It's a mantra vehemently repeated throughout the industry in various interactions and at conferences — supervisory committees are meant to be the “watchdogs” of the credit union. But what exactly are the responsibilities of this group?
The NCUA Supervisory Guide states:
“At least once every calendar year, you must complete (or have completed) the supervisory committee audit, and provide a report on the audit to the board of directors. The audit must cover the period elapsed since the last audit period.
At least once every two years, you must conduct a verification of members' accounts.
You must ensure that the board of directors is safeguarding assets, and that management complies with their policies and plans.
You must report to members at the annual meetings as stipulated in Article V of the standard bylaws.
You also should:
Review internal controls.
Hire and work with an internal auditor (if feasible for the credit union).
Hire and work with the external auditor (if feasible for the credit union).
Review examination and audit findings and follow-up to ensure that management takes the necessary corrective action. The action taken must be adequate to correct the findings.
Meet with the federal examiner as you or the examiner may request.
Research member complaints.
Complete other recommended procedures.
While your responsibilities encompass a range of areas, the depth of your review can vary. The internal control structure, size, complexity, and financial stability of your credit union will influence the extent of your review.”
The supervisory committee serves an important function in credit unions. It is tasked with asking the tough questions and following up on findings with management to ensure that remediation takes place. The list above is quite extensive for a volunteer position.
Over the last decade, credit unions have been forced to evolve. These institutions were always nimble with their practical approaches to helping members. But over the last ten years, between the cadre of regulations and agencies targeting consumer protection, savvier members who expect everything and more from the institution, and the ever-increasing ways in which fraudsters uncover and exploit vulnerabilities, credit unions as a whole have had to become more sophisticated — and this requirement also includes the supervisory committee.
Selection Of External Auditors
When selecting external auditors, the supervisory committee should start by evaluating the credit union's relationship with the current auditors. Do they do a good job overall for the credit union? Do they provide robust reports? Are they available to meet with the committee and management on short notice? Just because they have been the credit union's auditors for many years does not mean they should be replaced.
Keep in mind that although you may be using the same audit firm for years, these companies usually change staff over time to maintain fresh perspectives. If their reports contain comprehensive findings and sound recommendations, and management indicates that the auditors spend a lot of time at the credit union turning over all the rocks, then it's likely that no change is needed.
If the audit firm is not doing a good job (e.g., there is too much turnover, the reports are not very thorough, or the work is not comprehensive) then it might be time to make a change and go out for proposals.
The evaluation of proposals should include an analysis of hours to be spent and hourly rates to be charged. Pay special attention to hours that are spent in the field at the credit union versus hours that are spent in the CPA's offices. There is no magic wand when conducting an audit. Firms have to spend some time looking at the important issues, and there is no analytics or technology that can take the place of human interaction.
At the end of the day, it may be that neither the least expensive firm nor the most expensive firm is the best choice, just as value isn't only about low costs or lavish reputations. In some cases, the one in the middle might be the choice that provides the best value.
Ensure The Board Of Directors Is Safeguarding Assets And Management Complies With Policies And Plans
This responsibility is a tall order, and it will require the committee's attention year-round to ensure that all of the bullet points listed in the Supervisory Guide quoted above are addressed.
In addition, credit unions are required to have a number of compliance audits completed annually. Some of these can be done internally, although many credit unions outsource these functions. If the credit union has an internal auditor or an internal audit function, these reports should be presented to the committee for review.
Supervisory committees should meet at least quarterly (and more frequently where practical) to review the credit union's financial position with management. If there is an internal auditor, or if reports are completed by outside firms, the committee should also meet with the internal auditor to review reports.
Supervisory committees that follow best practices also keep minutes of their meetings. They review findings from both external and internal audits, and the examination reports are collected within a matrix so that the remediation progress of these items can be followed up on with management at the committee meetings.
Committee members should also attend at least one training session annually and meet with the auditors and examiners at least annually. Too often these committees lay dormant, and in today's environment that can be extremely dangerous.
There is far too much at stake for committees to merely act as rubber stamps. Instead, they should maintain a close relationship with their external auditors, and feel free to contact them throughout the year to discuss issues that come to their attention.
When all is said and done, the role of the Committee is to conduct the oversight function of the membership — i.e., to ask questions. Is the credit union opening itself up to too much risk? Does it have the right personnel to execute the board initiatives?
Many times, the supervisory committee is not favored because they feel they have to keep an eye on the operations. However, the committee does not have to physically spend time within the operations of the credit union, but rather should review the various reports produced by the auditors and the examiners and make sure that remediation has occurred.
The supervisory committee will also have to ask the board for money to execute its responsibilities and force management to go to the board to spend money on infrastructure to ensure that necessary remediation takes place in a timely manner. None of these are comfortable situations, but ultimately, they come with the territory.
These days, supervisory committees have to be more assertive and less passive. The position comes with lots of responsibility and members of the committee cannot be caught sleeping behind the wheel.
Committees should also have a budget for training. Often times, these resources can be accessed online from auditors or from management. For example, Turner, Warren, Hwang & Conrad provides free training for the supervisory committee members of our clients. Not only is this training very economical, but also quite useful, because it is customized to the committee's specific credit union and conducted in the privacy of its own boardroom so that committee members can ask as many questions as they like without reproach from their peers.
If you are interested in learning more about supervisory committee roles and responsibilities please feel free to reach out to Kian Moshirzadeh at TWHC. His email address is email@example.com.
Kian Moshirzadeh has been in banking since 1988 and joined TWHC in 1993 where he started his career as a credit union auditor. Since that time Kian has worked with hundreds of credit unions helping them with audits and consulting engagements. Today Kian is the managing partner of TWHC and continues to work with credit unions exclusively.
Since 1987, TWHC has helped credit unions with audits (both internal and external) as well as tax planning and compliance. TWHC is the auditor or consultant for over 150 credit union clients that range from $20 million in assets to over $6 billion in assets. They are the number one service provider for credit unions west of Arizona.