Supervisory Board Training
1:00 p.m. – 2:15 p.m.
Utopia A
Speaker: Bob Glynn and Eric Lemke
Special thank
you
Presenter
Bob Glynn, CPA
-
Audit Director, McGladrey Financial Institutions
Practice
Contact Information:
•
Bob.Glynn@McGladrey.com
Eric Lemke, CPA
-
-
Audit Partner, McGladrey Financial Institutions
Practice
Contact Information:
•
Eric.Lemke@McGladrey.com
2
Who is this presentation for?
New committee members
Want to understand what their duties and responsibilities are
Seasoned committee members
Want to refresh their understanding and share their
experiences
3
What Have I Gotten Myself Into?
Regulatory Matters
Credit Union Organizations
Supervisory Committee Qualifications
Supervisory Committee Responsibilities
Administration of the Committee
Red Flags
Information and Reporting
Financial Monitoring Checklist
Resources available
4
Regulatory Matters
Federal Credit Union Act
Passed in 1934
Purpose of the act was to make credit available
and promote thrift through a manual system of
non-profit, cooperative credit unions.
Act created the Federal Credit Union System.
Requirements of a credit union
-
Common Bond: Must have a common bond (many
battles fought over the definition of a common bond)
5
Regulatory Matters
Requirements of a credit union (con’t):
-
Ownership: Credit union is a cooperative
association (owned by its members)
-
Capital Structure: Generate capital only
through generating and retaining earnings
6
Regulatory Matters
Requirements of a credit union (con’t):
-
Administration: Administration of a credit
union is vested entirely in the officials elected
by the membership
-
Taxation: Federal credit unions are tax
exempt as are most state credit unions
7
Regulatory Matters
Current Section 715.3 of NCUA’s rules and
regulations states the Supervisory Committee is
responsible to determine that:
- The financial condition of the credit union is
accurately presented
-
That management practices are sufficient to
safeguard assets
-
That accounting records are prepared promptly
8
Regulatory Matters
-
That internal controls are established and
effectively maintained
-
That plans, policies and control procedures
established by the Board of Directors are
properly administered
-
Policies and control procedures to safeguard
against error, carelessness, fraud and selfdealing have been established
9
Regulatory Matters
The annual audit and verification of member
accounts are the activities generally used to carry
out these responsibilities
Supervisory Committee Guide for Federal Credit
Unions – excellent educational background
materials
10
Some Basic Supervisory Committee
Regulatory Facts...
The supervisory committee consists of between 3 5 members
Appointment is by the Board of Directors
From the Illinois Credit Union Act:
“The board of directors shall appoint from among the
members of the credit union, a supervisory committee of
not less than 3 members at the organization meeting and
within 30 days following each annual meeting of the
members for such terms as the bylaws provide. Members
of the supervisory committee may, but need not be, on the
board of directors, but shall not be officers of the credit
union, members of the credit committee, or the credit
manager if no credit committee has been appointed.”
