Supervisory Committee—

What You Need to Know

Southeast Directors and

Supervisory Committee Conference August 1, 2016

Supervis

Session Overview

ory Committee—What You Need to Know

• Why do we have a Supervisory Committee?

– Regulatory requirements

– Powers

• Types of audits

• Supervisory Committee responsibilities

– Reviewing audits

– Basic work plan

– Member account verification

– Resolving member complaints

• Resources

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Why Do We Have a Supervisory Committee?

• Regulatory Requirements-Federal Charters

– Part 715 of the NCUA Rules & Regulations defines a Supervisory

Committee consistent with Section 111(b) of the Federal Credit Union

Act (www.ncua.gov)

• Regulatory Requirements-State Charters

– Alabama Credit Union Administration (www.acua.alabama.gov)

• Section 8 of the Alabama Credit Union Administration Final Regulations

• Section 5-17-13 of the Code of Alabama

– Florida Office of Financial Regulation (www.flofr.com)

• 2010 Florida Statutes (including Special Session A)

• 657.026 Supervisory or Audit Committee

– Mississippi Department of Banking and Consumer Finance

(www.dbcf.state.ms.us)

• Mississippi Code Section 81-13-33

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Why Do We Have a Supervisory Committee?

(continued)

• Regulatory Requirements-State Charters

– Tennessee Department of Financial Institutions

(www.tennessee.gov.tdfi)

• Tennessee Code Annotated, Title 45, Chapter 4

– Texas Credit Union Department (www.cud.texas.gov)

• Supervisory Committee not specifically addressed in the Texas

Administrative Code; states board of directors shall obtain annual audit

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Regulatory Requirements-Federal Charter

• Appointed by the board of directors

• Minimum of 3 members, maximum of 5 members

• One member may be a member of the board of directors

• Board determines the term of service; terms should be

staggered

• Must be a member of the credit union

• Must be bondable

• Employees and credit committee members are not eligible to

serve on Supervisory Committee

• Others prohibited from serving by principles of internal control

are loan officer, membership officer, treasurer/assistant

treasurer, president/vice president, secretary

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Regulatory Requirements-Alabama Charter

• Section 5-17-10 of the Code of Alabama provides information

on the election of the supervisory committee

• “At the annual meeting, the credit union shall elect…a

supervisory committee of three members, all to hold office for

such terms respectively as the bylaws provide and until

successors qualify.”

• Power and duties of the supervisory committee are found in

Section 5-17-13

Regulatory Requirements-Florida Charter

• Section 657.026 of the Florida statutes focuses on the

supervisory or audit committee

• Supervisory committee of at least 3 members which may be

elected by the membership or appointed by the board or the

board may appoint an audit committee of directors

• An officer or employee may not serve on the supervisory or

audit committee.

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Regulatory Requirements-Mississippi Charter

• Section 81-13-33

• Supervisory committee shall, at frequent intervals, inspect the

securities, cash and accounts of the credit union and

supervise the acts of the board of directors, credit committee

and officers, any or all of whom the supervisory committee

may, at any time, by a unanimous vote suspend

• Annually the supervisory committee shall make or cause to be

made a thorough audit of the receipts, disbursements,

income, assets and liabilities of the credit union for the said

fiscal year and shall make a full report thereon to the

directors, which report shall be filed and preserved with the

records of the credit union

• The supervisory committee shall make a report to the

members at the annual meeting

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Regulatory Requirements-Tennessee Charter

• The organization of a state-chartered credit union is governed

by selected laws and regulations found in Tennessee Code

Annotated, Title 45, Chapter 4

• Basic Fundamentals for Organization of a Tennessee State-

Chartered Credit Union:

– WHAT IS A SUPERVISORY COMMITTEE? They are referred to as the

watch dog committee and consists of members elected by the board to

see that the affairs of business are carried out as they should be,

including reviewing the books, records, and policies

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Regulatory Requirements

• Specific Supervisory Committee responsibilities:

– Ensure that the credit union adheres to the measurement and filing

requirements for reports

– Perform or obtain a Supervisory Committee audit

– Verify or cause verification of members’ accounts

– Act to avoid the imposition of sanctions for failure to comply with the

requirements

• General goals of the Supervisory Committee:

