The NCUA has recently updated the regulation for the audit requirements and Supervisory Committee exam expectations. Effective January 6, 2020, the following changes will take place:
- Elimination of the balance-sheet-only audit [715.7(a)] and the Report on Examination of Internal Controls over Call Reporting [715.7(b)] for federally insured credit unions under $500 million in assets. Though these options were not used very often, the balance-sheet-only audit was used periodically throughout the transition between a Supervisory Committee exam and a financial statement audit. This option will not be available going forward.
- Amendment to 715.9(c)(6) to eliminate the 120-day requirement for completion of audits by an outside, compensated person. This will allow credit unions some flexibility and negotiation power when scheduling the annual audit with their external auditors.
- Elimination of the Supervisory Committee Guide and replacement of it with an appendix with new and expanded procedures [715.7(c)].
Many smaller and noncomplex credit unions opt for the Supervisory Committee exam, to be conducted either by an external auditor or by their own Supervisory Committee. If you are this category, please take note:
The Supervisory Committee Guide was published in 1999, and though some steps are still relevant today, a lot has changed since then and an update was much needed. The current appendix noted in the regulation lists the areas of coverage; however, the specific minimum steps required have not been published yet. We expect to see it published by the end of 2019. Expanded areas include other assets and liabilities, allowance for loan losses methodology and internal controls over wire transfers. New procedures will include key income and expense accounts, repossessed autos, other real estate owned, fixed assets, personnel, Board of Directors’ meeting minutes and information systems.
I recently attended a conference where I got some insight on some of these new steps. Below are some of the key steps to expect in the appendix:
- Identification of deferred compensation plans, including 457(b), 457(f) and the established liabilities
- Search for unrecorded liabilities through testing of expense disbursements post-year-end
- Allowance for loan and lease losses being compliant with generally accepted accounting principles and Interpretive Ruling and Policy Statement #02-3; also, determination of approval by Board of Directors
- Determination of segregation of duties with wire transfers through testing
- Determination that the annual ACH audit is being conducted under NACHA guidelines
- Comparing of interest and investment income and dividend and interest expense with subsidiary ledgers
- Determination that other real estate owned and sold is appropriately accounted for
- Testing of accuracy of fixed asset reconciliation and testing of a sample of fixed assets sold for proper accounting
- Review of active users from the core system to the employee listing
- Determination of whether the credit union has had annual penetration testing performed in accordance with NCUA
- Testing of a sample of employees for evidence of personnel files and proper pay based on approved rates
- Review of selected payroll journals and scanning for individuals not employed by the credit union
Keep in mind that these are the minimum steps. If there are additional areas the Supervisory Committee thinks are necessary, the committee should include them in the scope. These additional minimum procedures will expand the scope, budgets and time needed to prepare for the exam, so it is important for your credit union and Supervisory Committee to plan for this in the upcoming year.