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Presentation on theme: "Special thank you."— Presentation transcript:

0 Supervisory Board Training
1:00 p.m. – 2:15 p.m. Utopia A Speaker: Bob Glynn and Eric Lemke

1 Special thank you

2 Presenter Bob Glynn, CPA Eric Lemke, CPA
Audit Director, McGladrey Financial Institutions Practice Contact Information: Eric Lemke, CPA Audit Partner, McGladrey Financial Institutions Practice

3 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

4 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

5 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)

6 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

7 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

8 Regulatory Matters Current Section 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

9 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 self-dealing have been established

10 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

11 Some Basic Supervisory Committee Regulatory Facts...
The supervisory committee consists of between 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.”

12 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

13 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

14 Credit Union Organizations
NCUA major responsibilities (cont.): Oversee the National Credit Union Share Insurance Fund (NCUSIF) Manage the Central Liquidity Facility

15 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

16 Credit Union Organizations
Credit Union National Association (CUNA) State leagues Corporate credit unions Credit Union Service Organizations (CUSO) and Numerous other organizations

17 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

18 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

19 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

20 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 (non-opinion engagement) that can be done by a CPA or any other person – Assets from $3 million to $5 million

21 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

22 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

23 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?

24 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

25 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

26 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

27 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

28 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

29 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

30 NCUA Guidance Supervisory Committee Guide Regulatory Alerts
Letters to Credit Unions Other information from the website

31 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

32 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

33 Supervisory Committee/Internal Audit
Triangular Communication Board of Directors Guides Management Owns Risk Sets Risk Agenda & Executes Supervisory Committee/Internal Audit Validates STRATEGIC

34 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?

35 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?

36 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?

37 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.

38 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

39 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

40 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

41 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

42 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

43 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

44 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

45 Information & Reporting Systems
Reports received Independent auditor Internal auditor Third parties Regulatory examination Bonding company Outside advisors/consultants Whistleblower employees and members

46 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





51 The Financial Monitoring Checklist
Condition/Observation: Questions/Concerns: Cash – Reduced or lower levels of cash by observing trends and balances Why have our cash balances gone down? Does the CU have an adequate level of cash to meet cash requirements? Cash – Increased levels of cash Why do we have so much cash on hand? Should this money be invested to maximize yield? Investments – Levels or balances have changed Why has this occurred? Is this a trend or an isolated event? Investments – Regarding the maturity of the investment portfolio 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?

52 The Financial Monitoring Checklist
Condition/Observation: Questions/Concerns: Investments – Regarding yields 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 Is our portfolio adequately diversified? Real Estate Loans 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?

53 The Financial Monitoring Checklist
Condition/Observation: Questions/Concerns: Loans – Any portfolio that grows rapidly 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?

54 The Financial Monitoring Checklist
Condition/Observation: Questions/Concerns: Delinquencies & Charge-Offs – Increasing ratios 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 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 Find out the details. Do we have any other loans at risk for this?

55 The Financial Monitoring Checklist
Condition/Observation: Questions/Concerns: Borrowings/Interest on Borrowed Money 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? Shares/Dividends 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?

56 The Financial Monitoring Checklist
Condition/Observation: Questions/Concerns: Net Worth 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 Income/Expenses 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.)

57 The Financial Monitoring Checklist
Condition/Observation: Questions/Concerns: Sale of Assets (Investments or Office Property) for Gains/Losses 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 One Time/Unique Transactions Why did it occur? Dig deep into the reasons

58 References/Resources
Federal Credit Union Act/ Bylaws, Rules and Regulations ( Supervisory Committee Guide ( 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

59 Thanks for your participation!
Wrap Up Thanks for your participation! Contact Information Bob Glynn (312)


61 Thank you for attending!
Reminders: Complete Session Evaluation Send a Tweet

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