11
Opinion Audit on the Financial Statements
An opinion audit may only be performed by a
licensed CPA
Results in a CPA expressing an opinion on the
financial statements (statements of financial
condition, income comprehensive income,
members’ equity and statement of cash flows) and
includes footnotes describing the statements
Highest level of audit engagement possible
12
Credit Union Organizations
National Credit Union Administration (NCUA)
-
Created by Congress in 1970
-
Major responsibilities:
•
Approve federal charters
•
Supervise and examine federal chartered
and federally insured credit unions
13
Credit Union Organizations
NCUA major responsibilities (cont.):
-
Oversee the National Credit Union Share
Insurance Fund (NCUSIF)
-
Manage the Central Liquidity Facility
14
Credit Union Organizations
Most states also have a regulatory body in charge of
state chartered credit unions. Examples include:
Illinois:
- Illinois Department of Financial and Professional
Regulation (IDFPR)
In addition to the federal and state regulator, state
chartered-privately insured credit unions are also
bound by the private insurer
15
Credit Union Organizations
Credit Union National Association (CUNA)
State leagues
Corporate credit unions
Credit Union Service Organizations (CUSO) and
Numerous other organizations
16
Supervisory Committee Qualifications
-
Must be a member of the Credit Union
-
May also be a member of the Board of Directors
-
No employee of the credit union may be a
member of the supervisory committee
17
Supervisory Committee Qualifications
Experience in finance, accounting or auditing is
helpful, but not required (as of now)
Possessing such qualities as inquisitiveness,
professional skepticism, good communication skills,
willingness to invest time are the primary attributes
18
Supervisory Committee Responsibilities
As a practical matter, the role of the supervisory committee
consists of the following responsibilities to ensure “Safety and
Soundness”:
-
Ensure that the annual audit requirement is fulfilled
Ensure that the verification of member accounts is
performed when required
Monitor internal controls
Monitor financial trends and reporting
19
Supervisory Committee Responsibilities
The vast majority of credit unions hire an outside firm to
conduct the audit
Under current regulation, the annual audit requirement can be
satisfied by one of the two following engagements:
- An opinion audit (can only be done by a CPA) – Assets
great than $5 million
- An Supervisory Committee Guide Audit engagement (nonopinion engagement) that can be done by a CPA or any
other person – Assets from $3 million to $5 million
20
Supervisory Committee Responsibilities
What is an opinion audit?
-
Can only be done by a licensed CPA
-
Results in CPA expressing an opinion on fairness of the
credit union’s financial statements
-
Places responsibility on the auditor to follow GAAS
-
Highest level audit engagement possible, that
demonstrates the credit union’s due diligence in
conforming to the audit regulation
21
Supervisory Committee Responsibilities
(CPA Audit)
Relationship with the independent auditor
-
Selection of the CPA firm
Understanding the CPA firm’s quality control system
Making it clear who the CPA firm is working for
Communication with the CPA firm
•
At the audit planning stage, at the fieldwork completion
stage, when the audit reports have been finalized
22
Supervisory Committee Responsibilities
(CPA Audit)
Questions to ask the CPA firm (SAS 114)
-
What are the significant accounting policies?
Did the credit union select the accounting policies
that were most appropriate given the options?
What about management’s judgments and estimates
that play a role in the financial statements? How
would you characterize them?
Did you have to post any significant audit
adjustments?
Were there any waived adjustments?
Did you have any disagreements with management?
23
Supervisory Committee Responsibilities
(CPA Audit)
More questions to ask the CPA firm
- Did you encounter any difficulties in conducting
the audit?
- Are there significant risks that management is
not addressing?
Meet privately with the independent auditor in
conjunction with the final audit report
- Decide on how final report is presented to Board
of Directors
Consider the CPA firm as a resource should you
need advice on red flags that arise during the course
of the year
Review annually all relationships between the CPA
firm and the credit union
24
Supervisory Committee Responsibilities
(CPA Audit)
Evaluate the auditor and audit process
before, during and after the financial reports
and management letter have been issued
Review the verification of member accounts
performed by the CPA firm
Ascertain that the audit fee is appropriate
25
Supervisory Committee Responsibilities
(Other Audits)
Relationships with other professionals who
perform audit-like functions
-
Review results of significant regulatory audits
•
•
•
•
•
NCUA (or state regulatory agency)
ACH
BSA
Bonding company
IT audits
26
Supervisory Committee Responsibilities
(Internal Audit)
Relationship with the internal auditor
-
Establish open line of communication
Determine sufficiency of independence
Concur with the annual internal audit plan
27
Supervisory Committee Responsibilities
(Internal Audit)
Relationship with the internal auditor
-
Evaluate the ongoing objectivity of the internal
audit function
Emphasize that the committee wants prompt and
thorough analysis of any significant risks that
management is not addressing
Meet at least quarterly and review the results of
internal audits
Meet privately at least once a year with the head
of internal audit
28
Credit Union’s System
of Internal Controls
Definition: A credit union’s organization and system
of procedures that provides a reasonable
assurance that errors or irregularities will be
prevented or detected on a timely basis
Provides reliance to:
- Membership
- Management
- Auditors
- Examiners
29
NCUA Guidance
Supervisory Committee Guide
Regulatory Alerts
Letters to Credit Unions
Other information from the website
30
Question: Who is responsible for the design
and execution of the internal control system?
