NCUA Supervisory Committee Audit and Verfication Proposed Regulation
Samantha: Hello, this is Samantha Shares.
This episode covers Supervisory Committee
Audits and Verifications; Proposed Rule.
The following is an audio
version of that document.
This podcast is educational
and is not legal advice.
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And now the document.
The N C U A Board is proposing to
amend its regulations governing
supervisory committee audits to
eliminate unnecessary, redundant,
and overly prescriptive provisions.
The purpose of this action is to
reduce regulatory burden, increase
operational flexibility for credit
unions, and streamline requirements
that have become outdated or
duplicative of other authorities.
The goal of the proposal is to
simplify compliance for credit
unions without compromising the
integrity of the audit process.
Supplementary information.
Introduction.
Background.
The Board proposes amendments to part
seven fifteen, which governs supervisory
committee audits and verifications
for federally insured credit unions.
The primary purpose of these rules is
to ensure that federally insured credit
unions meet required financial reporting
objectives and establish practices
and procedures sufficient to safeguard
member assets from error, conflicts
of interest, self-dealing, and fraud.
The proposal would partially
or fully eliminate several
sections of the current rule.
Section seven fifteen point two defines
key terms used throughout the part,
including financial statements, financial
statement audit, G A A P, G A A S,
compensated person, and working papers.
This section distinguishes a formal
financial statement audit from the
broader supervisory committee audit
responsibilities, which may be met
through several types of engagements.
Section seven fifteen point
eight sets forth the requirement
to verify member accounts.
This requirement comes from the Federal
Credit Union Act and obligates the
supervisory committee to verify member
accounts at least once every two years.
Verification may be done through a
full ninety nine percent controlled
verification, a statistical sampling
method, or a non-statistical
method consistent with auditing
standards when performed by a
state-licensed independent person.
Section seven fifteen point
nine governs engagements with
outside compensated persons.
To ensure independence, the auditor
may not be related by blood or
marriage to any management employee
or official of the credit union.
Engagements must be formalized through
an engagement letter contracted
directly with the supervisory committee.
The letter must specify the terms and
objectives, the basis of accounting,
the compensation, the expected delivery
date of the audit report, and confirm
that regulators will have unconditional
access to the working papers, which must
be retained for at least three years.
Section seven fifteen point ten
outlines the responsibilities for
the audit report and working papers.
Upon receiving the written audit
report, the supervisory committee
must submit it to the board of
directors and provide a summary of
the audit at the next annual meeting.
If a member requests it, the full
audit report must be made available.
The supervisory committee is responsible
for maintaining the original working
papers and providing the N C U A with
unconditional access to them upon request.
Section seven fifteen point twelve
provides the statutory remedies available
to the N C U A Board when a federal
credit union fails to obtain a required
supervisory committee audit or when an
audit is incomplete or unsatisfactory.
The Board may compel an audit performed
by an independent, state-licensed person.
It may also compel a full financial
statement audit if the credit
union has serious and persistent
recordkeeping deficiencies.
Section seven forty one point two zero
two extends these supervisory committee
audit and verification requirements to
all federally insured credit unions,
including state-chartered credit unions.
Legal authority.
The Federal Credit Union Act sets
forth provisions governing auditing
and accounting requirements.
Section one fifteen requires an
annual audit and requires the
supervisory committee to submit a
report of that audit to the board of
directors and to provide a summary to
members at the next annual meeting.
Section two zero two authorizes the
Board to prescribe audit standards,
including requiring an outside
independent audit when a federally
insured credit union has not conducted
a required supervisory committee
audit or has experienced persistent
or serious recordkeeping deficiencies.
The Act also requires credit unions with
ten million dollars or more in assets
to use accounting principles consistent
with G A A P when filing reports.
Credit unions with five hundred
million dollars or more in assets must
obtain an annual independent financial
statement audit performed under G A A S.
Proposed rule.
The Board proposes several amendments
to part seven fifteen to reduce
burden, eliminate redundancies,
and increase flexibility.
The Board proposes changes to definitions,
verification procedures, engagement
letter requirements, audit report
handling, and statutory remedies.
The Board proposes to amend the definition
of internal control in section seven
fifteen point two by removing overly
prescriptive language describing specific
components of internal control structures.
The current definition
references a particular framework
that may evolve over time.
Removing this language would allow
credit unions and auditors to apply
current industry-accepted frameworks.
