Full Scope Annual Review vs. Minimum Procedures
Posted by Ms. Cheryl Ehmann, AVP Staff Analyst, Credit Union Resources, Inc on 9/15/2017

On July 24, my blog introduced two key types of Supervisory Committee Annual Reviews that I would like to expand upon further here today.

Many firms offer different levels of service – Credit Union Resources is no exception.  We offer two types of Supervisory Committee Annual Reviews.  I will go into detail on these different services here.  I realize not everyone reading this blog will use us for this service, but the key take-away here is to read the engagement letters carefully to know exactly what you are getting.

Our full scope review basically involves a review of an approximately 40-page internal control questionnaire, a review of all outstanding loans to officials, employees and family members, a review of a selection of member loans, a review of various loan exception reports and file maintenance reports, a review of every balance sheet account with an outstanding balance as of the review date, a review of overdrawn and dormant member accounts, testing of income and expense, a review of Board of Directors’ minutes, and a review of bond and fire and hazard insurance coverage.  This is an extremely thorough approach, and has enabled us to help many credit unions with issues they didn’t even know they had.

However, with the lagging revenues many credit unions are experiencing, many are hesitant to pay the fees it takes to support such a thorough review.  If the Supervisory Committee is not aware of any issues, they often would prefer a more general and less expensive review.

One thing the Supervisory Committee often does not realize is that any steps not performed by the external review team fall back on them.  They are responsible for ensuring that all areas of credit union operations are reviewed.  If the Committee does not have much time or is not familiar with the operations of a financial institution, it may be worth the extra money to have the more thorough review.  The increase in fees is often small when compared to the extra time and effort the Committee would need to put in themselves.

Our minimum procedures review includes only the steps outlined in the NCUA Supervisory Committee Guide as evidence of an acceptable review.  This means the following is omitted:

  • A full review of official, employee and family loans.  Instead of reviewing all of these loans outstanding, we will make a selection of between three to 10 loans.
  • Review of lending exception reports.
  • A full internal control review.  These questions are limited to the eight areas noted in the Guide.
  • A full general ledger account review.  Areas not reviewed include prepaid expenses, fixed assets and accrued expenses.  A selection of receivable and payable accounts will be reviewed rather than all accounts.  A selection of cash and investment accounts will be tested and confirmed rather than all accounts.
  • Income and expenses are not tested.
  • Only three months of Board of Directors’ meeting minutes are reviewed.
  • No review of bond or fire and hazard insurance coverage.

As you can see there is a big difference between the work performed in these two types of engagements.   The minimum procedures engagement places much more responsibility on the Supervisory Committee.  However, we do know that credit unions’ revenue margins are being squeezed now more than ever, so we also offer a combination engagement.

A combination engagement is a multiple year engagement (usually three or five years), with alternating procedures each year.  For example, in a three year engagement, the first and third years would be minimum procedures, while the middle year would be full scope.

This is important because although having a minimum procedures engagement performed in any particular year might not be so risky, having nothing but minimum procedures performed year after year could leave a lot of areas untested and rife for problems.

The engagement letter you receive from your firm should address exactly what procedures will be performed.  Be sure to read this thoroughly to ensure you are performing your fiduciary duty!

 

 

Categories: Financial & Auditing
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