Annex C
Internal Control Guideline
This guideline contains the basic procedures in handling savings and loan accounts of the ABC
loan product, with emphasis on very basic control measures. The procedures outlined in this
paper are applicable for transactions done within the bank and those that are done in the field.
To ensure that risks and fraud are reduced to a minimum, the bank (or the microfinance unit)
needs to look into three major areas of concern: (1) Good Product Design; (2) Excellent
Repayment Rate; and (3) Sound Internal Controls.
During the start-up phase, good product design and excellent repayment rate are the main
focus of the product implementation. However, it would be worthwhile for the Supervisor (aside
from the internal control personnel of the bank) to start working on sound internal controls
before any fraud has started. Internal control assessment must be conducted periodically to
determine whether:
1.
2.
3.
4.
all financial data gathered is accurate & reliable;
risks are identified and mitigated;
policies and procedures are followed;
and violations to prescribed policies and procedures are dealt with accordingly.
This is a very simple guide that will serve as a tool for the supervisor (or the internal controller)
in conducting the internal control assessment for the bank (or the product). The following areas
are covered here:
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Savings Account Opening & Maintenance
Cash Handling
Handling Cash Shortages & Overages
Loan Administration
Granting of Waivers
Others
Integrating fraud control measures in the operations level is often more effective than an internal
auditor’s post review. Fraud can be reduced to a minimum when operating procedures impose
tight internal control.
1.0
Savings Deposit Administration
The bank must have sound policies particularly in the following areas:
1.1
Identification and documentation requirements for Savings Account Opening
Sufficient identification and documents to support the account opening are very important
factors that could mitigate the risk of having fraudulent accounts in the bank.
For Individual Accounts, acceptable ID’s are Voter’s ID, Driver’s License, Credit Cards, SSS,
GSIS, Pag-Ibig and other club membership cards bearing the client’s signature or picture.
These cards provide positive identification and comparison with specimen signature on the
application forms & signature cards. Community Tax Certificate (CTC) is not acceptable as this
could easily be available to anybody, anywhere.
For Corporate Savings Accounts, a Board Resolution authorizing the account opening with
the authorized signatories and their specimen signatures must be required, as well as the SEC
registration, Articles of Incorporation and By-Laws of the company.
1.2
All information needed on all the forms for account opening must be supplied. For joint
accounts, agreement forms must be properly filled up.
1.3
Maintenance of signature cards: active accounts.
If the bank’s operation is computerized, the Cashier, the Bookkeeper, and/or the Teller, must
jointly keep a custody of alphabetical and numerical files of signature cards.
1.4
Maintenance of signature cards: inactive and dormant accounts).
Once an account becomes inactive or dormant, the signature cards must be pulled out
immediately from the active files, to be transferred to a locked cabinet. These must be held
under the dual custody of the Manager and the Assistant Manager or the Cashier. Any
movement (either deposit or withdrawal) in these accounts must be jointly approved by the
custodians. Monthly interest and service charge posting will not activate these accounts.
1.5
Handling check deposits.
All types of checks (including Manager’s Checks, Demand Draft and Pre-Audited Government
checks) must be subject for clearing. Only On-Us checks are not subject for clearing. All
checks presented for deposit must be in the name of the account owner, both for personal and
corporate savings account and must be properly endorsed by the payee. Acceptance of second
endorsed checks must be strongly discouraged as these are very potential sources of fraud.
1.6
Handling withdrawals and verification process for signature and identification.
If the bank’s operation is computerized, the teller verifies signature and approves withdrawal up
to a certain amount. If the bank’s operation is not computerized, the bookkeeper does the
signature verification and approves withdrawals up to a certain amount. For withdrawals beyond
their limit, the Junior Officers of the bank has to approve. Sufficient identification should be
required for transactions in substantial amount. For withdrawals made by a representative, the
authorization must be properly filled up and signature verified. These procedures could mitigate
the risk of paying out fraudulent withdrawals. As the bank has the primary responsibility to
safeguard its client’s money, then any unauthorized or fraudulent withdrawal from a client’s
account must be paid by the bank.
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Session 3: Loan Product Features
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2.0
Handling Daily Collections
Fraud Control is very necessary in Handling Collections. It is very hard to find individuals who
are always honest, given the opportunity to steal or to work in an office with no clear sanctions
for dishonest employees. Sound Internal Control reinforces a person’s internal sense of right
and wrong. The following basic procedures must be implemented by the bank to mitigate
collection-related fraud:
2.1
Start-of-Day Process.
Collectors ask for blank Official Receipts from the Cashier or anybody who takes custody of all
blank pre-numbered forms.
2.2
Mid-Day Process.
Ideally, collectors should remit all collections in the morning at noontime in order the risk of
robbery or theft while on field with the collection.
2.3
End-of-Day Process.
Collector prepares a list of collections at the end of the day to be verified by the Cashier or the
Teller. Verification should focus not only on the cash turned over, but also on the serial number
of the Official Receipt issued during the day. The unissued Official Receipts are then turned
over to the custodian before the collector goes home.
3.0
Administration Of Blank Cashier’s Checks & Receipts
A Junior Officer must maintain custody of blank Cashier’s Check and receipts and keep a
logbook to monitor issuance. All Cashier’s Check and Official Receipts requisition must be
logged prior to issuance.
4.0 Handling Of Overages And Shortages
4.1
A General Ledger account for Overages & Shortages must be maintained.
Tellers and Collectors must not simply keep overages and pay shortages. They must in the first
place, exhaust all means to trace the root of the discrepancies. In the event that the cause of
the discrepancy could not be traced, then these must be declared on the same day.
4.2
Booking of Overages & Shortages must be done via ticket entry, to be prepared by the
person incurring the discrepancy. Depending on the amount involved, copies of the ticket
must be furnished to the Manager or to the Board.
