Auditors

A credit union may have an internal audit department, external auditors, or a combination of the two.

Internal Auditors

Credit unions may employ internal auditors to perform all or some of the supervisory committee’s oversight responsibilities and ongoing monitoring of internal controls. While internal auditors may be hired by the credit union, internal auditors are independent of management and the board of directors, and report directly to the supervisory committee. This frees the internal audit function from management’s influence.

A strong internal audit function meets regularly with the supervisory committee to discuss the status of the audit plan and to provide completed internal audit reports and tracking reports on the resolution of findings. The supervisory committee’s meeting minutes document these activities. Throughout the year, the supervisory committee keeps the board informed of internal audit plan progress, findings, and resolution of any issues identified.

Examiners should assess the level of independence of an internal audit department. For more information, see NCUA regulation § 715.3(b)(4).

External Auditors

An auditor’s overall objectives in conducting a financial statement audit are to:

  • Obtain reasonable assurance the financial statements are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework.

  • Report on the financial statements, and communicate as required by GAAS, in accordance with the auditor’s results and findings. For more information, see AICPA’s AU-C § 200.12, Overall Objectives of the Auditor.

Engagement Letter

NCUA regulation § 715.9(b), Engagement letter, requires a supervisory committee to obtain an engagement letter when they hire an external auditor. The engagement letter documents the agreed-upon procedures to be performed for an other supervisory committee audit and provides the credit union with an enforceable contract. The engagement letter must be signed by the external auditor and acknowledged by the supervisory committee before the engagement begins.

An engagement letter should be addressed to the supervisory committee or supervisory committee chairperson. The engagement letter must specify the date of delivery of the audit report and provide for the NCUA’s unconditional access to the complete set of original workpapers. Omitted procedures may result in NCUA staff expanding reviews in the areas not included in an audit.

Auditor Rotation

Rotating the audit firm for the sake of providing rotations is not necessary when a credit union has used a particular auditor for a number of years and the independence, competence, and level of audit work is adequate. To maintain independence, audit firms, require their staff to rotate. If an examiner has concerns about the quality of an audit or impartiality of staff, they document the specific concerns and raise them with the supervisory committee. The questioning of a particular auditor's quality of work and citing of NCUA regulations § 715.11, Sanctions for failure to comply with this part, and § 715.12, Statutory audit remedies for Federal credit unions, may influence a supervisory committee to hire another auditor.

Prohibiting an Accountant or Accounting Firm

Qualified outside accountants and accounting firms contracted to perform audits of credit unions are a major help to supervisory committees in accomplishing their oversight responsibilities. A financial audit adds credibility to the financial statements, essentially assuring the reliability of the statements.

An audit is not designed to provide absolute assurance, but to reduce the risk of a material financial statement misstatement, whether caused by fraud or error. However, if an auditor’s or auditing firm’s credibility is in question, the data will also be of questionable integrity.

When an examiner has concerns about the quality of an audit or MAV, proper procedures must be followed as outlined in NCUA regulation § 715.11, Sanctions for failure to comply with this part, and the NSPM. In rare instances, prohibition may be warranted.

A prohibition should only be considered if an examiner suspects an accountant or accounting firm is knowingly or recklessly participating in any of the unacceptable conditions as defined by the FCUA, § 1786(r)(3). Specifically, these unacceptable conditions are:

  • Violation of any law or regulation

  • Breach of fiduciary duty

  • Unsafe or unsound practice

Any of which caused or is likely to cause more than a minimal financial loss to, or a significant adverse effect on, the insured credit union

Unlike prohibitions initiated against individuals convicted of criminal actions against a credit union, additional steps are required to classify the contracted accountant(s) as an institution-affiliated party subject to NCUA enforcement actions as defined by the FCUA § 1786(r)(3). Determining this requires a fact-intensive review by the NCUA’s Office of General Counsel.

NCUA Instruction No. 4820, Enforcement Manual states that an examiner must contact his or her supervisor before pursuing further research into an institution-affiliated party prohibition. It may be helpful to check with other examiners and regions to see if similar problems are occurring in their credit unions with the same firm. If the supervisor concurs, they should contact the regional office to determine if a prohibition is worth pursuing.

NCUA Instruction No 4016.1, Obtaining Concurrence and Advancing an Assertion That an Opinion Audit or Agreed-Upon-Procedures are Unacceptable in Meeting NCUA Audit Regulations, outlines how a prohibition packet is developed.

Last updated on October 14, 2022.