A - The Board of Directors
B - The internal auditor
C - The CEO
D - The Supervisory Committee
E - Management
31
Credit Union’s System
of Internal Controls
The installation and maintenance of the system of internal
controls is the responsibility of management
Common examples of internal controls:
- Segregation of duties
- Cross training/rotation of duties
- Completion of general ledger account reconciliations
- Tone at the Top
- Entity Level controls
32
Triangular Communication
Supervisory
Committee/Internal
Audit
Validates
Board of Directors
Guides
STRATEGIC
Management
Owns Risk
Sets Risk Agenda
& Executes
33
Supervisory Committee Responsibilities
Remember management is responsible for establishing,
maintaining & monitoring
Questions to ask management about internal control:
-
-
What is your assessment of the internal control system and
what criteria did you base your assessment on?
Talk to us about the “Tone at the Top” and what you do to
maintain an uncompromising ethical environment
Has a whistleblower channel been established?
34
Supervisory Committee Responsibilities
Questions to ask management about internal
control:
-
Were any reported conflicts of interest or irregularities
or other violations of the code of conduct identified
during the year?
Were any significant regulatory compliance issues
identified?
Are there any significant deficiencies in our
accounting systems or personnel that should be
addressed?
What process is used to ensure the integrity of any
new or revised operating or financial systems we
have deployed in the current year?
35
Supervisory Committee Responsibilities
Questions to ask management about internal control:
-
-
Have the independent or internal auditors identified
major control deficiencies?
Is there a specific management-level person
designated as responsible for knowing and
understanding relevant legal and regulatory
requirements?
• What are the key risks in this area and how are
they identified and managed?
36
Supervisory Committee Responsibilities
Keep abreast of changes in your credit union:
-
New products and services being offered to
membership
Changes in field of membership
Important issues being discussed by Board
Mergers, key personnel changes, new
investments, etc.
37
Supervisory Committee Responsibilities
Keep abreast of issues impacting other credit
unions:
-
Regulatory changes
Technical changes
Frauds and scams
Whistle-Blower Program
Annual Conflict of Interest
38
What are your boundaries?
Attendance at board meetings:
While most regulators encourage the attendance of
at least one supervisory committee representative at
Board of Director meetings, attendance is only
permitted at the discretion of the Board
The Board of Directors must publish minutes,
however, and those minutes must be made available
to the Supervisory Committee (or its designee) for
their review
39
What are your boundaries?
You (or your designee) have access to ALL Credit
Union records, without exception
-
You are responsible for maintaining strict
confidentiality of these records
You shouldn’t remove any Credit Union records
from the premises
It is important to build an effective working relationship
with the Board of Directors
-
Respect your boundaries
Work together
Communicate effectively
40
Administration of the Supervisory Committee
Create a charter
Get the right people on the bus
-
Independent, objective & competent oversight is the goal
Financial literacy
Collective skills is what is most important
Use outside advisors when necessary
Continuing education is essential
41
Administration of the Supervisory Committee
Get the right information at the right time
Set meeting agendas
-
Audit reports
Driven by the internal control assessment
Look at agendas for past 18 months and evaluate their
relevance
Conduct meetings
Make annual report to the membership
42
Red Flags
The following are typical situations that give rise to
red flags:
-
-
Complex business arrangements that you can’t understand
Last minute transactions that result in improvement in
financial performance
Frequent differences between management and the
auditors
Failure to enforce the credit union’s code of conduct
43
Red Flags
Red flag situations continued:
-
Failure by management to display and communicate an
appropriate attitude regarding internal control
-
High turnover of senior management
Rapid changes in the industry
Sharply rising interest rates
Unusually rapid growth or profitability compared to other
credit unions
44
Information & Reporting Systems
Reports received
-
Independent auditor
Internal auditor
Third parties
• Regulatory examination
• Bonding company
• Outside advisors/consultants
• Whistleblower employees and members
45
Information & Reporting Systems
Reports received (cont.)
