An observant bank auditor recoups excess charges from a mishandled investment, and claims personnel at an insurance company learn a valuable lesson in the importance of communication.
DURING AN AUDIT OF A financial institution, the auditor was assigned to review the semi-annual accounts prepared by the finance department. He noticed that the investment account balance had drastically increased due to a $60 million purchase of recently issued long-term federal government bonds, which constituted approximately 25 percent of the bank's total assets. The auditor also observed that the bond investment note showed a purchase of 600,000 items at $100 each. The amount of each item struck the auditor as unusual, as he reasoned that it would never be the intention of the federal government to issue $100 bonds for such a large purchase.
The auditor questioned the dealing department head, who said that this was his first deal in bonds and that he had no prior experience with bond acquisition. When the auditor expressed concern over the individual bond amounts, the department head stuck to his contention that the face value of each bond was $100. Still not satisfied with the explanation he received, the auditor decided to request the investment file relating to this transaction.
While reviewing the file, the auditor noticed that the investment confirmation did not specify the number of bond certificates issued. Moreover, he did not see a copy of the prospectus or any write-up related to the bonds. After further investigation, the auditor learned that the correct face value was $10,000 per bond. The fact that the bonds were issued at 100 percent of their denominated face value had confused the inexperienced dealing department head, leading him to believe that the value of each bond was 100 dollars. If this anomaly had continued to go unnoticed, differences in per-unit profit/loss computations would have arisen on any subsequent bond transactions.
Because his investigation had uncovered a significant finding, the internal auditor was eager to bring his discovery to the client's attention. However, a gut feeling told him that something else was wrong.
It suddenly occurred to him that, in the absence of a prospectus or write-up related to the bonds in the investment file, nobody had bothered to check the confirmation rate at which the deal was concluded. The auditor obtained a copy of the prospectus and noted that the issue price of the bonds was 0.35 percent lower than the concluded deal price, which translated to an excess charge of $210,000. Further documentation in the investment file showed...