The Supervisory Committee Guide: Gone But Not Forgotten
Greetings Compliance Friends!
The time has come to pay our respects to the Supervisory Committee Guide. A lot has changed since the last update some 20 years ago; so NCUA voted to retire the 300+ page behemoth in its recently issued Final Rule on Supervisory Committee Audits and Verifications. The Final rule replaces the Supervisory Committee Guide with a simplified appendix, eliminates two rarely used audit options, and eliminates a specific deadline for outside compensated persons who deliver written audit reports to federally-insured credit unions (FICUs).
Retirement of the Supervisory Committee Guide
For FICUs with $500 million or more in assets, the Federal Credit Union Act imposes a requirement to obtain an annual independent audit of its financial statements by an independent certified public accountant or state-licensed public accountant in accordance with generally accepted auditing standards, aka the financial statement audit. See, 12 USC §1782(a)(6)(D). For FICUs under the $500 million asset threshold that are not required to obtain a financial statement audit, completing an audit according to procedures from the Supervisory Committee Guide was an alternate option under section 715.7 of NCUA’s regulations.
In replacing the guidance, the final rule adopts the newly-created Appendix largely as proposed, with the addition of two new topics: a review of board minutes and testing for unrecorded liabilities. In lieu of prescriptive provisions, the Appendix provides flexibility for the Supervisory Committee to use its judgment in determining the auditing procedures. The Appendix establishes the minimum areas of review which are intended to reflect common industry practices for auditing accounts and controls over financial statements. The following topics must be included in the Supervisory Committee review:
· reviewing Board of Director minutes;
· testing and confirming certain types of asset and liability accounts;
· testing material equity, income and expense accounts;
· testing unrecorded liabilities;
· reviewing key internal controls;
· testing the methodology and mathematical accuracy of the allowance for loan and lease loss account; and
· testing loan delinquency and charge-offs.
The Appendix also requires that the audit report explain the method of selection when a test or confirmation procedure includes the making of a sample or selection. NCUA plans to monitor implementation of the new audit process and consult with accounting professionals to consider the appropriateness of providing future informal guidance or reference materials. Although the Supervisory Committee Guide is no longer codified into NCUA’s regulations, it will continue to exist as a historical reference manual on NCUA’s website. Outside of the audit functions, the Supervisory Committee Guide can otherwise be a useful tool for things like establishing internal Supervisory Committee policies or evaluating a credit union’s internal control structure, for example.
Elimination of Outdated Audit Alternatives
Section 715.7 also provided FICUs under the financial statement audit threshold with the option to conduct either a balance sheet audit or a “Report on Examination of Internal Control over Call Reporting.” The final rule removes both options from section 715.7. NCUA determined that the balance sheet audit does not provide sufficient information to allow the Board of Directors to assess the financial health of the credit union. NCUA further opined that the supervisory committee audit provides greater insight at reasonable costs for those credit unions under the threshold who may not have the resources or desire to voluntary conduct a financial statement audit.
Regarding the “Report on Examination of Internal Control over Call Reporting” option, the Final Rule notes that less than one percent of FICUs utilized this option to fulfill their audit requirements and removing this option advances the purposes of the regulatory reform task force -- to eliminate outdated and ineffective regulations. The Final Rule also indicates that this option provided limited insight into a credit union’s financial condition. Accordingly, the revised 715.7 now includes only one alternative, the “Other Supervisory Committee Audit,” which is one that is performed by the Supervisory Committee, its internal auditor, or any other qualified person and satisfies the minimum requirements from the previously discussed Appendix.
Timing of Completed Outside Audits
The last item addressed in the final rule is the elimination of a specific timing requirement for the completion of audits by an outside, compensated person. Section 715.9(c)(6) currently requires that an engagement letter specify a target delivery date for the completed audit report that is within 120 days of the end of the fiscal year. The final rule replaces this with a more flexible standard requiring only that the target delivery date allow credit unions to meet its requirement to obtain an audit each calendar year. NCUA believes this change will provide more flexibility and potential cost savings without an adverse impact to the auditing process.
The Final Rule is effective 90 days after publication in the Federal Register. NAFCU Members can learn more about it in NAFCU's upcoming Final Regulation Summary.
About the Author
Reginald Watson, NCCO, was named regulatory compliance counsel in August 2017. In this role, Watson helps credit unions with a variety of compliance issues.