-
Management reports to Supervisory Committee
• Internal control assessment
• Internal ethical & integrity issues as they arise
• Legal and regulatory issues as they arise
• Risk assessment, particularly emerging risks
• Credit union industry developments & competitive
environment
46
Peer Group and Key Ratios Snapshot September 30, 2014
Credit Union Group
Total Assets
ROA
Equity
Ratio
Share
Growth
Loan
Growth
Loans /
Assets
DQ Ratio C/O Ratio
Other Inc.
Members
/ ROA Members
/ FTE
Assets /
FTE
Credit Unions over $1B
2,715,480,413
1.00%
10.72%
5.11%
12.65%
65.03%
0.79%
0.50%
124.94%
205,210
416
5,502,023
Natl CUs $250m - $1b
494,723,675
0.76%
10.99%
3.98%
9.73%
63.31%
0.84%
0.45%
186.20%
45,942
351
3,775,230
Natl CUs $50m - $250m
112,825,847
0.54%
10.99%
2.56%
6.27%
58.29%
1.00%
0.44%
250.09%
12,568
360
3,230,362
14,526,743
0.25%
12.63%
0.67%
2.77%
49.34%
1.39%
0.50%
399.13%
2,132
420
2,861,101
Natl CUs Under $50m
Risk Based Capital Ratio
Credit Union Group
Risk Based
Capital Ratio
Natl CUs Under $50m
20.39%
Natl CUs $50m - $250m
15.97%
Credit Unions over $1B
15.49%
Natl CUs $250m - $1b
15.29%
47
Peer Group and Key Ratios Snapshot September 30, 2014
Credit Union Group
Total Assets
ROA
Equity
Ratio
Share
Growth
Loan
Growth
Loans /
Assets
DQ Ratio C/O Ratio
Other Inc.
Members
/ ROA Members
/ FTE
Assets /
FTE
Credit Unions over $1B
2,715,480,413
1.00%
10.72%
5.11%
12.65%
65.03%
0.79%
0.50%
124.94%
205,210
416
5,502,023
Natl CUs $250m - $1b
494,723,675
0.76%
10.99%
3.98%
9.73%
63.31%
0.84%
0.45%
186.20%
45,942
351
3,775,230
Natl CUs $50m - $250m
112,825,847
0.54%
10.99%
2.56%
6.27%
58.29%
1.00%
0.44%
250.09%
12,568
360
3,230,362
14,526,743
0.25%
12.63%
0.67%
2.77%
49.34%
1.39%
0.50%
399.13%
2,132
420
2,861,101
Natl CUs Under $50m
Risk Based Capital Ratio
Credit Union Group
Risk Based
Capital Ratio
Natl CUs Under $50m
20.39%
Natl CUs $50m - $250m
15.97%
Credit Unions over $1B
15.49%
Natl CUs $250m - $1b
15.29%
48
49
50
The Financial Monitoring Checklist
Condition/Observation:
Questions/Concerns:
Cash – Reduced or lower levels of cash by
observing trends and balances
1.
2.
Cash – Increased levels of cash
1.
2.
Why have our cash balances gone
down?
Does the CU have an adequate level of
cash to meet cash requirements?
Why do we have so much cash on
hand?
Should this money be invested to
maximize yield?
Investments – Levels or balances have
changed
1.
2.
Why has this occurred?
Is this a trend or an isolated event?
Investments – Regarding the maturity of
the investment portfolio
1.
What is our philosophy regarding the
maturity mix of the portfolio?
Do we have too much in short-term
maturity and are we sacrificing yield by
staying so short?
Have we gone too far out on the yield
curve?
2.
3.
51
The Financial Monitoring Checklist
Condition/Observation:
Questions/Concerns:
Investments – Regarding yields
1.
2.
