[Federal Register Volume 84, Number 37 (Monday, February 25, 2019)]
[Proposed Rules]
[Pages 5957-5960]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-03164]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 84, No. 37 / Monday, February 25, 2019 /
Proposed Rules
[[Page 5957]]
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 715
RIN 3133-AE91
Supervisory Committee Audits and Verifications
AGENCY: National Credit Union Administration (NCUA).
ACTION: Notice of proposed rulemaking and request for comment.
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SUMMARY: The NCUA Board (Board) proposes to amend its regulations
governing the responsibilities of a federally insured credit union
(FICU) to obtain an annual supervisory committee audit of the credit
union. The proposal implements recommendations outlined in the agency's
Regulatory Reform Task Force's Regulatory Reform Agenda (Agenda) and
will provide additional flexibility to FICUs.
DATES: Comments must be received on or before April 26, 2019.
ADDRESSES: You may submit comments by any of the following methods, but
please send comments by one method only:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
NCUA Website: http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the instructions for
submitting comments.
Email: Address to [email protected]. Include ``[Your
name]--Comments on Proposed Rule--Supervisory Committee Audits and
Verifications'' in the email subject line.
Fax: (703) 518-6319. Use the subject line described above
for email.
Mail: Address to Gerard Poliquin, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria,
Virginia 22314-3428.
Hand Delivery/Courier: Same as mail address.
FOR FURTHER INFORMATION CONTACT: Technical information: Alison Clark,
Chief Accountant, Office of Examination and Insurance, at the above
address or telephone (703) 518-6611; or Legal information: Marvin Shaw,
Staff Attorney, Office of General Counsel, at the above address or
telephone (703) 518-6553.
SUPPLEMENTARY INFORMATION:
I. Background and Legal Authority
A. NCUA Regulatory Reform Task Force
In August 2017, the Board published and sought comment on the
Agenda.\1\ The Agenda identifies those regulations the Board intends to
amend or repeal because they are outdated, ineffective, or excessively
burdensome.\2\
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\1\ 82 FR 39702 (Aug. 22, 2017).
\2\ This is consistent with the spirit of President Trump's
regulatory reform agenda and Executive Order 13777. Although the
NCUA, as an independent agency, is not required to comply with
Executive Order 13777, the Board has chosen to comply with it in
spirit and has reviewed all of the NCUA's regulations to that end.
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The Agenda addresses the NCUA's regulations on Supervisory
Committee Audits. As discussed more fully below in the Proposed
Amendments section, the Agenda recommends removing from Sec. 715.7 of
the NCUA's regulations the reference to the ``NCUA's Supervisory
Committee Guide'' and amending in Sec. 715.9 of the NCUA's regulations
the requirement related to the timing for delivery of written reports.
B. Federal Credit Union Act Audit Requirements
Sections 115 and 202(a)(6) of the Federal Credit Union Act (FCU
Act) set forth provisions addressing auditing and accounting
requirements.\3\ Section 115 of the FCU Act requires an FCU's
supervisory committee to make an annual audit and submit a report of
that audit to the FCU's Board of Directors and a summary of that report
to the FCU's members at the next annual meeting.\4\ Further, the
supervisory committee is required to make supplemental reports as they
deem necessary.
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\3\ 12 U.S.C. 1761d; 12 U.S.C. 1782.
\4\ 12 U.S.C. 1761d.
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Section 202(a)(6)(A) of the FCU Act is a general grant of authority
to the Board to prescribe audit standards that require an outside,
independent audit by a certified public accountant for any fiscal year
for which a credit union has not conducted an annual supervisory
committee audit, has not received a complete and satisfactory
supervisory committee audit, or during which the credit union has
experienced persistent or serious record keeping deficiencies.
Section 202(a)(6)(C) of the FCU Act generally requires FICUs having
assets of $10 million or more to use accounting principles consistent
with GAAP in all reports or statements required to be filed with the
Board.\5\ The Board, and state credit union supervisors under
applicable state law, may require credit unions having less than $10
million in assets to follow GAAP.\6\
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\5\ 12 U.S.C. 1782(a)(6)(C). ``In lieu of GAAP, the NCUA Board
may prescribe an accounting principle . . . that is no less
stringent than GAAP.''
\6\ Id.
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Section 202(a)(6)(D) of the FCU Act imposes audit requirements for
larger FICUs. Specifically, a FICU having assets of $500 million or
more is required to obtain an annual independent audit of its financial
statements performed in accordance with generally accepted auditing
standards (GAAS), hereafter referred to as a ``financial statement
audit.'' That audit must be performed by an independent certified
public accountant or public accountant licensed to do so by an
appropriate state or jurisdiction.\7\
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\7\ 12 U.S.C. 1782(a)(6)(D)(i).
