"Balancing Effectiveness and Efficiency in Internal Controls"

www.bankersdigest.com

May 25, 2015

Volume 146, No. 20

Jena Banker Tweedy Installed as 2015-2016 Louisiana Bankers Association Chairman

Barber Named EVP, Trinity in Fort Worth

ate past chairman on the LBA board W. Paul Tweedy, senior vice president of directors. and chief operating officer of CatahouThe other 2015-2016 la-Lasalle Bank in Jena, LBA officers installed was installed as the include: chairman-elect, 2015-2016 chairman of Thomas L. Martin, the Louisiana Bankers president/CEO officer of Association during the Gibsland Bank & Trust, 115th Annual LBA ConGibsland; and treasurvention & Exposition, er, Ken Hale, president/ held May 13-15 at the CEO of Bank of MontRitz-Carlton, Naples, FL. gomery, Montgomery.

Tweedy has served Delegates to the LBA on the LBA executive convention elected the team as treasurer and following new directors: chairman-elect.

He • Northwest Region joined Catahoula-LaW. Paul Tweedy Representative: Jim salle Bank after its 2014 Barlow, president/CEO of Home Fedacquisition of Bank of Jena, where he eral Bank in Shreveport served as president/CEO. • Northeast Region Representative: Tweedy succeeds Paul Durand, Brian Woodard, president/CEO of president/CEO of St. Martin Bank and Trust in St. Martinville, who will conFirst National Bank in Ruston. tinue to serve for one year as immedi(continued on Page 6)

Jeffrey M. Harp, president/CEO of Trinity Bank, N. A., Fort Worth, TX, has announced that Mike Barber has joined the bank as an executive vice president. He comes to Trinity after eight years with Capital One Bank, where he served as Fort Barber Worth Area President.

Born and raised in Fort Worth, Barber earned a BBA degree in finance from TCU in 1996. He is a career commercial banker who has also served in commercial lending positions at Wells Fargo Bank and Guaranty Federal Bank.

Active in both civic and community organizations, he serves on the boards of directors for the Fort Worth Chamber of Commerce and the Boys and Girls Clubs of Greater Fort Worth, and is a current member of the Housing Committee at Catholic Charities Fort Worth.

Trinity Bank, N. A., is a Fort Worthbased commercial bank founded on May 28, 2003. The $215 million-asset bank was recently selected the topperforming bank in TX by the nationally-known rating service Bankers Caddy Q

Goodwin Joins RCB Bank As Senior Vice President, Market President for Yukon, OK David K. Goodwin has joined Claremore, OK-based RCB Bank as senior vice president, market president of its new lending office in Yukon, according to Roger Mosier, president/ CEO. Goodwin has 30 years of banking industry exGoodwin perience, including lending positions and serving as a chief lending officer. He comes from Yukon National Bank, where he served 20 years, most recently as executive

vice president. Goodwin earned a BS, business administration degree from Oklahoma State University and is a graduate of the Southwestern Graduate School of Banking at SMU. He has been active in the Yukon community, including the Yukon Chamber of Commerce, Canadian Valley Technology Center, and other organizations.

RCB Bank reports the Yukon lending office will open later this year. The new office will serve as a lending office only, offering consumer and commercial lending services for individuals and businesses. The bank has been aggressively expanding into the Oklahoma City market over the past few years Q

In This Issue...

Balancing Effectiveness and Efficiency in Internal Controls Feature..............................................3

Published weekly on Mondays except fifth Mondays

FEATURE

INTERNAL CONTROLS Balancing Effectiveness and Efficiency in Internal Controls By James Mihills, CPA Weaver and Tidwell, LLP www.weaver.com Developing appropriate internal controls is critical for banks to manage risk, but bankers often face the competing challenges of establishing controls needed to manage risk while also maintaining profitability.

For example, risks such as fraud, sysJames Mihills tem interruptions, posting errors, or failure to meet strategic objectives present considerable exposure and require effective internal controls. In confronting that exposure, however, the bank’s profitability goals can be strained due to internal control costs.

In managing these competing challenges, a bank’s internal controls must be effective and efficient. While every bank faces specific circumstances based on its size, product offerings, and other factors, the following measures can enhance the effectiveness and efficiency of any bank’s internal controls.

will require more than one employee.

However, to enable separation of duties to be as efficient as possible, the minimal number of employees should be deployed to retain appropriate segregation. For example, a bank may properly utilize loan checklists to assure the accuracy of loan information and completeness of loan documentation. Rather than having two or three employees review different checklist and loan documentation items, a bank can establish one checklist covering all aspects of the loan cycle and have

one independent employee secondarily review the checklist for completeness while reviewing loan documentation and system set-up.

Increase Reliance on System Controls A typical bank relies upon a combination of system (IT-based) controls and manual (performed by an individual) controls. While system controls require initial investment, they function continuously and consistently, thus often rendering these controls more (continued on Page 8)

Establish Efficient Separation of Duties Separation of duties prevents one employee from performing conflicting or incompatible duties, meaning that no one individual can initiate, complete, review, and release a transaction. Separation of duties serves as a key preventive control for fraud and also reduces the possibility of an error going undetected. For example, one employee should not be entering and releasing electronic fund transfer information, and someone else should have transaction review and release responsibility.

As separation of duties is a fundamental element of an effective control environment, many internal processes

May 25, 2015 BANKERS DIGEST Page 3

NEWSWATCH TEXAS

INTERNAL CONTROLS (continued from Page 3)

Frost Bank Plans New Downtown San Antonio Headquarters Dick Evans, chairman/CEO of Frost Bank, San Antonio, squelched any concerns that Frost is not fully committed to staying in San Antonio when he announced that Frost had negotiated a deal for a new 400,000-squarefoot office tower in downtown.

Evans told the San Antonio Business Journal a move out of San Antonio was never even a consideration. He said,

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"San Antonio has been our home for 147 years. We have never had any intent of leaving."

Evans said the new office building and the subsequent sale of the old building at 100 W. Houston St. to the city of San Antonio is good news for everyone.

Frost Bank reported $28.2 billion in assets at March 31, 2015 Q

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FEATURE efficient and more effective than manual controls. Such system controls may apply to posting access, automated balancing processes, or system-enforced dual control for processing.

Focus on Crucial Issues Banks do not have unlimited resources, so it is important to determine what internal control concerns matter most. For example, an independent, next-day review of a system-generated file maintenance report is an important internal control for loans and deposits. However, many standard file maintenance reports include changes that pose little to no risk. Therefore, management can identify file maintenance changes deemed to be more critical, such as changes in loan payment dates, address or telephone changes to deposit accounts, or parameter changes for interest rates or new accounts. A daily custom report can then be created, for review purposes, that includes just those changes.

Also, secondary review can be most effective and efficient when the reviewer focuses on the following concerns: • Accuracy (verifying that the transaction or reconciliation agrees to supporting documentation).

• Completeness (determining if all aspects of the transaction have been properly included).

• Validity (considering whether the transaction is valid for the customer or process).

• Reasonableness (considering whether the transaction appears to be unusual based on typical activity within the account).

With one independent employee addressing these considerations, the need for multiple reviews of transactions can be reduced.

Effectiveness and Efficiency Sustain Banks Banks will always face the need to find the right balance between effectiveness and efficiency in establishing an internal control environment. By focusing on that balance, a bank can better manage risks Q About the author: James Mihills, CPA, is a partner in financial institutions consulting for Weaver and Tidwell, L.L.P. He can be reached at James.Mihills@ Weaver.com or 817-882-7361.

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