Summary: NCUA Proposal, Part 715
Supervisory Committee Audits and Verifications
(By reference in §741.6 and §741.202)

Prepared by NASCUS Legislative & Regulatory Affairs Department
March 2019

NCUA is proposing changes to its regulations governing supervisory committee and other audits.  NCUA’s audit rules are found in NCUA’s Rules and Regulations Part 715. For federally insured state credit unions (FISCUs), Part 715 is referenced in Parts 741.6 and 741.202. Specifically, §741.6 requires FISCUs submit financial reports to NCUA in the manner, and by the means, prescribed by the agency. The provision requires FISCUs file required reports consistent with generally accepted accounting principles (GAAP) if the FISCU has assets in excess of $10 million. The provision incorporates the definition of GAAP found in §715.2(e) and the definition of generally accepted auditing standards (GAAS) found in §715.2(f). Part 741.202, applying to FISCUs, states:

(a) The supervisory committee of each credit union insured pursuant to title II of the Act shall make or cause to be made an audit of the credit union at least once every calendar year covering the period elapsed since the last audit. The audit must fully meet the applicable requirements set forth in part 715 of this chapter or applicable state law, whichever requirement is more stringent.

(b) Each credit union which is insured pursuant to title II of the Act shall verify or cause to be verified, under controlled conditions, all passbooks and accounts with the records of the financial officer not less frequently than once every 2 years. The verification must fully meet the requirements set forth in §715.8 of this chapter.

NCUA’s proposed rule may be read here. The proposed rule is open for comment until April 26, 2019.

Summary

Section 202(a)(6)(A) of the FCU Act authorizes the NCUA to prescribe audit standards that require an outside, independent audit by a certified public accountant for any fiscal year for which a credit union has not conducted an annual supervisory committee audit, has not received a complete and satisfactory supervisory committee audit, or during which the credit union has experienced persistent or serious record keeping deficiencies.

Section 202(a)(6)(D) of the FCU Act requires larger FICUs having assets of $500 million or more to obtain an annual independent audit of its financial statements performed in accordance with generally accepted auditing standards (GAAS). That audit must be performed by an independent certified public accountant or licensed public accountant.

NCUA’s audit rules are in Part 715 of their rules and regulations. Specifically, §715.5 and §715.6 establish: (1) the minimum type of annual audit a FICU is required to obtain according to its charter type and asset size; (2) the licensing requirements of persons performing certain audits; and (3) the auditing principles that apply to certain audits. In addition, §715.7 allows FICU to comply with the annual audit requirement if it has elected not to voluntarily obtain a financial statement audit by obtaining:

(1) a Balance Sheet Audit
(2) a Report on Examination of Internal Controls over Call Reporting
(3) an Audit per the Supervisory Committee Guide

The first two options are analogous to options adopted in 1999 by the Federal Financial Institutions Examination Council for other federally insured financial institutions. The third option was clarified by NCUA in 1999 when the agency amended the Supervisory Committee Guide to detail the minimum scope and procedures for an audit distinct from a financial statement audit.

NCUA’s Proposed Change

Part 715.7 Supervisory Committee Audit Alternatives to a Financial Statement Audit

NCUA proposes eliminating references to the Supervisory Committee Guide as an audit alternative. NCUA would replace a Supervisory Committee Guide audit with an option to conduct an audit so as to meet certain minimum requirements incorporated into a proposed new Appendix A to Part 715.

Under the proposed new Appendix A, the supervisory committee, internal auditor, or other qualified person would be required to perform and document the following areas of review:

  • Test and confirm material asset and liability accounts, including, at a minimum, loans, cash, investments, shares and borrowings
  • Test material equity, income and expense accounts
  • Review key internal controls, at a minimum, bank reconciliation procedures, cash controls, dormant account controls, wire and ACH transfer controls, loan approval and disbursement procedures, and inside account controls
  • Test the mathematical accuracy of the allowance for loan and lease loss accounts and ensure the methodology is properly applied
  • Test loan delinquency and charge-off

In addition to the proposed changes, NCUA is seeking comment on whether other areas should be included in Appendix A such as loans to insiders, pay and benefits to employees and board members, regulatory compliance, compliance with the Bank Secrecy Act, or other topics.

Part 715.9 Assistance from Outside, Compensated Person

NCUA proposes amending §715.9(c)(6), the provision addressing engagement letters a credit union may use to hire a compensated auditor to perform audit functions. Current NCUA rules require credit unions stipulate audit reports must be completed and delivered no later than 120 after the calendar year end for which the audit was performed.

NCUA proposes eliminating the specified 120-day target date. The new standard would only require a credit union specify in the engagement letter a target delivery date that enables it to meet its §715.4 annual audit requirements. NCUA intends the proposed changes will:

  • Provide credit unions greater ability to negotiate the target date for delivery of audit reports
  • Eliminate the need for a Supervisory Committee to obtain a waiver from NCUA for audit reports exceeding the 120-day period

Supervisory Committee Guide

NCUA proposes amending §715.9(c)(3), §715.9(d), and §715.9(e) to remove references to the Supervisory Committee Guide. NCUA will revoke the Supervisory Committee Guide and replace it with minimum requirements in a new Appendix A consistent with the proposed changes to §715.7(c).

NCUA will also amend §715.7 by removing a current option a credit union has to obtain “a report on examination of internal controls over call reporting” as an alternative to obtaining a financial statement audit. NCUA believes this option is of limited value and has been used by less than 1% FICUs.

Balance Sheet Audit Alternative

NCUA seeks comment on whether it should also eliminate the “balance sheet audit” alternative. It has been the NCUA’s experience that the balance sheet audit alternative is utilized only by a small number of credit unions (approximately 2.5 percent) and provides limited value, as it does not include an audit of a credit union’s income statement.