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Additionally, if an FCU having total assets of less than $500
million but more than $10 million elects to obtain a financial
statement audit, the audit must be performed consistent with the
accountancy laws of the appropriate state or jurisdiction.\8\
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\8\ 12 U.S.C. 1782(a)(6)(D)(ii).
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C. The NCUA's Supervisory Committee Audit Regulations
Sections 715.5 and 715.6 of the NCUA's regulations specify: (1) The
minimum type of annual audit a FICU is required to obtain according to
its charter type and asset size; (2) the licensing requirements of
persons performing certain audits; and (3) the auditing principles that
apply to certain audits.\9\ These provisions were last updated in July
1999.\10\
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\9\ 12 CFR part 715.
\10\ 64 FR 41035 (July 29, 1999).
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The July 1999 rulemaking also adopted Sec. 715.7 of the NCUA's
regulations outlining the options for a FICU to comply with the annual
audit requirement if it has elected not to voluntarily obtain a
financial statement audit. The options permitted include a
[[Page 5958]]
FICU obtaining: (1) A Balance Sheet Audit; (2) a Report on Examination
of Internal Controls over Call Reporting; or (3) an Audit per the
Supervisory Committee Guide. The first two options are analogous to
options adopted in 1999 by the Federal Financial Institutions
Examination Council for other federally insured financial institutions.
Regarding the third option, the NCUA amended the Supervisory Committee
Guide in 1999 to detail the minimum scope and procedures for engaging
outside compensated professionals in the audit process and to clearly
distinguish a Supervisory Committee Guide audit from a financial
statement audit.
II. Proposed Amendments
A. Section 715.7 Supervisory Committee Audit Alternatives to a
Financial Statement Audit
The Board proposes to remove the reference to the NCUA's
Supervisory Committee Guide in Sec. 715.7(c). Section 715.7 outlines
the alternatives a credit union that is not required to obtain a
financial statement audit may elect to utilize in lieu of obtaining a
financial statement audit to fulfill its supervisory committee
responsibilities. One such option is to conduct an audit per the
Supervisory Committee Guide, which is published by the NCUA. The Board
is proposing to replace this option with the option to conduct the
audit so as to meet certain minimum requirements, which would be
incorporated into a proposed new Appendix A to Part 715. The minimum
procedures outlined in Appendix A reflect common industry practices for
testing accounts and controls over financial institution financial
statements.
The Board believes that providing a targeted list of minimum
procedures to be included in an audit would clarify and simplify the
audit process. Under this framework, credit unions and outside parties
hired to conduct audits for credit unions would only need to refer to
the streamlined Appendix A to determine the minimum audit requirements,
rather than needing to refer to the current Supervisory Committee
Guide, which, at over 350 pages, is overly specific, burdensome, and
outdated.
Under the proposed Appendix A, the supervisory committee, internal
auditor, or other qualified person would be required to perform and
document the following areas of review:
Test and confirm material asset and liability accounts,
including, at a minimum, loans, cash, investments, shares and
borrowings.
Test material equity, income and expense accounts.
Review key internal controls, at a minimum, bank
reconciliation procedures, cash controls, dormant account controls,
wire and ACH transfer controls, loan approval and disbursement
procedures, and inside account controls.
Test the mathematical accuracy of the allowance for loan and
lease loss accounts and ensure the methodology is properly applied.
Test loan delinquency and charge-offs.
In selecting these areas of review for inclusion in Appendix A,
NCUA staff has borrowed substantially from the Supervisory Committee
Guide, reviewed and adopted procedures established by the American
Institute of Certified Public Accountants, and consulted with
accounting professionals. This proposed amendment is intended to make
it easier for a credit union to understand what it needs to include in
its audits, not necessarily to change the areas of review the Board
considers important. Nevertheless, the Board requests comment on if
there are other areas of review that should be included in Appendix A,
including, for example, loans to insiders, pay and benefits to
employees and board members, regulatory compliance, compliance with the
Bank Secrecy Act, and other topics.
Appendix A further directs the supervisory committee, internal
auditor, or other qualified persons to determine if additional
procedures are needed to supplement the minimum procedures that are
subject to the audit.
The Board requests comments on other areas that might be included
in Appendix A, including loans to insiders, pay and benefits to
employees and board members, regulatory compliance, compliance with the
Bank Secrecy Act, and other topics.
The Board plans to decommission the outdated Supervisory Committee
Guide. The NCUA would issue reference material on how to conduct
procedures that would meet the minimum requirements of Appendix A. This
reference material could be used by Supervisory Committees and the
third parties hired to develop agreed upon procedures. Alternatively,
Supervisory Committees and hired third parties could elect to
incorporate other agreed upon procedures, as long as the testing
resulted in the minimum requirements being met.
