Are Supervisory Committees Up to the Job?

January 9, 2013 at 7:40 am 1 comment

imagesRecently, the CEO of the now defunct Women’s Southwest FCU pleaded guilty to embezzling $3.4 million from the credit union over an 11 year period.  This is quite the trick considering that the credit union had only $2 million in assets.  Incidentally, the Credit Union Times reports that the CEO was going for her criminal justice degree, which will probably come in handy as she spends time in prison.  To me, this case demonstrates an issue that the industry should proactively confront.  With “small” credit unions about to get a lot bigger and all credit unions now interconnected with the largest financial institutions in the world, are supervisory committees up to the task of providing oversight of a credit union’s financial practices on behalf of a credit union’s members and its board?  Don’t underestimate the importance of the supervisory committee.  Its general responsibilities are intended to ensure that a credit union meets financial reporting requirements and, more importantly, has “practices and procedures sufficient to safeguard members’ assets.”

This is important stuff, but although NCUA’s guidelines outlined preferred qualifications, there are no formal requirements for membership in the supervisory committee other than the requirement that the members serve on a voluntary basis.  In other words, even though the core responsibility of a supervisory committee is to be able to deal with a credit union’s outside auditor and understand the conclusions reached, there is absolutely no guarantee that the committee members will have the expertise to do so.

Credit unions have argued that the volunteer nature of their oversight structure effectively shields them from the type of structural temptations that necessitated the creation of independent review committees comprised of independent directors for banks under the Sarbanes-Oxley Act.  This is half right, but if anything, mandating that volunteers make up the supervisory committee makes it more difficult to get individuals with an accounting or financial background to serve on these committees, particularly in smaller communities.  So, with the reminder that the opinions that I express in this blog are mine and only mine, why not work for a system that:

  • Permits, but does not require, credit unions to reasonably compensate one supervisory committee member not connected with the credit union who has a background in auditing and/or the financial industry, such as a state license certified public accountant; and
  • Extends the current requirement of board members to have basic training in understanding a credit union’s balance sheet to members of the supervisory committee.  If anything, supervisory committee members should be more informed than board members about how to read a balance sheet.

I have been looking at regulations that are imposed on banks for independent audit committees and the potential problems I am outlining are not unique to credit unions.  The reality is that the stricter independent audit requirements don’t kick in for a bank until it has about $500 million in assets.  And the real tough requirements for baseline qualifications don’t kick in until a bank has $3 billion in assets.  Historically, the assumption has been that for many institutions, the cost of insuring strong audit committees has been outweighed by the cost and compliance burden of such requirements.  But as the example of Southwest demonstrates, small credit unions are as vulnerable to financial mismanagement as bigger ones.

 

Entry filed under: Advocacy, Compliance, Legal Watch, Regulatory. Tags: , , .

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1 Comment Add your own

  • 1. Anonymous  |  March 1, 2013 at 3:00 pm

    Our supervisory committee members are old, senile, and basically don’t have a clue.

    Reply

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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