– Ensure management’s financial reporting objectives have been met

– Ensure management practices and procedures safeguard member

assets

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Goals of Supervisory Committee

• To meet the general goals, the Supervisory Committee must:

– Establish and maintain effective internal controls to achieve

financial reporting objectives

– Determine accounting records and financial reports are promptly

prepared and accurately reflect operations and results

– Determine that relevant plans, policies and control procedures

established by the Board are properly administered

– Determine that policies and control procedures are sufficient to

safeguard against error, conflict of interest, self-dealing and

fraud

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Supervisory Committee Powers

• If the supervisory committee finds violations of the Federal

Credit Union Act, credit union charter, credit union bylaws or

regulations, the committee should first discuss the findings

with the board of directors

• If the problem is serious enough, the committee may decide

by majority vote to call a meeting of the members to decide

how to handle unsafe or unauthorized practices

• Supervisory Committee can also contact external auditors or

regulatory agency for advice in cases where serious problems

may exist

• Contact NCUA regional office or state supervisory authority

before taking significant action

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Supervisory Committee Powers

• Supervisory Committee must take prompt and decisive action

if it finds credit union officials are violating the bylaws or

mishandling the organization in any way

• Supervisory Committee has the power to suspend any officer,

director, or member of the Credit Committee

• In the event of a suspension, the Supervisory Committee

must call a special meeting of the members to be held not

fewer than seven or more than 14 days after the suspension

• Chair of the committee leads the special meeting unless the

credit union members select another person

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Types of Audits

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Audit Requirements

Type of Charter Asset Size Minimum Audit Required to

Fulfill Supervisory Committee

Audit Responsibility

Part 715 Section

Federal Charter $500M or more Financial statement audit per Generally

Accepted Auditing Standards by

independent, state-licensed person

715.5

Federal Charter Less than $500M

but Greater than

$10M

Either financial statement audit or

supervisory committee audit

715.5

Federal Charter $10M or less Supervisory committee audit 715.5

State Charter $500M or more Financial statement audit per Generally

Accepted Auditing Standards by

independent, state-licensed person

715.6

State Charter Less than $500M Supervisory committee audit unless audit

prescribed by state law is more stringent

715.6

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Opinion Audit/Financial Statement Audit

• Expresses an opinion on the fair presentation of the financial

statements in all material respects in accordance with

generally accepted accounting principles (GAAP)

– Financial Statement Audit: Audit the balance sheet, income statement,

statement of equity and other comprehensive income, and statement of

cash flows, and will present an opinion on all the statements, taken as a

whole

– Balance Sheet Only Audit: Audit the balance sheet and render an

opinion

• American Institute of Certified Public Accountants (AICPA)

establishes standards for thoroughness and independence of

CPAs

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Agreed Upon Procedures Engagement

• Supervisory Committee engages an independent accountant

to issue a report of findings based on specific procedures

performed on specified subject matter:

– Elements

– Accounts

– Items of the Financial Statements

• Supervisory Committee and independent accountant agree

upon the procedures that the Supervisory Committee believes

the independent accountant should perform

• Supervisory Committee has responsibility for the sufficiency

(nature, timing, and extent) of the procedures

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Non-Opinion Audits

• Includes critical and systematic examination of the internal

controls, statements, records and accounting transactions

prepared by management

• Professional standards governing competence and

independence do not govern this type of audit

• Examiners use similar criteria for reviewing and evaluating

non-CPA audits as for reviewing and evaluating a CPA’s work

• Acceptable audit satisfies the requirements of NCUA Rules

and Regulations 715.7 (c)

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Engaging Auditors

• Contract with third party to perform audit at least once per

calendar year

• Ask other credit unions or trade associations for references

• Obtain competitive bids from auditors with credit union

experience

• Inquire about experience level of individuals who will complete

the audit and knowledge of credit union operations and

regulations

• Determine time period for scheduling the audit and timeframe

for receiving the final audit report

• Meet with auditor at the end of the engagement

• Obtain engagement letter which complies with Part 715 of

NCUA Rules and Regulations

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Engagement Letter

• Specify the terms, conditions, and objectives of the

engagement

• Identify the basis of accounting to be used

• For non-opinion audits, include an appendix setting forth the

procedures to be performed

• Specify the total compensation to be paid for the audit

• Upon completion of the engagement, the auditor will deliver a

written audit report to Supervisory Committee

• Notice in writing, either within the audit report or a separate

report, of any internal control reportable conditions and/or

irregularities or illegal acts which come to the auditor’s

attention during the normal course of the audit

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Engagement Letter (continued)

