Best Practice: Supervisory Committee/Audits
By Brian GatelySometimes, we as credit unions might ask ourselves, why do some CUs do well, and others just seem to plod along, and even others fail? Part of the answer can be found in the concept of “best practices”.
Best Practice: Supervisory Committee/Audits
The best credit unions have an active supervisory committee. This committee can save your credit union many thousands of dollars, with an investment of not a lot of time. How? Let us list some of the ways:
How do you get people to serve on the supervisory committee? Treat them well, with respect. As official family of the credit union they are eligible to go to conferences and other official events. Since they are volunteers, they cannot be paid as supervisory committee members, however.
- Anecdotal evidence from many sources indicates that supervisory committees uncover more frauds than outside auditors. Why? Because supervisory committees are more familiar with their credit unions and their members and recognize irregularities more quickly than an outsider would. Also the supervisory committees are at their credit unions more frequently than outsiders so have a greater chance of discovering fraud.
- Supervisory committees, by doing periodic cash counts and other simple internal control checks, provide the extra vigilance necessary to discourage fraud which might otherwise occur.
- Even though most supervisory committees no longer do their own audits entirely, they can save the credit union a lot of money by coordinating with the outside auditors. Some of the tasks performed by the external auditors can be done by the committee itself. This can be used to negotiate a lower price from the external auditors. Most external auditors are only too pleased to share the routine work with the committee.
- The regulators now have the statutory authority to impose a CPA audit on a credit union which is dilatory in having a regular audit done. If the supervisory committee is not functioning, it is more likely the audit will not be done at all or done late. CPA audits, especially for a small credit union, can be very expensive.
Other facts worth noting:
Per NCUA’s February 27, 1997 Letter No. 97-CU-2 to credit unions,
“NCUA DOES NOT REQUIRE OPINION AUDITS. NCUA accepts that those who set standards governing the practice of accounting by licensed individuals have the authority "to regulate" those licensed individuals relative to auditing functions within auditing standards. Similarly, NCUA has authority to establish supervisory committee requirements within the law and interpret what it will accept as satisfactory in meeting those requirements. NCUA will accept a supervisory committee product which is less than an opinion audit on the financial statements.”
Federally-insured credit unions over $500 million in assets, and those that are late in having an audit done and/or that have serious record keeping problems must have a CPA-type audit. Here is the asset-size breakdown on audit requirements per NCUA’s Supervisory Committee Guide for Federal Credit Unions (Revised 1999):
- Federally insured credit unions with assets of $500 million or greater must obtain a financial statement audit consistent with generally accepted auditing standards (GAAS) by an independent certified public accountant or public accountant licensed by the appropriate State or jurisdiction to perform those services.
- Federal credit unions with assets less than $500 million but more than $10 million may obtain a financial statement audit (as above); a balance sheet audit; a report on the examination of internal control over call reporting under attestation standards; or an audit consistent with this Guid
- Federally insured credit unions with less than $10 million in assets may obtain a balance sheet audit; a report on the examination of internal control over call reporting under attestation standards; or an audit consistent with this Guid”
Auditors are busiest starting in January, through mid-April. This is because many businesses need to have year-end audits, and because many auditors also are involved in the preparation of taxes. Luckily for most credit unions, there is no requirement for them to have a year-end audit. They are required to have an audit once every calendar year, but not as of year end. This can be used to negotiate a cheaper rate from your auditors—have them do the audit in a season that is slow for them. An added advantage of varying the actual date of the audit is better internal control (surprise factor).
Technically your credit union could have an audit done as of January of one year and November of the next, which would mean 22 months between audits. Is this legal? Sure. The requirement is once every calendar year—not once every 12 months. This is an important distinction.
On the other hand the verification of members’ accounts is due every 24 months. Your supervisory committee can do it more often, but not less frequently than every two years.
Your supervisory committee should keep minutes to prove that they are meeting and doing work. A simple schedule of tasks that the committee can do can be found in NCUA’s Supervisory Committee Guide (on their website at www.ncua.gov under the radio button “Resources & Publications, then Publications, and then Guides, Manuals and Forms”). Each quarter (or more often) the committee can meet to do a task. The idea is not to become overly burdened, but to lighten the load of the outside auditors and to provide increased internal control and—not incidentally—save the credit union money.
Conclusion: a well-functioning active supervisory committee is a sign of a healthy credit union that is both saving money and providing needed internal control.