FDl6 NEWS RELEASE
FIDERAL DEPOSIT INSURANCE CORPORATION
FOR IMMEDIATE RELEASE PR-98-86 (6-24-86)
FDIC CHAIRMAN STRESSES IMPORTANCE
OF INTERNAL AUDITORS IN FRAUD DETECTION
"Internal auditors represent the front line of defense against fraud,
insider abuse and unwise financial practices within the nation's
corporations," FDIC Chairman L. William Seidman today told practitioners
attending the 45th Annual Conference of the Institute of Internal Auditors.
Mr. Seidman cited three elements the FDIC looks for in a bank's internal audit
department: independence, competence and management support.
"Independence is critically important. Auditors need the power to delve
into all of the bank's affairs, including those of the bank management.
Without this independence the internal auditor will lack effectiveness and be
of little or no real value to the bank," the FDIC Chairman told the group
meeting in New York City.
Stressing the need for management support, he said: "Senior management
must demonstrate, by the nature of its relationship with the internal
auditors, that they are key players in the organization."
Turning to the role of outside auditors, Mr. Seidman said their most
important role is confirming the strength of control systems, both internal
controls and management controls. He said both internal and external auditors
should watch for fraud and insider abuse when conducting bank audits, and he
provided the auditors with a sampling of a new fraud and insider abuse "red
flag" system now being developed by the FDIC's examination staff.
An independent bank audit "should provide assurance to the board of·
directors that they are well informed about the condition of the bank, that
-more-
FEDERAL DEPOSIT INSURANCE CORPORATION, 550 Seventeenth St., N.W., Washington, D.C. 20429 • 202-898-6996
FIDERAL DEPOSIT INSURANCE CORPORATION
FOR IMMEDIATE RELEASE PR-98-86 (6-24-86)
FDIC CHAIRMAN STRESSES IMPORTANCE
OF INTERNAL AUDITORS IN FRAUD DETECTION
"Internal auditors represent the front line of defense against fraud,
insider abuse and unwise financial practices within the nation's
corporations," FDIC Chairman L. William Seidman today told practitioners
attending the 45th Annual Conference of the Institute of Internal Auditors.
Mr. Seidman cited three elements the FDIC looks for in a bank's internal audit
department: independence, competence and management support.
"Independence is critically important. Auditors need the power to delve
into all of the bank's affairs, including those of the bank management.
Without this independence the internal auditor will lack effectiveness and be
of little or no real value to the bank," the FDIC Chairman told the group
meeting in New York City.
Stressing the need for management support, he said: "Senior management
must demonstrate, by the nature of its relationship with the internal
auditors, that they are key players in the organization."
Turning to the role of outside auditors, Mr. Seidman said their most
important role is confirming the strength of control systems, both internal
controls and management controls. He said both internal and external auditors
should watch for fraud and insider abuse when conducting bank audits, and he
provided the auditors with a sampling of a new fraud and insider abuse "red
flag" system now being developed by the FDIC's examination staff.
An independent bank audit "should provide assurance to the board of·
directors that they are well informed about the condition of the bank, that
-more-
FEDERAL DEPOSIT INSURANCE CORPORATION, 550 Seventeenth St., N.W., Washington, D.C. 20429 • 202-898-6996
-2-
the management is complying with their policies, and that internal controls
are strong," Mr. Seidman said.
"All told, fraud and insider abuse contributed to over 40 percent of bank
failures between 1980 and 1983," Mr. Seidman said. He stressed that good
communications between regulators and auditors can improve the performance of
both groups. He noted, "I have suggested that when CPAs resign from an audit
engagement because they have discovered insider abuse or fraud and the
management does not take appropriate action, that it would be desirable for
the CPA to inform the appropriate regulator." He emphasized that, "I have not
suggested that there be any communication of this nature until the CPA is no
longer engaged by the client, except with the permission of the client."
He concluded by saying that "the courts, the Congress and the people
expect us as auditors, whether for the government or the private sector, to be
looking for fraud and insider abuse. We should make it a high priority part
of each examination. We may not always find these abuses, because clever
people are good at hiding them, but we should always try to search them out.11
###
the management is complying with their policies, and that internal controls
are strong," Mr. Seidman said.
"All told, fraud and insider abuse contributed to over 40 percent of bank
failures between 1980 and 1983," Mr. Seidman said. He stressed that good
communications between regulators and auditors can improve the performance of
both groups. He noted, "I have suggested that when CPAs resign from an audit
engagement because they have discovered insider abuse or fraud and the
management does not take appropriate action, that it would be desirable for
the CPA to inform the appropriate regulator." He emphasized that, "I have not
suggested that there be any communication of this nature until the CPA is no
longer engaged by the client, except with the permission of the client."
He concluded by saying that "the courts, the Congress and the people
expect us as auditors, whether for the government or the private sector, to be
looking for fraud and insider abuse. We should make it a high priority part
of each examination. We may not always find these abuses, because clever
people are good at hiding them, but we should always try to search them out.11
###