4.3
Settlement shall be via Payroll Deduction and the term will also depend on the amount
involved. If the bank gives teller’s allowance, then it must be first applied to the shortages
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Session 3: Loan Product Features
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incurred and the balance shall be settled according to the terms specified in the bank’s
policies. Shortages are declared as Other Income of the bank at the end of the year.
5.0
Waiver Of Penalties And Other Charges
A clear guideline showing the levels of authority in granting waiver of penalties and other bank
charges must be in place. Bank could lose money if granting waiver will not be controlled.
Besides, this could be a potential source of fraud if employees will grant waiver to clients for a
fee or commission.
For banks with computerized operations, security password from a higher officer must be
needed before any waiver can be posted. For banks that are not computerized, ticket for the
waiver must be approved by the most Senior Officer of the branch.
6.0
Approvals Of Other Daily Transactions
A “Maker-Checker-Officer” system must be implemented in the bank. This simply illustrates that
the person originating the transaction is not the same person checking and approving it. The
checker must be higher in level than the person originating the transaction. Approving Officer
must either be the Manager or the Assistant Manager. It is very important that the different
degrees of responsibility over the transaction be laid out clearly.
7.0 Loan Administration
Loan accounts are totally self contained by each Account Officer. This practice could lead to
the following fraudulent transactions:
7.1
Existence of “ ghost borrowers and co-makers.” There’s no way for the bank to verify if all
the borrowers and Co-Makers really exist. To prevent this from happening Supervisors
should implement the following policies:
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7.2
Client ID must be a non-negotiable requirement.
Account Officers must not be allowed to have the loan documents
(Promissory
Note, Disclosure Statement, Deed of Assignment) signed outside of the bank.
Borrowers, together with their spouse and co-makers must sign the documents in the
bank in front of the supervisor as they come to get the loan proceeds.
Padded loan amount. Out of financial need, Account Officers can process a loan that is
much bigger than what a borrower actually needs and borrow the excess amount with the
commitment to pay the amortizations due. To prevent this from happening, Supervisors
should do the following:
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As the borrower comes to sign the loan documents, Supervisors should ask a few
questions like, the amount of the loan applied for, and how the money will be used.
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Session 3: Loan Product Features
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8.0
Make sure that borrowers are not made to sign blank loan documents and that they
get their copies of those.
Include as part of their weekly activities, a random client visit.
Visit immediately the borrower who starts making partial payments and find out the
reason why he/she could not come up with the full amortization due.
Loan Collectons Handling And Booking
There are two methods of recording payments being adopted by our Participant Banks. These
are the card based method and the receipt method. Whichever method a bank may use,
Supervisors/Managers must ensure the implementation of Internal Control measures to prevent
the following fraudulent transactions:
8.1
Juggling of collections. Card based method is more susceptible to this. During the field
exposure of our trainees to the pilot banks, we have witnessed cases of borrowers
complaining that some payments are not recorded in their cards. The bank has no way of
checking if all collections are remitted on the same day, especially if they implement the
seven-day grace period. To avoid this from happening, Supervisors must always do the
following:
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8.2
Ensure that all collections are remitted within the same day.
Closely monitor unpaid amortizations for the day and
Immediately visit clients who miss paying one amortization.
Undeclared overages in loan payments. Amortization amounts that are not rounded off
make collection difficult as collectors have to provide lose change. Oftentimes, this
becomes the source of overages/shortages as they total their collections at the end of the
day. As witnessed during the field exposure with our pilot banks, one Account Officer did
not declare the overage, but took the money instead, saying that it could be traced the
following day. Tolerating this practice could lead to bad habits among collectors. To
prevent this from happening, Supervisors must implement the following policies:
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Amortization amounts must be rounded off.
All overages/shortages must be properly declared.
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Session 3: Loan Product Features
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Internal Controls Checklist
This is a short list for Point Persons’ use as they do Internal Controls Assessment for their respective banks.
SUBJECT
Savings Account
Opening
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WHAT TO CHECK
ID’s required for personal accts.
Documents required for corporate accts.
Signature Cards
Maintenance
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Custody of signature cards of active accts.
Custody of signature cards of inactive & dormant accts.
Handling Check Deposits
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Are second endorsed checks acceptable?
Are Manager’s Checks, Demand Draft, Pre-Audited Gov’t.
Checks subject to Clearing ?
Does the bank follow the standard number of clearing days
set by the Phil. Clearing House?
Who verifies signature ? Limits?
Who approves withdrawals? Limits?
Is ID required ?
Who pays for fraudulent withdrawals?
Who keeps Official Receipts?
When does collector request?
When does collector turn over cash collection? To whom?
Does collector include the series of OR’s issued in the daily
collection report?
Who keeps blank CC’s and OR’s ?
Is a monitoring logbook maintained?
Are issuances logged before or after?
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Handling Withdrawals
Handling Cash Collections
Administration of blank
Cashier’s Checks and
Official
Receipts
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STATUS
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SUBJECT
Handling of
Overages/Shortages
Waiver of Penalties &
Other Charges
Approval of Daily
Transactions
Loan Administration
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WHAT TO CHECK
Is there a GL acct. for Overages & Shortages?
How are these booked?
How are these settled?
Does the bank waive loan penalties? Up to
How much? How is this booked?
Does the bank waive interest due? Up to how
how much? How is this booked?
Who approves waiver requests?
Who prepares entry tickets?
Who checks entry tickets?
Who approves entry tickets?
Are loan applicants required to submit ID’s?
Can the borrowers bring home the loan application
and other forms for their spouse or Co-Maker to
sign?
Does Loan Supervisor interview borrowers prior
to release?
Does the Loan Supervisor visit clients? How often?
STATUS
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Session 3: Loan Product Features
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