B. Section 715.9 Assistance From Outside, Compensated Person
The Board proposes to amend Sec. 715.9(c)(6) of the NCUA's
regulations. This section, among other things, addresses engagement
letters a credit union may use to hire a compensated auditor to perform
audit functions. The current regulation requires that an engagement
letter specify a target date of delivery of written reports ``not to
exceed 120 days from the date of calendar or fiscal year-end under
audit (period covered).'' The proposed amended provision would
eliminate the 120-day time frame in favor of language that provides
enhanced flexibility free of any deadline articulated in a specific
number of days. The new standard would only require a credit union to
specify in the engagement letter a target delivery date that enables
the credit union to timely meet its annual audit requirements as
articulated in Sec. 715.4 of the NCUA's regulations.
This proposed change provides a credit union with the ability to
better negotiate the target date for delivery of written reports with
the person or firm it contracts with, and still meet the audit
requirements. Additionally, this will eliminate the need for a
Supervisory Committee to obtain a waiver from the appropriate NCUA
Regional Director, if delivery of the written report will exceed the
120-day period.
C. Miscellaneous
The Board also proposes to amend Sec. 715.9(c)(3), Sec. 715.9(d),
and Sec. 715.9(e) to remove references to the Supervisory Committee
Guide and replace them with references to the minimum requirements of
proposed new Appendix A, consistent with the proposed changes to Sec.
715.7(c).
In addition, the proposed rule amends Sec. 715.7 by removing one
of the alternatives a Supervisory Committee has in lieu of obtaining a
financial statement audit, namely, the option to obtain a report on
examination of internal controls over call reporting. The NCUA believes
this option has limited value in serving as an audit of the credit
union's financial reports of condition as it does not necessarily
involve any review of balances reported. As of September 30, 2018, less
than 1 percent of FICUs used this option to fulfill the annual audit
requirement.
III. Request for Comment
The Board seeks comment on all aspects of this proposal. Further,
in addition to removing the alternative of obtaining ``a report on
examination of internal controls over call reporting,'' as proposed
above, the Board seeks comment on if it should also remove the
``balance sheet audit'' alternative. It has been the NCUA's experience
that the
[[Page 5959]]
balance sheet audit alternative is utilized only by a small number of
credit unions (approximately 2.5 percent) and provides limited value,
as it does not include an audit of a credit union's income statement.
IV. Regulatory Procedures
A. Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
of any significant economic impact a regulation may have on a
substantial number of small entities (those with less than $100 million
in assets).\11\ This proposed rule will provide relief to small credit
unions by clarifying and simplifying requirements related to
supervisory committee audits. Accordingly, NCUA certifies the proposed
rule will not have a significant economic impact on a substantial
number of small credit unions.
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\11\ 5 U.S.C. 603(a).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in
which an agency creates a new paperwork burden or increases an existing
burden.\12\ For purposes of the PRA, a paperwork burden may take the
form of a reporting or recordkeeping requirement, both referred to as
information collections. The information collection requirements under
the current rule are covered under OMB #3133-0059. This proposed rule
does not contain any additional information collection requirements
that require approval by OMB under the Paperwork Reduction Act.\13\
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\12\ 44 U.S.C. 3507(d); 5 CFR part 1320.
\13\ 44 U.S.C. 3501.
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C. Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests.
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the executive order to adhere to fundamental
federalism principles. The proposed rule does not have substantial
direct effects on the states, on the relationship between the national
government and the states, or on the distribution of power and
responsibilities among the various levels of government. NCUA has,
therefore, determined that this proposal does not constitute a policy
that has federalism implications for purposes of the executive order.
D. Assessment of Federal Regulations and Policies on Families
NCUA has determined that this proposed rule will not affect family
well-being within the meaning of Sec. 654 of the Treasury and General
Government Appropriations Act, 1999, Public Law 105-277, 112 Stat. 2681
(1998).
List of Subjects in 12 CFR Part 715
Credit unions, Reporting and recordkeeping requirements.
By the National Credit Union Administration Board on February
19, 2019.
Gerard Poliquin,
Secretary of the Board.
For the reasons discussed above, the National Credit Union
Administration Board proposes to amend 12 CFR part 715 as follows:
PART 715--SUPERVISORY COMMITTEE AUDITS AND VERIFICATIONS
0
1. The authority citation for part 715 continues to read as follows:
Authority: 12 U.S.C. 1761(b), 1761d, and 1782(a)(6).
0
2. Revise Sec. 715.7 to read as follows:
Sec. 715.7 Supervisory Committee audit alternatives to a financial
statement audit.
A credit union which is not required to obtain a financial
statement audit may fulfill its supervisory committee responsibility by
one of the following engagements:
(a) Balance sheet audit. A balance sheet audit, as defined in Sec.
