls, and trader oversight. The claims result from losses of $475 million from illegally induced loans provided by a Mexican subsidiary and $81 million from trader mismarking and improper proprietary trading. The first actions were inaccurate books and records and Citigroup Global Markets Inc.’s inability to oversee traders (Washington D.C., 2018). The SEC’s conclusions were neither admitted nor refuted in the settlement, and Citigroup committed to stopping further breaches. The SEC discovered that between 2013 and 2016, three CGMI traders mislabeled illiquid positions in several of the managed proprietary accounts, in two instances masking losses from pervasive illicit trading.

Additionally, Citigroup agreed to settle allegations that it had failed to establish and maintain effective internal accounting controls by paying a $4.75 million fine. Without acknowledging or disputing the SEC’s allegations, Citigroup settled and promised to stop any such breaches (Washington D.C., 2018). According to the SEC’s order, Oceanografia, S.A. (OSA) received a loan of about $3.3 billion from Citigroup subsidiary Grupo Financiero Banamex S.A. de C.V. between 2008 and 2014.

Recommend Techniques

To ensure that appraisals are accurate, Citigroup should consider instituting independent verification. The correctness of values might be double-checked by employing third-party tools or hiring professional auditors.

Citigroup must enhance its oversight processes and systems to catch trader wrongdoing earlier. This can entail training supervisors and implementing new monitoring and reporting mechanisms.

Citigroup should strengthen its red flag detection systems to detect fraudulent activity before it happens. This can entail checking for transactions that are out of the ordinary, such as those with abnormally high prices or at odd hours.

Citigroup should tighten its internal accounting controls to stop unlawful trading and ensure that loans are only granted based on valid invoices and work estimates. This can entail establishing a different team to examine invoices and job estimates or generating extra levels of review before loans are granted.

References

Chang, Y. T., Chen, H., Cheng, R. K., & Chi, W. (2019). The impact of internal audit attributes on the effectiveness of internal control over operations and compliance. Journal of Contemporary Accounting & Economics, 15(1).

Mehta, M. N., & Zhao, W. (2020). Politician careers and SEC enforcement against financial misconduct. Journal of Accounting and Economics.

Washington D.C. (2018, August 16). Press release. SEC Emblem. Retrieved April 19, 2023, from https://www.sec.gov/news/press-release/2018-155-0#:~:text=The%20Securities%20and%20Exchange%20Commission,accounting%20controls%2C%20and%20trader%20supervision.

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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 control failures. See the article from SEC.gov, Citigroup to Pay More Than $10 Million for Books and Records Violations and Inadequate Controls.

Case Study on Audit and Internal Control

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:

1.)Critique Citigroup’s internal controls and the purpose they serve.
2.)Distinguish between operation and design control deficiency.
3.)Determine the reasons that led Citigroup Inc. to pay $10.5 million in penalties.
4.)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.