CASE 7-1 The Greater Providence Deposit & Trust Embezzlement Nino Moscardi, president of Greater Providence Deposit& Trust (GPD&T), received an anonymous note in hismail stating that a bank employee was making bogusloans. Moscardi asked the bank's internal auditors to in-vestigate the transactions detailed in the note. The investi-gation led to James Guisti, manager of a North Providencebranch office and a trusted 14-year employee who hadexamine all loans and generally focus on loans muchlarger than the ones in question. Second, Greater Provi-dence had recently dropped its computer services ar-rangement with a local bank in favor of an out-of-statebank. This changeover may have reduced the effective-ness of the bank's control procedures. Third, the bank'sloan review clerks were rotated frequently, making fol-low-up on questionable loans more difficult.Guisti was a frequent gambler and used the embez-zled money to pay gambling debts. The bank's lossestotaled $624,000, which was less than the $1.83 millionin bogus loans, because Guisti used a portion of theborrowed money to repay loans as they came due. Thebank's bonding company covered the loss.The bank experienced other adverse publicityprior to the fraud's discovery. First, the bank was fined$50,000 after pleading guilty to failure to report cashtransactions exceeding $10,000, which is a felony. Sec-ond, bank owners took the bank private after a lengthypublic battle with the State Attorney General, who al-leged that the bank inflated its assets and overestimatedits capital surplus to make its balance sheet look stron-ger. The bank denied this charge.once worked as one of the bank's internal auditors. Guistiwas charged with embezzling $1.83 million from the bankusing 67 phony loans taken out over a three-year period.Court documents revealed that the bogus loanswere 90-day notes requiring no collateral and ranging inamount from $10,000 to $63,500. Guisti originated theloans; when each one matured, he would take out a newloan, or rewrite the old one, to pay the principal and inter-est due. Some loans had been rewritten five or six times.The 67 loans were taken out by Guisti in five names,including his wife's maiden name, his father's name, andthe names of two friends. These people denied receivingstolen funds or knowing anything about the embezzle-ment. The fifth name was James Vanesse, who police saiddid not exist. The Social Security number on Vanesse'sloan application was issued to a female, and the phonenumber belonged to a North Providence auto dealer.Lucy Fraioli, a customer service representative whocosigned the checks, said Guisti was her supervisor andshe thought nothing was wrong with the checks, thoughshe did not know any of the people. Marcia Perfetto,head teller, told police she cashed checks for Guistimade out to four of the five persons. Asked whether shegave the money to Guisti when he gave her checks tocash, she answered, “Not all of the time," though shecould not recall ever having given the money directly toany of the four, whom she did not know.Guisti was authorized to make consumer loans upto a certain dollar limit without loan committee approv-als, which is a standard industry practice. Guisti's origi-nal lending limit was $10,000, the amount of his first1. How did Guisti commit the fraud, conceal it, andconvert the fraudulent actions to personal gain?2. Good internal controls require that the custody, re-cording, and authorization functions be separated.Explain which of those functions Guisti had and howthe failure to segregate them facilitated the fraud.3. Identify the preventive, detective, and correctivecontrols at GPD&T, and discuss whether they wereeffective.4. Explain the pressures, opportunities, and rational-izations that weresent in the Guisti fraud.5. Discuss how Greater Providence Deposit & Trustmight improve its control procedures over the dis-bursement of loan funds to minimize the risk of thistype of fraud. In what way does this case indicate alack of proper segregation of duties?6. Discuss how Greater Providence might improve itsloan review procedures at bank headquarters to mini-mize its fraud risk. Was it a good idea to rotate theassignments of loan review clerks? Why, or why not?7. Discuss whether Greater Providence's auditorsfraudulent loan. The dollar limit was later increased to$15,000 and then increased again to $25,000. Some ofthe loans, including the one for $63,500, far exceededhis lending limit. In addition, all loan applications shouldhave been accompanied by the applicant's credit his-tory report, purchased from an independent credit ratingfirm. The loan taken out in the fictitious name would notshould have been able to detect this fraud.have had a credit report and should have been flaggedby a loan review clerk at the bank's headquarters.News reports raised questions about why the fraudwas not detected earlier. State regulators and the bank's8. Are there any indications that the internal environ-ment at Greater Providence may have been defi-cient? If so, how could it have contributed to thisembezzlement?internal auditors failed to detect the fraud. Several rea-sons were given for the failure to find the fraud earlier.First, in checking for bad loans, bank auditors do notSource: John Kostrezewa, "Charge: Embezzlement," ProvidenceJournal-Bulletin (July 31, 1988): F-1.

Answer1. Commit: J was an old and trusted employee of the trust who held an influential position in…

How did Guisti commit the fraud, conceal it, and convert the fraudulent actions to personal gain? Good internal controls require that the custody, re- cording, and authorization functions be separated. Explain which of those functions Guisti had and how the failure to segregate them facilitated the fraud. Identify the preventive, detective, and corrective controls at GPD&T, and discuss whether they were effective.

How did Guisti commit the fraud, conceal it, and convert the fraudulent actions to personal gain? Good internal controls require that the custody, re- cording, and authorization functions be separated. Explain which of those functions Guisti had and how the failure to segregate them facilitated the fraud. Identify the preventive, detective, and corrective controls at GPD&T, and discuss whether they were effective.

Understanding Business

12th Edition

ISBN:9781259929434

Author:William Nickels

Publisher:William Nickels

Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment

Section: Chapter Questions

Problem 1CE

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