• Specify a target date of delivery of the written reports

• Certify that NCUA staff or its designated representative will be

provided unconditional access to the complete set of original

working papers either at the credit union or at a mutually

agreeable location for purposes of inspection

• Acknowledge that working papers shall be retained for a

minimum of three years from the date of the written audit

report

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Audit Follow-up

• Committee members should meet with outside

auditors:

– Review evaluation of internal controls

– Review audit work papers

– Review audit report

– Inquire about material weaknesses in internal controls,

errors or irregularities noted during the audit

– Inquire about illegal acts noted during the audit

– Inquire about accounting issues noted during the audit

• Supervisory Committee must receive written audit

report

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Supervisory Committee

Responsibilities

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Supervisory Committee Work Plan

• Reviewing Audits

• Interim Audits or Annual Work Plan

• Ensure review of Insurance & Bond Coverage

• Ensure review of Inventory of Fixed Assets

• Other Audits

– ACH Audit (may be included in interim procedures)

– Bank Secrecy Act Audit (may be included in interim procedures)

– SAFE Act Audit

– Member Account Verification (positive confirmation verification may be

included as part of Opinion Audit)

– Consumer Loan and/or Mortgage Loan Audits

– Website Compliance Audit

– OFAC Assessment

Reviewing Opinion Audit

• Reporting standards require that CPAs:

– Conduct their audits in accordance with generally accepted auditing

standards (GAAS)

– State whether financial statements are presented in conformity with

generally accepted accounting principles (GAAP)

– State whether such principles have been consistently applied in the

current period in relation to the preceding period

• Report must contain an expression of opinion regarding the

financial statement taken as a whole, or an assertion that the

CPA cannot express an opinion

• CPA must state in the report any reasons for the inability to

express an overall opinion on the financial statements

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Reviewing Opinion Audit (continued)

• When no material exceptions exist, the CPA will issue an

unqualified (clean) opinion

• When a material exception exists, but not so material as to

negate an opinion on the financial statements taken as a

whole, a qualified opinion is appropriate

– Materiality of the circumstance will be determined by the auditor

• If matter relates to scope of the procedures or the fairness of

presentation of the financial statements, the phrase “except

for” normally appears

• Only in situations where an uncertainty exists should the

auditor use the phrase “subject to”

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Reviewing Opinion Audit (continued)

• The following circumstances may require departure from the

auditor’s standard report:

– Credit union has restricted scope of audit, or conditions exist that

do not permit application of auditing procedures considered

necessary in the circumstances

– Inadequate disclosure or lack of conformity with GAAP affect the

financial statements and they do not fairly present financial

conditions, results of operations, or changes in financial position

– Consistent application of accounting principles has not occurred

– Unusual uncertainties exist as to the outcome of future events

and the auditor cannot reasonably estimate their effect on

financial statements

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Reviewing Opinion Audit (continued)

• CPAs issue an adverse opinion when the matter to which they

have taken exception is so pervasive that the financial

statements do not fairly present the financial position, results

of operation, or change in financial position,

or do not conform to GAAP

• In the case of a qualified, adverse or disclaimer of opinion, the

auditor should set forth all material reasons for issuing the

particular report form

• As to limitations of scope, the audit report would specify the

omission of any generally accepted auditing procedures and

the reasons for the omission; if the credit union requested the

omission, the report should specify it

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Review of Agreed Upon Procedures Audit

• Report standards require independent accountants to present

the results of applying Agreed Upon Procedures to specific

subject matter in the form of findings

• Report findings should not include vague or ambiguous

language

• Working papers should affirm that the auditor adequately

planned and supervised the work, and obtained evidential

matter to provide a reasonable basis for the findings

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Review of Non Opinion Audits

• An acceptable audit satisfies the requirements of NCUA Rules

and Regulations 715.7 (c), Audit per Supervisory Committee

Guide

• Appendix A of NCUA’s Supervisory Committee Guide

established the minimum procedures for performing a

Supervisory Committee Audit:

