Oversight Risk: Evidence of Compliance...

In light of the tremendous announcements of corporate and financial malfeasance over the past few months, there is a "cramdown" in the works. The US Office of the Special Inspector General for the Troubled Relief Asset Program (SIGTARP) is gearing up.

The Office of the Special Inspector General for the Troubled Asset Relief Program ("SIGTARP") was established by the Emergency Economic Stabilization Act of 2008 ("EESA").

Under EESA, the Special Inspector General has the responsibility, among other things, to conduct, supervise and coordinate audits and investigations of the purchase, management and sale of assets under the Troubled Asset Relief Program ("TARP"). SIGTARP’s goal is to promote economic stability by assiduously protecting the interests of those who fund the TARP programs - i.e., the American taxpayers - by facilitating transparency in TARP programs.

Transparency and effective oversight in the TARP will be accomplished in coordination with other relevant oversight bodies, and by robust criminal and civil enforcement against those, whether inside or outside of Government, who waste, steal or abuse TARP funds.

The Special Inspector General, Neil M. Barofsky, was confirmed by the Senate on December 8, 2008, and was sworn into office on December 15, 2008.

As the new Stimulus Package works it's way to the local and state governments additional oversight will be placed on the bidding, procurement and contracting processes. Compliance with federal and state laws will become ever so vital as funds are applied under TARP in the mortgage markets and "shovel ready" projects are funded for maintenance and repair of critical infrastructures.

As the government ramps up to spend trillions of dollars to revive the economy, loopholes in federal law and a shortage of FBI agents assigned to investigate white-collar crime could lead to a big payday for perpetrators of mortgage fraud and other schemes.

That's the view of lawmakers who want to extend federal fraud laws to private mortgage companies that aren't regulated at the federal level, and provide $155 million a year to the U.S. Justice Department to triple the number of active mortgage-fraud task forces and help the FBI rebuild its white-collar investigation program.

So what should a Chief Compliance Office or Vice-President of Operational Risk Management at an institution be concerned with over the next few years? Get ready. First and foremost, the Board of Directors will be focused on "Corporate Governance Strategy Execution." Public institutions who have most recently taken on the role of becoming a more traditional bank in order to become eligible for government funds are most at risk. Some of these include traditional insurance companies and credit or charge card institutions. This is because they have not had the controls, staff and policy programs in place to effectively deal with all of the new banking regulations and compliance mechanisms the oversight agencies will be scrutinizing during their audits.

Securities and Exchange Commission Chairman Mary Schapiro plans to look into whether the boards of banks and other financial firms conducted effective oversight leading up to the financial crisis, according to SEC officials, part of efforts to intensify scrutiny of the top levels of management and give new powers to shareholders to shape boards.

As she examines what went wrong, Schapiro is also considering asking boards to disclose more about directors' backgrounds and skills, specifically how much they know about managing risk, said the officials,

As new sources of funding flow to the organizations for redistribution to consumers or small businesses the oversight process must be implemented up front. The human factors will play a tremendous role in how ethics are either applied consistently or are absent all together, in day to day operations. Boards of Directors will ensure that corporate management are injecting the correct amount of corporate governance and compliance management oversight to keep human behavior and red flags in check. Operational Risk Managers will be busy expanding their breadth and reach into the corporate enterprise for years to come.

operational risk

Managing the Business Risk of Fraud...

Operational Risk Management is in full swing at distressed institutions as the TARP funds continue to flow to these needy corporations. One thing is certain; you can expect increased oversight. The risk management mechanisms to determine how and where funds are being utilized will be the focus. Anti-fraud planning and investigative projects are on the radar of the Board of Directors and the Audit committee chair. The US government Anti-Fraud Task Force is gearing up:

Six more U.S. government agencies, including the Federal Reserve, will take part in a federal anti- fraud task force to strengthen its focus on uncovering mortgage and securities crimes.

Deputy Attorney General Mark Filip announced the expansion yesterday of the President's Corporate Fraud Task Force, which was formed in 2002. Joining the group are the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Department of Housing and Urban Development and the Office of Inspector General for the financial industry rescue program approved last year by Congress.

"These new members reflect the breadth and depth of the mortgage crisis that we are now confronting and the urgency of the task before us," Filip said in a statement.

Current members of the task force include the heads of the Securities and Exchange Commission and the Commodity Futures Trading Commission.

Gil Soffer, associate deputy attorney general, said the task force expansion would let FBI officials coordinate with monitors of the Troubled Asset Relief Program.

"To be able to bring in our resources and to be able to tap into our expertise and to be able to work with our investigators and our prosecutors when there's criminal activity afoot, it's a tremendous boon" to TARP investigators, he said in an interview.

Congress passed the $700 billion TARP rescue package in October, and lawmakers have said oversight is needed to ensure the funds aren't misused.

The business of Fraud Risk Management has been spelled out for years and continues to be a high priority. Most Fortune 50 organizations have established sophisticated frameworks for addressing compliance, ethics and governance in their organizations. However, the question remains how well they understand their respective roles, responsibilities and jurisdictions. This organizational challenge is no different than the battle between the physical security and information security domains who are now converging. The ACFE, AICPA and the Institute of Internal Auditors have released their latest Practical Guide for Managing the Business Risk of Fraud. Here are the key principles:

Only through diligent and ongoing effort can an organization protect itself against significant acts of fraud. Key principles for proactively establishing an environment to effectively manage an organization’s fraud risk include:

• Principle 1: As part of an organization’s governance structure, a fraud risk management program should be in place, including a written policy (or policies) to convey the expectations of the board of directors and senior management regarding managing fraud risk.
• Principle 2: Fraud risk exposure should be assessed periodically by the organization to identify specific potential schemes and events that the organization needs to mitigate.
• Principle 3: Prevention techniques to avoid potential key fraud risk events should be established, where feasible, to mitigate possible impacts on the organization.
• Principle 4: Detection techniques should be established to uncover fraud events when preventive measures fail or unmitigated risks are realized.
• Principle 5: A reporting process should be in place to solicit input on potential fraud, and a coordinated approach to investigation and corrective action should be used to help ensure potential fraud is addressed appropriately and timely.

Operational Risk Management issues still exist in Tier II organizations who have market caps below $1B. in assets and are more vulnerable. This is typically due to the lack of resources and extensive staff devoted to a an enterprise wide program that incorporates the mission from the Board of Directors and the "Tone-at-the-Top". 2009 will be busy and you can bet the General Counsel and CxO's will be burning the midnight oil.

operational risk