These Teaching Notes draw on an OECD report on the governance of banks in China (OECD 2005). They also draw on the Internal Control—Integrated Framework by COSO (1992) and the control principles discussed by Kimmel et al. (2011). The instructor may encourage students to be familiar with these materials to prepare for case discussion.
To prepare for this discussion, the instructor may want to lecture on principles of control activities, using a traditional textbook chapter, for example. The basic principles laid out in Kimmel et al. (2011) are Establishment of Responsibility; Segregation of Duties; Documentation Procedures; Physical, Mechanical, and Electronic Controls; Independent Internal Verification; and Human Resource Controls.
Related to the described fraud incident at BOC, the most notable internal control weakness pertained to the principle of segregation of duties. The Kaiping bank managers had undivided authority in making loans. Their authority enabled them to...