A central bank fines a commercial bank it supervises for not following statutory regulations regarding non-performing loan provisions on three large loans as a result of the bank’s loan provisioning policy. Louis Marie Buffet, CFA, sits on the Board of Directors of the commercial bank as a non-executive director, representing minority shareholders. He also chairs the internal audit committee of the bank that determines the loan provisioning policy of the bank. Mercy Gatabaki, CFA, is the bank’s external auditor and follows international auditing standards whereby she tests the loan portfolio by randomly selecting loans to check for compliance in all aspects of central bank regulations. Which charterholder is most likely in violation of the Code and Standard?

  1. Both.
  2. Buffet.
  3. Gatabaki.

Solution

B is correct because Buffet sat on the audit committee that determined the bank’s provisioning policies that were contrary to the statutory regulations of the central bank. As a result, he most likely violated Standard I–Professionalism by not abiding with regulations of a regulatory body. Gatabaki did not violate Standard I–Professionalism as it is not apparent she knowingly facilitated the incorrect provisioning policy.

But doesnt Gatabki also lack due diligence for selecting only a few portfolio which should also be a violation of ethical standards? shouldn’t she take in all the loans for consideration?