Question

Pacific Bank provides loans to businesses in the community through its Commercial Lending Department. Small loans (less than $100,000) may be approved by an individual loan officer, while larger loans (greater than $100,000) must be approved by a board of loan officers. Once a loan is approved, the funds are made available to the loan applicant under agreed-upon terms. Pacific Bank has instituted a policy whereby its president has the individual authority to approve loans up to $5,000,000. The president believes that this policy will allow flexibility to approve loans to valued clients much quicker than under the previous policy. As an intern auditor of Pacific Bank, how would you reposnd to this change in policy ?

Answer 1

Pacific Bank has instituted a policy whereby its president has the individual authority to approve loans up to $5,000,000. The president believes that this policy will allow flexibility to approve loans to valued clients much quicker than under the previous policy.
As an internal auditor I would not really welcome such a policy and would be rather against it since in any business organization it is very important to have dual authorization system and it becomes even more important in banking companies as they involve huge cash flows.
In case of loans as huge as up to $5000000 it is important to have a system of dual authorization.
This is an additional security measure that removes the risk of an individual user authorising inappropriate payments due to some bias. With dual authorisation, two different people need to authorise any payment above a certain amount.
If the company decides to formulate a policy where the director is solely responsible for granting such loans then there are greater possibilities of fraud and inconsistent transactions.The policy may seem to make the work and process faster but can lead to huge repercussions.With increasing cases NPAs due to glitch in the internal banking authorization and systems it becomes very important to have dual authorization and not giving the entire responsibility to a single individual to ensure proper checks, transparency and avoidance of cases of inconsistent and bad loans.
Hence, as an auditor I would suggest the company against the new policy.