Kendallville Case Study

Kendallville Case Study

In the case of Kendallville Bank, a large number of material control weaknesses and financial statement fraud deterrence can be discovered. The most obvious and material one is overly dependence on the single star executive Dan Davis (CLO). With previous accomplishments in sensing market conditions accurately and generating profits during economy recessions successfully, Davis is given so much respect and authority that no one really questions the decisions he makes, which exposes the bank to risky situations and he can easily commit financial fraud. For example, in measuring ALLL, the most important estimate necessary for Kendallville’s financial reporting, David “had built the ALLL calculation methodology, and he periodically modified or added to it when he uncovered new factors or trends to consider” and “the back and forth between Davis and the CQC members frequently seemed more about educating the members on Davis’s thinking than about including the member’s thoughts into the results.” As a public traded company, it is not appropriate that one person has such superior authority in setting crucial business operation rules without appropriate supervision that no one else even questions the decisions that the person makes. Any mistake in Davis’s decision-making process can result in unpredictable harm in stockholders’ benefits. And this material control weakness also provides Davis with opportunity to commit financial fraud. He can basically make whatever changes he wants on financial reports as long as he is able to persuade the other executives, which is easy for him since most people in management do not what is going on in business and relies on him heavily. This phenomemon is particularly obvious when it is mentioned in the article that “Since most of the discussion had already occurred, the CQC members typically agreed by consensus to the ALLL proposed by Davis. Only rarely did the CQC make adjustments to what Davis proposed”. Lack of sufficient general management participation in important decision-making processes, potential financial fraud can be introduced and the result can be biased since it is generated from a single person’s perspective. In this circumstance, skepticism and communication should be encouraged among management and other staff. Instead of relying on one person, the other management should be encouraged to participate in decision-making discussion and come up with their idea from their perspective. Every one in the meeting should be critical to whatever suggestion is proposed and discuss it together. Also, Renwood points out that in Kendallville culture, “when one of her executives presented at a meeting, the other executives tended to ask clarifying questions, but not probing or challenging questions”. Therefore, communication between employees should be stimulated so that more complete information can be gathered from