– Teller controls

– Dormant accounts

– Wire transfers

– Bank reconciliations

– Loans

– Allowance for Loan Losses

– Regular reserves, undivided earnings, reserves for contingencies

– Investments

– Shares

– Other Assets and Liabilities

– Board Minutes

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Interim Audits or Annual Work Plan

• Determine appropriateness of contracting with outside auditor

or if Supervisory Committee can complete tasks to comply

with regulatory requirements

• Following slides present a sample work plan that could be

executed by a Supervisory Committee

• Develop work plan appropriate for the complexity of your

credit union and your level of risk

– Requires significant time commitment from Supervisory Committee

members.

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Sample Supervisory Committee Work Plan

January

February

March

• Complete account verification

• Contact outside auditors to request bids

• Follow-up on prior audit and exam findings

• Review bank reconcilement

• Review employee, official and related family member accounts

• Review audit bids and select auditor

• Conduct a surprise cash, traveler’s check, money order and gift card count

• Follow-up on prior audit and exam findings

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Sample Supervisory Committee Work Plan

April

May

June

• Conduct the annual audit, maintain contact with outside auditor

• Verify closed accounts

• Review dormant or inactive accounts for proper escheatment

• Review internal controls in the cash area

• Contact a sample of members with new loans to ensure that loans are legitimate

• Provide audit report to Board

• Request a response from management on any audit findings

• Conduct a surprise cash, traveler’s check, money order and gift card count

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Sample Supervisory Committee Work Plan

July

August

September

• Verify closed accounts

• Review and follow-up on management’s audit response

• Review internal controls in lending area

• Review official, employee and related family accounts

• Review bank reconcilement

• Review for compliance with the credit union’s loan policy all loans granted to officials and employees since last annual audit

• Follow-up on prior audit and exam findings

• Conduct a surprise cash, traveler’s check, money order and gift card count

• Review ALCO minutes or obtain ALM reports documented as utilized by credit unions since last audit

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Sample Supervisory Committee Work Plan

October

November

December

• Review internal controls in the investments area

• Review official, employee and related family accounts

• Ensure the credit union’s operating budget for next year includes funding for external auditing

• Verify closed accounts

• Follow-up on prior audit and exam findings

• Review and test written branch security policy

• Conduct a surprise cash, traveler’s check, money order and gift card count

• Review sample of charged-off loans for compliance with charge-off policy

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Review of Insurance & Bond Coverage

• On an annual basis, ensure review of credit union’s package

of protection. Could include insurance policies such as:

– Fidelity Bond

– Management & Professional Liability

– Plastic Card

– Cyber & Security Incident

– Property/Business Liability

– Workmen’s Compensation

– Employee/Director Dishonesty

– Employee/Member Property Theft

– Mortgage Loan Documentation

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Review of Inventory of Fixed Assets

• On an annual basis, ensure review of fixed assets.

• Fixed asset accounts include:

