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FRM Part II · FRM Exam Part II · Case Study: Financial Crime and Fraud

A regional bank's internal audit finds that one employee can create a new vendor in the payables system, approve invoices from that vendor, and release the resulting payments. Which fraud-prevention control principle is most directly violated?

Segregation of duties is violated. One employee can create a vendor, approve its invoices and release payments, so no independent check exists to stop or detect a fictitious vendor scheme. Splitting these functions among different people is the core preventive control against internal fraud.

  1. ASegregation of dutiesCorrect
  2. BDual-currency reconciliation
  3. CRisk-based pricing
  4. DStraight-through processing

Explanation

Fraud prevention relies on separating the authorization, recording and custody or payment functions so that no single person can both commit and conceal an irregularity. Here one employee controls vendor creation, approval and payment release, so segregation of duties is broken. The other options are not control principles that address this conflict.

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