715.2(a), performed by a person who is licensed to do so by the State
or jurisdiction in which the credit union is principally located; or
(b) Other Supervisory Committee Audit. An audit performed by the
supervisory committee, its internal auditor, or any other qualified
person (such as a certified public accountant, public accountant,
league auditor, credit union auditor consultant, retired financial
institutions examiner, etc.) that satisfies the minimum requirements in
Appendix A of this part. Qualified persons who are not State-licensed
cannot provide assurance services under this subsection.
0
3. In Sec. 715.9 revise paragraphs (c)(3), (6), (d), and (e) to read
as follows:
Sec. 715.9 Assistance from outside, compensated person.
* * * * *
(c) * * *
(3) If an Other Supervisory Committee Audit, include an appendix
setting forth the procedures to be performed.
* * * * *
(6) Specify a target date of delivery of the written reports, so
that such target date will enable the credit union to meet its annual
audit requirements;
* * * * *
(d) Complete scope. If the engagement is to perform an Other
Supervisory Committee audit intended to fully meet the requirements of
Sec. 715.7(c), the engagement letter shall certify that the audit will
address at least the minimum requirements in Appendix A of this part.
(e) Exclusions from scope. If the engagement is to perform an Other
Supervisory Committee audit which will exclude any of the minimum
requirements in Appendix A of this part, the engagement letter shall:
(1) Identify the excluded items;
(2) State that, because of the exclusion(s), the resulting audit
will not, by itself, fulfill the scope of a supervisory committee
audit; and
(3) Caution that the supervisory committee will remain responsible
for fulfilling the scope of a supervisory committee audit with respect
to the excluded items.
0
4. Revise part 715 by adding Appendix A to read as follows:
Appendix A--Supervisory Committee Audit--Minimum Procedures
This Appendix presents minimum procedures which a supervisory
committee, its internal auditor, or other qualified person must
complete when a credit union chooses the Other Supervisory Committee
Audit option for completing its annual audit requirements under
Sec. 715.7(c) of this part.
This option may not be adequate for all credit unions as it is
designed for smaller, less complex credit unions. The supervisory
committee, internal auditor, or other qualified person may also need
to perform additional procedures to supplement these minimum
procedures if the specific circumstances of a particular credit
union so dictate. The supervisory committee must apply its judgment
in determining the procedures necessary to meet audit requirements.
The supervisory committee remains responsible to ensure that a
complete set of test procedures is performed. All test procedures
will be done using balances and samples for the applicable review
period.
Any time the test or confirmation procedures include making a
sample or selection, the supervisory committee's report, its
internal auditor's report, or other qualified person's report on
minimum procedures should delineate the method of selection and the
number of selected items.
For purposes of this Appendix, the following definitions will
apply:
[[Page 5960]]
Confirm or confirmation refers to a written
verification with a third-party (person or organization) pertaining
to an account balance or condition. Examples of confirmation letters
are bank/corporate credit union account confirmation, investment
account confirmation, borrowing or line of credit confirmation,
attorney letter confirmation, and member share/loan account
confirmation.
Materiality refers to a statement, fact or item, which,
giving full consideration to the surrounding circumstances as they
exist at the time, it is of such a nature that its disclosure, or
the method of treating it, would be likely to influence or to make a
difference in the judgment and conduct of a reasonable person.
Materiality should take into account ending balances as well as the
volume of transactions in an account. Typically, balances or
transaction volume greater than 5 percent of the credit union's net
worth should be considered material for purposes of this Appendix.
Review refers to the examination of policies and
procedures, and a review of a sample portion of activities, rather
than all of the activities.
Test refers to procedures applied to the individual
items that compose an account balance or class of transactions. The
tests involve confirmation, inspection, or observation procedures to
provide evidence about the recorded amount.
The supervisory committee, internal auditor, or other qualified
person must perform and document the following minimum procedures:
Test and confirm material asset and liability accounts
including, at a minimum:
[cir] Loans
[cir] Cash on deposit
[cir] Investments
[cir] Shares
[cir] Borrowings
Test material equity, income, and expense accounts
Review key internal controls including, at a minimum:
[cir] Bank reconciliation procedures
[cir] Cash controls
[cir] Dormant account controls
[cir] Wire and ACH transfer controls
[cir] Loan approval and disbursement procedures
[cir] Inside account controls
[cir] Other real estate owned
[cir] Foreclosed and repossessed assets
Test the mathematical accuracy of the allowance for loan
and lease loss account and ensure the methodology is properly
applied
Test loan delinquency and charge-offs
[FR Doc. 2019-03164 Filed 2-22-19; 8:45 am]
BILLING CODE 7535-01-P