Reference no: EM133399004

Case: As manager of the Finance department for National Capital Trust, Miriam Richardson was in charge of financial functions at the institution. It was her job to ensure that clients' funds were managed properly. In August 2013, Miriam noticed several unexplained changes in various accounts, including some accounts that were worth millions of dollars. Small sums of money were being withdrawn frequently, and large undocumented credit card purchases were being made. The Legal Services department also reported that an unusually large number of amendments were being made to client wills. With all this going on, Miriam was concerned about the safety of the customers' assets.

National Capital Trust (NCT) was formed in the 1970s to provide trustee services for elderly clients. Even as it grew and subsequently offered additional services to its customers, NCT remained first and foremost a trust company. As its aging client base grew, more assets were being placed in the hands of NCT's professional staff. As a trustee, the company provided security for money held in its accounts, items in safety deposit boxes (such as jewelry), investment portfolios, and real estate assets. To do this, NCT was assigned power of attorney (POA) over the client's assets through a document completed by the client or a family member. Clients' bills were paid with funds held in the trust, and their assets were managed so that they could maintain a comfortable lifestyle. Miriam was concerned that financial safeguards had not kept pace with the rapid growth in NCT's assets. Fraud was always a possibility when dealing with assets held in trust. In fact, the company's external auditors and regulatory authorities had identified weaknesses in the internal controls on several occasions. Unfortunately, very few of these issues were addressed. As one senior manager said, "We trust our employees." In addition, Miriam's department was constantly backlogged with work, and the shortage of workers with the necessary skills made it difficult to find qualified candidates to hire. NCT has four client-facing departments: Client Services, Finance, Investments, and Legal Services (see Figure 1). The processes at the company relating to trust accounts involve client enrollment, administration procedures, and transaction controls. Figure 2 provides an overview of the processes relating to client accounts, while Figures 3 and 4 contain a sample of job descriptions and NCT policies and procedures.For an individual to enroll with NCT, an application form needs to be completed in the Client Services department. This typically is done by a family member of the elderly customer. The customer's assets are catalogued by a representative of NCT who goes to the individual's home to take an inventory of valuables. In the past, two individuals usually went and catalogued everything, but staff shortages resulted in only one bank representative now being sent. Assets that get catalogued could include jewelry, collectibles, and-not uncommonly-loose cash. The assets are then placed in a secure location at NCT (or sometimes offsite), and a POA is assigned to the trustee to make prudent financial decisions on the client's behalf. Assets are held in trust until the client dies. At that time, they are distributed based on the terms of the will. The Legal Services department coordinates client POA documents and wills NCT assigns a case worker from its Client Services department to each new customer. It is the case worker's job to contact clients periodically to ensure their wellbeing. For example, if the individual is in a care facility, the case worker ensures the person is properly fed, clothed, and bathed. A financial representative in the Finance department works with the case worker to ensure that all financial issues, such as paying bills and making small purchases (e.g., a television for personal use), are handled properly. It is the financial representative's job to ensure the propriety of any payments made, including providing appropriate supporting documentation for any disbursements. In most cases, family members aren't interested in caring for their elderly parents. As a result, the case worker becomes the main personal contact for many clients, and close ties frequently develop between client and case worker.Prior to a payment being made, a pre-audit is done on the disbursement to ensure that (1) it relates to the correct client, (2) the funds are taken from the right account, (3) the necessary approvals have been obtained, and (4) appropriate supporting documentation is provided. Payments can be made by way of petty cash, check, or by using a client's credit card. Payments are authorized by the case worker and approved by the financial representative. The Finance department requires supporting documentation for the disbursement, but it is not always provided. Case workers can make small payments using petty cash, which is taken directly from the client's bank account. Because of the small dollar value of these disbursements, supporting documentation usually is not provided to the financial representative who approves the transactions. The Finance department receives cash from client investments (such as dividend checks, interest on bonds, and certificates of deposit, as well as rent from real estate holdings). Incoming mail is opened by the client's financial representative. Any cash or checks received are deposited into the appropriate account by the financial representative and recorded by both the Investments department and the Finance department. NCT's auditors had noted that a bank reconciliation of the cash received and cash deposited was required but not always completed on a timely basis.A new case worker was hired in January 2013 to alleviate staff shortages and deal with the large backlog of work, particularly in client enrollment. She seemed to be the ideal candidate. She had relevant work experience, proper academic qualifications, and had performed well on aptitude tests. In addition, phone calls placed to her references resulted in glowing reports. NCT's Human Resources (HR) department was tasked with verifying the candidate's credentials. Unknown to the HR person checking her qualifications, the person who provided confirmation of the candidate's prior work experience also served as a reference and was a close personal friend of the applicant. Also unknown to HR was the fact that her qualifications came from an obscure college located outside the country. A photocopy of her degree had been accepted as evidence of education. These vetting procedures were not normal practice for HR, but the department was short-staffed and busy trying to fill numerous positions. The urgency to fill the case worker position and time constraints led to the relaxed standards. ASSIGNMENT In August 2013, Miriam noticed that some of the client accounts were becoming seriously depleted for no apparent reason. In addition, clients' petty cash accounts were being used more often than usual. The Legal Services department notified Miriam of changes to clients' wills that, while not unusual, were not frequent occurrences. Miriam wanted to investigate these apparent anomalies and make the necessary changes.Your assignment is to address each of the following questions:

Question 2. What are the risks associated with providing financial services such as those of a trustee? Classify each risk as (1) high, (2) medium, or (3) low.

Question 3. Review the processes outlined in the case and indicate where: a. Controls should be in place but do not exist and b. Controls are in place but are not working effectively.

Question 4. For each of the controls that are in place, or should be, identify whether that control is preventive or detective.

Question 5. Was NCT's senior management adequately performing its fiduciary responsibilities on behalf of its clients? (See Figure 5.) Give an example of how it was, or was not, meeting its responsibilities.

Question 6. What are the ethical responsibilities of senior management toward its clients?

Question 7. How would you test whether inappropriate activity (potential fraud) had occurred?

Question 8. What is the conclusion of this case?.