Written by Brandy Bruyere, Vice President of Regulatory Compliance
Hello everyone! Our usual Wednesday blog was delayed to technical issues, but we promise to blog three times a week so here's a special Thursday edition for you. Here at NAFCU, members often call us to ask about where they can find certain examination guidance or information explaining an examiner request. Many times, even if there is not a specific regulation, we are able to point to a Supervisory Letter, section of the Examiner’s Guide, AIRES Questionnaire, or similar guidance document. Other times, there is not obvious or clear guidance with regard to an examiner’s request. However, the Federal Credit Union Act does provide NCUA with rather broad examination authority, here’s an excerpt from 12 U.S.C. § 1784:
Examination of insured credit unions.—
(a) Examiners and claim agents; powers; report by examiner; jurisdiction of court.—The Board shall appoint examiners who shall have power, on its behalf, to examine any insured credit union, any credit union making application for insurance of its member accounts, or any closed insured credit union whenever in the judgment of the Board an examination is necessary to determine the condition of any such credit union for insurance purposes. Each examiner shall have power to make a thorough examination of all of the affairs of the credit union and shall make a full and detailed report of the condition of the credit union to the Board… (Emphasis added.)
NAFCU has pressed for NCUA to pull back from regulation, but on the flip-slide it can create more uncertainly on the exam side. It is helpful for us to hear about potential issues- if you are having one then maybe another credit union is too. Case in point: recently we heard from a member that examiners were asking for the credit union’s auditor to directly provide the credit union’s audit report to NCUA. This represented a change from the past practice where examiners requested this report straight from the credit union’s management. We reached out to NCUA for clarification and were informed that requesting the audit be provided by the credit union’s audit firm is a new procedure moving forward, implementing a recommendation made by NCUA’s Office of Inspector General in OIG 13-13 (see p. 18). OIG addressed the issue again as an outstanding recommendation in its Semiannual Report to Congress, April 1 – September 30, 2016, on p. 16:
“Recommendation: OIG-13-13, recommendation #3. Consider requiring examiners to obtain audit reports directly from independent auditors rather than receiving them from credit union management to avoid potential manipulation. NCUA could accomplish this through an e-file system for independent auditors to upload completed audits. Examples of similar systems include the Federal Audit Clearing House maintained by the U.S. Census Bureau and the Integrated Station Information System used by the Corporation for Public Broadcasting.
Status: Open. NCUA’s Office of General Counsel evaluated the agency’s options for obtaining audit reports directly from independent audit firms and concluded that NCUA does not have the power to mandate that these firms provide audit reports directly to the agency because the audit report represents the result of a contract between the credit union and the audit firm. As an official record, credit unions are obligated to share their audit reports with NCUA as a condition of share insurance. However, NCUA has concluded that independent audit firms do not have the same obligation. As a result, independent audit firms must obtain consent from their credit union client prior to sending audit reports directly to NCUA.
NCUA plans a proposed revision to Part 715 of NCUA's Rules and Regulations that will include a requirement that the credit union's engagement letter, signed with an independent third party audit firm, must submit audit reports directly to NCUA. Part 715 is not scheduled to be revisited until 2017.” (Emphasis added.)
As this indicates, sections 715.9(b) and (c) require credit unions to secure an engagement letter when using a “compensated auditor” to perform all or some of the credit union’s financial statement audit or supervisory committee audit. This includes certifying that NCUA staff will have “unconditional access” to working papers:
(b) Engagement letter. The engagement of a compensated auditor to perform all or a portion of the scope of a financial statement audit or supervisory committee audit shall be evidenced by an engagement letter. In all cases, the engagement must be contracted directly with the Supervisory Committee. The engagement letter must be signed by the compensated auditor and acknowledged therein by the Supervisory Committee prior to commencement of the engagement.
(c) Contents of letter. The engagement letter shall:
(7) Certify that NCUA staff and/or the State credit union supervisor, or designated representatives of each, will be provided unconditional access to the complete set of original working papers, either at the offices of the credit union or at a mutually agreed upon location, for purposes of inspection…(Emphasis added.)
For now, NCUA examiners are requesting credit unions to have auditors provide the information directly. While some audit firms are already making documentation automatically available to NCUA through online portals and similar mechanisms, where an audit firm does not wish to take such steps or otherwise provide information directly to NCUA, then NCUA will work with the credit union’s supervisory committee which could result in physical inspection of audit work papers. However, it appears that NCUA’s new procedure aims to maintain the chain of custody with regard to the audit and is not a reflection on an individual credit union’s management or operations.