The economic downturn has underscored the importance of credit unions’ relationship with their auditors. Accuracy in financial reporting is critical, as all financial institutions are intense scrutiny from regulators, legislators, and the public. Credit union accounting issues of particular interest in the current environment include:
- Loan loss reserves;
- Charge-off policies;
- Loan modification reporting;
- The timing and amount of corporate credit union membership capital write-downs; and
- Merger accounting and related balance sheet valuations.
Auditors provide essential guidance at credit unions. The industry insight offered by auditing firms that have worked with other credit unions is a valuable component of the services they provide. It can prove particularly important in internal policy discussions with regulators, as many auditors base their policy advice on their own industry experience.
The Dodd-Frank bill does not specifically impact accounting rules, but several components of the legislation will impact rules regarding overdraft protection programs and interchange income. Many credit unions will rely on auditor assistance to address the challenges of the new regulatory environment. Strategies could include launching new business lines, an area in which auditors often provide input and share best practices related to the processes and procedures credit unions are establishing.
One pending accounting issue that could have a measurable effect on credit union financials is the Financial Accounting Standards Board’s (FASB) proposed rule that requires financial institutions with assets of more than $10 million to record loans at their current value on their balance sheet following “mark-to-market” accounting. This would impact regions, such as the Sand States, where real estate values have fallen and loan values could be reduced. The goal of the proposal is to create “more timely, transparent, and representative” financial statements.
As member-owned cooperatives, “timely, transparent, and representative” financial statements are an important element of credit unions’ value proposition. The Supervisory Committee at each credit union helps ensure this goal is met. Their role is increasingly important in today’s environment.
The Credit Union Auditor Market
Credit unions with $500 million or more in assets are required by NCUA to perform an annual financial statement audit. Although these credit unions represent less than 5% of the industry, more than 38% of credit unions underwent a financial statement audit in 2010.
The auditors that serve credit unions typically focus in this segment of financial institutions. Four firms work with at least 100 credit unions: RSM McGladrey; LarsonAllen; Nearman, Maynard, Vallez; and Orth, Chakler Murnane & Co. Other firms have strong presences in certain geographic areas such as Clifton Gunderson in the Southwest, Cindrich, Mahalak & Co. in the Midwest, and Turner, Warren, Hwang & Conrad in Hawaii. Only one of the Big Four accounting firms appears on the list of the top 30 credit union auditing firms, though a number of large credit unions do work with these firms. For a complete listing of credit union auditing firms, check out Callahan's Buyer's Guide.
It is a diverse group of firms that serve the industry, with 28 firms performing audits on at least a dozen credit unions with more than $40 million in assets. As a result, credit unions have a range of CPA firms with whom to work. Although credit unions are not subject to Sarbanes-Oxley, many follow the guidelines and will occasionally change their auditor relationship. The breadth of expertise available to credit unions is a positive attribute at a time when accounting issues are increasingly complex.
For more insight into the CPA market, pick up Callahan & Associates’ 2010 Credit Union CPA Market Share Guide. The guide provides contact information, market rankings, listings of credit unions and their auditing firms.