Mike Sacher has served as an audit partner with O’Rourke Sacher & Moulton and McGladrey & Pullen. He has more than 30 years of experience and thousands of credit union audits under his belt, which gives him a thorough understanding of industry accounting and governance matters. In 2008, Sacher launched a consulting practice, Sacher Consulting, which provides services exclusively to credit unions.
Callahan & Associates: How has the complexity of a credit union audit changed compared to when you started in this industry 30 years ago?
Mike Sacher: It’s apparent to me the auditor’s role in credit unions (and retail banking in general) is more critical than ever. Increased complexity of accounting rules combined with the larger size and increased sophistication of the average credit union is an obvious reason. And secondly, after the demise of Enron and the other large corporate failures earlier this decade, auditors have an increased and more highly visible role in protecting the public from the abuses of dishonest or unqualified management. These issues combined with the current economic crisis create an environment where auditors are being challenged by the various standard setters (SEC, AICPA, PCAOB, FASB, etc.) to perform at even higher levels of professionalism. It is also clear if auditors fail to meet these stringent standards, they face greater liability and increased exposure to legal and regulatory actions.
C&A: Can you share your thoughts on the subject of auditor rotation/auditor retention?
MS:One of the most common questions asked over the years was how often a credit union should change CPA firms. My answer to this question is based on the following perspective:
- There is no regulatory requirement to change firms after a set number of years. In the public company world, auditor rotation is actually a rare event.
- Rotation of audit partners and senior audit staff is a good idea; fresh perspective from the audit team increases the quality of an audit.
- Frequent auditor rotation results in lower quality audits and raises a red flag as to the client’s motivation for auditor rotation.
- An audit firm must be able to balance the theoretical accounting framework with the challenges of running a successful business.
I chair the audit committee of the Board of Directors of a publically held financial institution. The qualities I consider in the retention of our CPA firm include the experience and expertise of the partner assigned to our engagement, the specific industry expertise of the firm, signs of stress in the CPA firm exhibited by significant turnover in the partner base or senior staff, ability of the firm to provide partner rotation, reasonableness of fee, and commitment of the firm to support the industry.
My best advice to credit unions is to evaluate the level of service provided by your CPA firm on a regular basis. Even if you are satisfied with the firm, seek competitive bids approximately every five years. And most importantly, advise your CPA firm if you are dissatisfied with services in as timely a manner as possible to avoid a bad situation from becoming worse.
C&A: Based on your insider’s perspective, what are the biggest challenges that CPA firms have in providing quality services to credit unions?
MS: Several challenges come to mind. Some of these challenges are reflective of the public accounting business model. Some are related to characteristics common to many credit unions. It is my hope that by articulating these issues, both the CPA firm and the client will better understand each other’s challenges and work together to improve the auditor/client relationship in the credit union industry.
- Prior to this current economic cycle, by far the biggest challenge was the hiring and retention of talented professional staff. Although dormant today, I suspect this challenge will recur once the economy picks up and unemployment rates come back down to more historic levels.
- Inadequate audit fees resulted in pressure to get audits completed without being able to devote the appropriate amount of time and resources to the engagement. Although credit unions should give consideration to the audit fee, it is only one of the many issues that need to be evaluated in the retention of the auditor. There are many times when a comparatively low fee will be indicative of a comparatively low quality audit engagement.
- Central office structures that impose firm-wide procedures that are not relevant to credit unions add costs and inefficiencies to the audit process, which results in less of a consultative audit product. Credit unions should evaluate the flexibility the audit team has to design audit procedures based on the nature of the industry in general and on the client in particular.
- Highly complex accounting rules that are often not understood or addressed by credit unions create a stressful and less efficient audit engagement. There are many credit unions that haven’t devoted the professional resources that are needed to stay abreast of these complexities.
- An inadequate or under-documented internal control structure causes the auditor to take a more “skeptical” viewpoint of the institution and spend more time and resources than should be needed to efficiently execute the engagement.
C&A: How does a CPA firm determine the professional fees for conducting a credit union audit? How can a credit union control those fees?
MS: The audit fee is a simply a function of how many professional hours will be spent on an engagement and the hourly billing rates of those professionals that will participate on the engagement. The vast majority of audit engagements have fixed fees, meaning that unless fraud or other unusual circumstances are encountered, the auditor will commit to a fee not to exceed a specified amount. Most firms that have large credit union practices estimate the fee based on the asset size and the perceived complexity and sophistication of the of the credit union. The firm will often prepare a time budget that summarizes the expected amount of time by various levels of professional staff by various areas of the audit engagement process. Credit unions should request a summary of the audit budget during the proposal process and identify areas of similarity and difference among the various firms bidding on the engagement.
Fees can be controlled by the client being responsive to the client assistance request and by having a strong accounting function and an independent internal audit function.