Why is our yield higher than average –
are we taking excessive risk?
Why is our yield lower than average –
are we keeping too much for liquidity
purposes?
Investments - General
1.
Is our portfolio adequately diversified?
Real Estate Loans
1.
Is our level of real estate mortgage
lending appropriate?
Is our level of fixed rate mortgage
lending too much or not enough?
When was the last time we addressed
limit parameters on all mortgage loan
types?
2.
3.
52
The Financial Monitoring Checklist
Condition/Observation:
Questions/Concerns:
Loans – Any portfolio that grows rapidly
1.
2.
3.
4.
5.
6.
Why is it happening and have we done an
extensive evaluation of the reasons?
Are our rates and terms overly favorable?
Have we lessened our underwriting
standards?
Have we had this loan area audited to
make sure all internal controls are in place
and working?
When loans quickly increase, the
allowance for loan losses should also
increase – has it? (Often loan growth
outruns the associated losses, since loss
ratios are based on historical data)
Any new staff? Have they been vetted?
53
The Financial Monitoring Checklist
Condition/Observation:
Questions/Concerns:
Delinquencies & Charge-Offs – Increasing ratios
1.
2.
3.
4.
5.
6.
Why are delinquencies and/or charge-offs
increasing?
If only delinquencies are increasing – why
aren’t charge-offs also increasing?
If there are loans over 6 months delinquent –
ask why they haven’t been charged-off/
Is this an indication of relaxed underwriting
standards?
Do we have necessary staffing in collections to
handle the added collection burden?
Is the allowance for loan losses properly valued
given these higher levels of delinquency and
charge-offs?
Provision for Loan Losses
1.
The provision for loan losses is primarily
derived by the monthly/quarterly allowance for
loan loss adequacy analysis and therefore the
monthly expense should not be consistent –
sometimes significantly. If the monthly
provision amount is the same amount, it may
indicate a “smoothing of expense” – ask about
this.
Collateral in Process
1.
2.
Find out the details.
Do we have any other loans at risk for this?
54
The Financial Monitoring Checklist
Condition/Observation:
Questions/Concerns:
Borrowings/Interest on Borrowed Money
1.
2.
Shares/Dividends
1.
2.
3.
Does the credit union have a planned
strategy for borrowings?
If not, why did we have the borrow
funds? Do we have cash flow
problems?
If growth is occurring in excess of the
norm
•
Why?
•
Are we paying above market rates
for shares – if so why?
If growth is below average:
•
Why? Is this ok?
•
Do we offer all share types we
should?
What is our strategy for share growth?
55
The Financial Monitoring Checklist
Condition/Observation:
Questions/Concerns:
Net Worth
1.
2.
3.
Income/Expenses
1.
Why has it changed?
Do we have enough capital or too
much/little?
Question the trend and make sure it
conforms to your credit union’s strategic
plan
Ask about all trends and variances.
Variances are normal and should be
expected, especially in accounts
affected by outside forces (i.e. loan
income, investment income, dividends,
loan losses, etc.)
56
The Financial Monitoring Checklist
Condition/Observation:
Questions/Concerns:
Sale of Assets (Investments or Office
Property) for Gains/Losses
1.
2.
3.
One Time/Unique Transactions
1.
Why was the sale made?
Was the sale made to improve the
bottom line or capital? If so, these
motives need to be investigated to
make sure the sale was ultimately in
the best interests of the credit union
Make sure the impact of the sale to the
bottom line is notated, so you can see
the true results from operations
exclusive of the sale
Why did it occur? Dig deep into the
reasons
57
References/Resources
Federal Credit Union Act/ Bylaws, Rules and
Regulations (www.ncua.gov)
Supervisory Committee Guide (www.ncua.gov)
Conferences with Regulator and External Auditor
Trade association meetings (state and national
associations)
Trade literature
Training classes (such as this)
Various credit union publications & periodicals
58
Wrap Up
Thanks for your participation!
Contact Information
Bob Glynn
(312) 634-5011
Bob.Glynn@McGladrey.com
59
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