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Full Scope Annual Review vs. Minimum Procedures
Wednesday, October 4, 2017 6:25 AM

Cheryl Ehmann, AVP Staff Analyst, Credit Union Resources

On July 24, my blog introduced two key types of Supervisory Committee Annual Reviews that I would like to expand upon further.

Many firms offer different levels of service; Credit Union Resources is no exception. We offer two types of supervisory committee annual reviews. Whether you use Resources for this service or not, the key takeaway here is to read the engagement letters carefully to know exactly what you are getting.

Our full scope review involves a review of:

  • An approximate 40-page internal control questionnaire;
  • All outstanding loans to officials, employees, and family members;
  • A selection of member loans;
  • Various loan exception and file maintenance reports;
  • Every balance sheet account with an outstanding balance as of the review date;
  • Overdrawn and dormant member accounts;
  • Testing of income and expense;
  • Board of directors’ minutes; and
  • Bond and fire and hazard insurance coverage.

This is an extremely thorough approach that has enabled us to help many credit unions with issues they didn’t even know they had. However, with the lagging revenues many credit unions are experiencing, many are hesitant to pay the fees it takes to support such a thorough review. If the supervisory committee is not aware of any issues, they often would prefer a more general and less expensive review.

One thing the supervisory committee often does not realize is that any steps not performed by the external review team fall back on them. They are responsible for ensuring that all areas of credit union operations are reviewed. If the committee does not have much time or is not familiar with the operations of a financial institution, it may be worth the extra money to have the more thorough review. The increase in fees is often small when compared to the extra time and effort the committee would need to put in themselves.

Our minimum procedures review includes only the steps outlined in the NCUA Supervisory Committee Guide as evidence of an acceptable review. This means the following is omitted:

  • A full review of official, employee, and family loans. Instead of reviewing all of these loans outstanding, we will make a selection of between three to 10 loans.
  • A review of lending exception reports.
  • A full internal control review. These questions are limited to the eight areas noted in the Supervisory Committee Guide.
  • A full general ledger account review. Areas not reviewed include prepaid expenses, fixed assets, and accrued expenses. A selection of receivable and payable accounts will be reviewed rather than all accounts. A selection of cash and investment accounts will be tested and confirmed rather than all accounts.
  • Income and expenses are not tested.
  • Only three months of board of directors’ meeting minutes are reviewed.
  • No review of bond or fire and hazard insurance coverage.

As you can see there is a big difference between the work performed in these two types of engagements. The minimum procedures engagement places much more responsibility on the supervisory committee. However, we do know that credit unions’ revenue margins are being squeezed now more than ever, so we also offer a combination engagement.

A combination engagement is a multiple year engagement (usually three or five years), with alternating procedures each year. For example, in a three-year engagement, the first and third years would be minimum procedures, while the middle year would be full scope.

This is important because although having a minimum procedures engagement performed in any particular year might not be so risky, having nothing but minimum procedures performed year after year could leave a lot of areas untested and rife with problems.

The engagement letter you receive from your firm should address exactly what procedures will be performed. Be sure to read these procedures thoroughly to ensure you are performing your fiduciary duty.