The Board also proposes to remove the
sentence defining reliable financial
reporting solely by reference to call
report preparation, as this is too narrow.
The Board proposes to amend section
seven fifteen point eight by removing
the phrase âof the treasurer.â
Under the Federal Credit Union
Act, the treasurer must maintain
the records of the credit union,
but the supervisory committee is
responsible for verifying member
accounts against credit union records.
This change simplifies and
clarifies the requirement.
The Board proposes to amend section
seven fifteen point nine by removing
a sentence that details how the
engagement letter must be signed.
The Board finds that such
detail is unnecessary.
The provision will remain clear
that the supervisory committee
must contract directly with any
compensated outside auditor.
Removing this detail reduces regulatory
burden without reducing audit integrity.
The Board proposes to amend section
seven fifteen point ten by removing
the sentence requiring the supervisory
committee to provide the N C U A with
a copy of audit reports upon request.
This requirement is redundant because the
N C U A already possesses broad statutory
authority to access all records of any
federally insured credit union during
examination and supervision activities.
The Board also proposes to amend section
seven fifteen point twelve by removing two
sentences describing the objective of a
financial statement audit compelled by the
N C U A and stating that adverse opinions
or disclaimers should be the exception.
These sentences duplicate
expectations already provided under
G A A S and may cause confusion
if auditing standards change.
Regulatory procedures.
The Providing Accountability Through
Transparency Act of twenty twenty three
requires each proposed rule to include the
internet address of a summary of no more
than one hundred words, presented in plain
language, posted on Regulations dot gov.
The summary explains that the Board
is proposing to amend its regulations
governing supervisory committee audits
to eliminate unnecessary and overly
prescriptive provisions and to streamline
compliance without compromising
the integrity of the audit process.
Under Executive Orders twelve eight
six six and thirteen five six three,
the proposed rule is not considered
a significant regulatory action.
Under Executive Order fourteen one
nine two, the rule is expected to be
deregulatory because it eliminates
requirements and reduces burden.
Under the Regulatory Flexibility Act,
the Board certifies that the proposed
rule would not have a significant
economic impact on a substantial
number of small credit unions.
The amendments clarify or eliminate
prescriptive requirements but do not
materially change audit obligations.
The N C U A has determined that the
proposed rule does not create or revise
information collection requirements
under the Paperwork Reduction Act.
The Board also determined that the
proposal does not have federalism
implications under Executive
Order thirteen one three two.
The requirements continue to
apply uniformly to all federally
insured credit unions, including
state-chartered institutions.
The N C U A has determined
that this proposed rule would
not affect family well-being.
For the reasons stated in the preamble,
the N C U A Board proposes to amend title
twelve, Code of Federal Regulations,
part seven fifteen as follows.
Part seven fifteen.
Supervisory Committee
Audits and Verifications.
First, the authority citation for
part seven fifteen continues to
read as the statutory provisions
governing supervisory committee
responsibilities and audit requirements
in the Federal Credit Union Act.
Section seven fifteen point two paragraph
h would be revised to define internal
control as the process established
by the board of directors, officers,
and employees, designed to provide
reasonable assurance of reliable
financial reporting and safeguarding
of assets against unauthorized
acquisition, use, or disposition.
Internal control over safeguarding
of assets refers to the prevention
or timely detection of unauthorized
access, use, or disposition of assets
which could result in a loss that is
material to the financial statements.
Section seven fifteen point eight
would be amended by removing
the words âof the treasurer.â
Section seven fifteen point nine paragraph
b would be revised to require that the
engagement of a compensated auditor be
evidenced by an engagement letter, and
that the engagement must be contracted
directly with the supervisory committee.
Section seven fifteen point ten paragraph
a would be revised to require the
supervisory committee, upon completion
or receipt of the written audit report,
to verify that the audit was performed
and reported according to the engagement
letter, to submit the report to the board
of directors, and to provide a summary
of the results orally or in writing to
the members at the next annual meeting.
If a member requests it, the full
audit report must be made available.
Section seven fifteen point twelve
paragraph b would be revised to state
that the N C U A Board may compel a
federal credit union to obtain a financial
statement audit performed under G A A S
by an independent person licensed in the
state or jurisdiction in which the credit
union is principally located when the
credit union has experienced serious and
persistent recordkeeping deficiencies.
This concludes the document.
If your credit union could use assistance
with your exam, reach out to Mark Treichel
on LinkedIn or at Mark Treichel dot com.
This is Samantha Shares, and
we thank you for listening.