– Land

– Building

– Furniture and equipment

– Leasehold improvements

– Leased assets under capital lease

– Related allowances for depreciation

– Allowances for amortization

• Fixed assets must be adequately safeguarded to limit the

opportunity for inappropriate use of credit union assets

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Other Audits

• ACH Audit

– Conduct audits pursuant to NACHA (National Automated Clearinghouse

Association) operating rules for receiving depository financial institutions

(RDFIs) and originating depository financial institutions (ODFIs) by

December 31st annually

• Bank Secrecy Act Audit

– Compliance with NCUA Rules & Regulations 748 and 749, anti-money

laundering, member ID programs, Currency Transaction Reports,

Suspicious Activity Reports

• SAFE Act Audit

– Annual audit to meet requirements of the Secure and

Fair Enforcement for Mortgage Licensing Act

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Other Audits

• Consumer loan and/or mortgage loan audits

– Periodic review of loan portfolios beyond the normal financial audit

procedures

• Website Compliance Audits

– Websites are subject to the same compliance requirements as printed

marketing materials

– Savings and loan rate pages—including payment calculators

– Information security

– Website policies and disclosures

– Third-party links to external services

– Advertising compliance

• OFAC Assessment

– Compare membership lists to current OFAC and NS-PLC lists to ensure

regular due diligence and adherence to OFAC laws

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Member Account Verification

• Conduct at least once every two years

• Verifying members’ accounts means requesting members to

respond to Supervisory Committee if the activity or balances

on their statements are not accurate

• If contracting with CPAs for Opinion Audit, positive

confirmation verification of members could be conducted as

part of Opinion Audit

• Purpose of the verification is to detect errors

• Verification is also a good control to prevent fraud

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Member Account Verification

• Notification must be provided with the statements and request

members contact Supervisory Committee with any

discrepancies

• General notice made in the form of a sign in the lobby

• Return address must be home address of committee member,

PO Box in the name of the credit union that the staff does not

have access to, or address of third-party vendor

• Maintain documentation of procedures performed

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How to Be an Effective Supervisory Committee

Member

• Attend Supervisory Committee Meetings Monthly: – Keep minutes

– Detail attendance

– Include facts on reports reviewed, procedures conducted, updates on findings

• Attend Board meetings or review minutes: – Monitor attendance

– Three consecutive absences warrant removal when no valid circumstances are presented

– Note: Board is not required to allow Supervisory Committee members to attend meetings

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Additional Supervisory Committee

Responsibilities

• Ensure Board follows plans, policies and procedures

• Review examination and audit findings

– Follow-up to ensure management takes the necessary corrective

actions

– Actions taken must be adequate to correct the findings

• Review the Credit/Loan Committee Activities

• Review Member Complaints

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How Do You Ensure Board is Safeguarding

Assets?

• It is not the responsibility of the Supervisory Committee to

make operating decisions

• Supervisory Committee must ensure that the Board’s plans

and policies are reasonable and that they protect the safety

and soundness of the credit union

• Review business plan for reasonableness

• Review policies to make sure they provide the structure for

adequate control

• Ensure that management is implementing policies

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Review of the Credit /Loan Committee

Activities

• Credit/Loan Committee should:

– Meet at least once a month

– Approve loans within legal limitations and limitations set by

board

– Grant sound loans

– Make decisions based solely on individual’s creditworthiness

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Review Member Complaints

• Supervisory Committee is typically only involved in complaints

submitted in writing or submitted directly to NCUA or

Consumer Financial Protection Bureau (CFPB)

• Handle complaints in an impartial and independent manner

• If a complainant identifies a policy or procedure that needs

correction, follow through to ensure Board and management

implement corrective changes

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Types of Complaints

• Types of member complaints can vary greater but most

involve concerns with:

– Lending policies and procedures

– Loan rejections

– Annual meetings

– Share withdrawals

– Dividend rates and terms

– Credit union services

• Regardless of type of complaint, the Supervisory Committee

must ensure that full and complete investigation is conducted

• Prepare and submit a written response to the member

• Prepare and submit a written report to NCUA and CFPB, as

appropriate

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Protecting Yourself and Your Credit Union

• Know duties and responsibilities

• Know laws and regulations

• Avoid any actual or perceived conflicts of interest

• Act in the best interest of the members

• Maintain confidentiality of all information reviewed as part of

Supervisory Committee responsibilities

• Ensure audits are performed to meet regulatory requirements

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Resources

• League of Southeastern Credit Unions – www.lscu.coop

– InfoSight

• CU Audit & Compliance Group – www.myleverage.com

• Credit Union National Association – www.cuna.org

• National Credit Union Administration – www.ncua.gov

– Supervisory Committee Guide

– Examiner’s Guide

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Contact Information

• League of Southeastern Credit Unions: – Laura Lee Vann, Vice President, Membership Relations

• 866.231.0545, ext. 2181 or laura.vann@lscu.coop

– April Ales, Member Relations Consultant

• 866.231.0545, ext. 1038 or april.ales@lscu.coop

– Judy Scott, Member Relations Consultant

• 866.231.0545, ext. 1062 or judy.scott@lscu.coop

– Juli Lewis, Member Relations Consultant

• 866.231.0545, ext. 1108 or juli.lewis@lscu.coop

– Jo Anne Funk, Member Relations Consultant

• 866.231.0545, ext. 2111 or joanne.funk@lscu.coop

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