Where are NCUA’s Honest Numbers?

It is almost a year since the NCUA took over WesCorp and almost two years since NCUA published an audit. Whatever happened to "honest numbers"?


It is almost a year since the NCUA took over WesCorp, asserting that the credit union was not preparing "honest numbers" about its financial situation as of December 2008. The Agency conserved the credit union. As conservator the Agency reclassified all investments as available for sale and gave the auditor, BDO Seidman, the assumptions the Agency wanted used in estimating OTTI losses on those securities. Two months later the Agency got the audited numbers it wanted. They were significantly different from the preliminary estimates provided by WesCorp's management to the Agency, its board, and major California CEO's prior to NCUA's takeover.

The last audited numbers, December 2007, for the credit union funds managed by NCUA were issued as of February 13, 2008, almost two years ago. Audited financial statements for the NCUSIF, CLF and Agency's operating funds for the year ending December 2008 have not been released.

Late audits are a warning signal to users of financial statements. Something is wrong. NCUA and the auditor (Deloitte & Touche) are not in agreement. This absence has been noted in a published story that the Agency will not receive an unqualified (clean) opinion when the statements are released; and that Deloitte & Touche is being replaced for the current year's (2009) financial audit.

Talk about warning signs. No numbers, then when numbers are released they will not conform to GAAP and the auditor is being changed. Whatever happened to "honest numbers?"

When Audits are Late
Audits are late because there is a disagreement between the independent auditor's judgments and management's about the statements. That is exactly the reason audits are so critical, for they can support interim assumptions and presentations, or not. Where could there be differences that would be critical for credit unions to be aware of?

Could these differences be in the loss estimates for the NCUSIF? The $3.7 billion dollar estimate of corporate losses in January of 2009 or the $6.0 billion figure provided two months later? These and other natural person loss estimates were used to justify a premium in August even though the NCUSIF's reserves were in the normal operating range of 1.2 to 1.3%.

Could it be in presenting the equity of the CLF which is the statutory basis for borrowing? How can the CLF count "equity" when a corporate's membership capital is eliminated? What is the CLF's current borrowing authority under the Congressionally-appropriated $41.0 billion line with no U.S. Central membership capital shares? These membership shares are the account which qualifies most credit unions for CLF membership.

Or is the disagreement in the presentation of the statements? Under FASB 140B^ should the yearend financial statements of WesCorp and U.S. Central be combined with NCUSIF since they are under NCUA's direct control? How should interim statements then be presented? Does this mean the Deloitte wants to review BDO Seidman's audit numbers of WesCorp before a consolidation?

We don't know the answers. However, before the numbers are available, the Agency has projected additional credit union expense commitments of $8 billion in its November 2009 Board meeting. This total includes a NCUSIF premium of up to 40 basis points or $2.8 billion for 2010. "Honest numbers" would certainly be helpful in evaluating the reasonableness of these requirements.

The NCUA's 25 Year GAAP audit record
Credit unions with assets exceeding $500 million (Regulations 703 and 715) and all CUSOs (Regulation 712)are required to have an independent CPA audit of their financial position every year. This is not a mere ministerial requirement — that is, a box checked and a duty done. Rather it is the foundation of these organizations' financial integrity.

Tens of millions of members entrust their savings to credit unions and their affiliates, relying on that integrity. Member "assets" are deposited for their credit union's use, a process that is fundamental for any economy to have a functioning system of "financial intermediaries."

This is the same circumstance for NCUA. Credit unions own the NCUSIF and CLF. They provide the equity. These are not government funds. The capital is entrusted with NCUA on the promise that it will be managed in the best interests of the owners and promote a properly functioning cooperative financial system.

Audits are an essential component of the Agency's accountability to the fund's owners. For over 25 years, the NCUSIF, CLF and NCUA operating funds have had independent unqualified-opinion audits. This process was started in 1982 when it was found that the prior reliance on GAO reviews every two years was not a sufficient or timely way of presenting the condition of these funds to the industry, Congress and the public.

This commitment was reiterated in 1984 and 1985 when credit unions were asked to support a new financial structure for the NCUSIF in which each would place a 1% of its insured shares as the capital base for the fund. As shareholders they would receive dividends on their equity in good years and limits were placed on the amount of earnings NCUA could retain, initially 1.3%. To verify the Agency's proper accounting for these funds and compliance with the operating requirements, the check and balance of an independent audit was reaffirmed in writing in the Agency's annual reports and in board statements.

President Obama's Insight
Timely independent audits are, at the most basic level, assurance that management is presenting the financial position of an organization in an accurate manner. When properly done, these reports can be presented to customers, the public, regulators and Congress as an external validation of an organization's financial condition —"in conformity with the accounting principles generally accepted in the United States of America."

Whatever market conditions may be, or whenever issues arise during a year, all users of audited statements can be assured that the results are not merely management's interpretation or in extreme cases, a misrepresentation.

Without numbers, let alone "honest numbers" independently verified, the most important factor in any organization's success is at risk. President Obama said it best in his State of the Union message last Wednesday:

"We face more than a deficit of dollars right now. We face a deficit of trust—deep and corrosive doubts about how Washington works that have been growing for years."

^FASB 140* - “derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished.”  Summary of Statement No. 140 (http://www.fasb.org/summary/stsum140.shtml)




Feb. 1, 2010


  • The time is now to demand accountability from our own ageny. They demand tranparency publicly, but they are not "wallking the talk". Time to call them out, and contact your legislative leadership, or demand the agenciy AG make public the reasons for the delay.
    Name witheld to protect the insolent... I meant innocent.