1

10 Common Financial Statement Audit Findings…and Then Some

CarrieKennedy,PartnerDustinBirashk,Partner

2

Thematerialappearinginthispresentationisforinformationalpurposesonlyandshouldnotbeconstruedasadviceofanykind,including,withoutlimitation,legal,accounting,orinvestmentadvice.Thisinformationisnotintendedtocreate,andreceiptdoesnotconstitute,alegalrelationship,including,butnotlimitedto,anaccountant‐clientrelationship.Althoughthisinformationmayhavebeenpreparedbyprofessionals,itshouldnotbeusedasasubstituteforprofessionalservices.Iflegal,accounting,investment,orotherprofessionaladviceisrequired,theservicesofaprofessionalshouldbesought.

3

Moss Adams at a Glance• Full service public accounting firm with

assurance, tax, and consulting services for middle-market public and private companies

• Largest accounting firm headquartered in the West and one of the 15 largest in the United States

• 28 offices in California, Arizona, New Mexico, Oregon, Washington, Kansas and Texas.

• More than 270 partners and over 2,000 staff• Founded in 1913 and headquartered in

Seattle, Washington• A founding member of Praxity, a global

alliance of accounting firms• We are the 3nd largest firm servicing credit

unions in the nation (based on assets)

4

Agenda

5

• Internal controls over financial reporting

• Investments• Loans and allowance for loan

losses• Other real estate owned• Compensation arrangements• Other accounting items• Regulatory hot buttons

Snapshot agenda

6

Internal Controls over Financial Reporting

7

1. SYSTEM ACCESS AND CONTROLS• Issues we have seen in practice:

• Too much access• Template access settings• Supervisory access• Terminations and internal moves

8

2. SEGREGATION

OF DUTIES

• Issues we have seen in practice: • Improper supervision• Posting/reconciling• Approving and

funding

9

Investments

10

3. IN

VEST

MEN

TS

Issues we have seen in practice:

Lack of timely investment valuation

Incorrect recording of unrealized gains and

losses

Lack of sale/purchase analysis

Incomplete consideration of OTTI

Thoughts for recommended action

11

Loans and ALLL

12

• Issues we have seen in practice: • Information not input into

the system correctly• Lack of functional

independent secondary review of loan information input into core system

4. LOAN BOARDING

13

• Issues we have seen in practice: • Information – multiple sources

and does not reconcile to the general ledger

• Information for loan footnotes not complete

• Cutoff issues• Lack of reporting controls

5. DISCLOSURES

14

• Issues we have seen in practice: • Calculation errors

(spreadsheet controls)• Charge-offs input into wrong

loan classifications• Information not flowing

properly through the schedules

• Interagency guidance not followed

• Thoughts for recommended action

6. ALLOWANCE

FOR LOAN LOSS

CALCULATION

15

• Issues we have seen in practice: • Lack of adequate support for value of

impaired loans• Fair value of loan• Discounted expected future cash

flows• Fair value of collateral

• Lack of timely support for fair value

7. IMPAIRED LOAN ACCOUNTING

16

Other Real Estate Owned

17

8. OTHER REAL ESTATE OWNED

Issues we have seen in practice: Lack of adequate support for value of OREO

Appraisal

BPO/AVMLack of timely support for fair value

Incorrect accounting for sales of OREOIncorrect accounting for other OREO related costs

18

Compensation Arrangements

19

• Issues we have seen in practice: • Lack of

communication with accounting department

• Incorrect accounting for deferred compensation

• Thoughts for recommended action

9. ACCOUNTING FOR

COMPENSATION ARRANGEMENTS

20

Other Accounting Items

21

• Issues we have seen in practice: • Inadequate

monitoring of suspense accounts

• Lack of action taken on reconciling items• Issues impacting

member accounts• Lack of

accountability

10. Suspense accounts

22

Regulatory Hot Buttons

23

11. THIRD PARTY DUE DILIGENCE

Finding:

Lack of due diligence over

vendors

Over reliance on vendor

Recommended Action:

Revisit and update policy surrounding vendor selection

Obtain SSAE 16 reports and monitor

vendors’ controls and performance

24

12. MEMBER

BUSINESS LENDING

(MBL)

• Finding: • Violations to regulatory MBL limits• Lack of MBL policies or inadequate policies• Underwriting of MBLs despite being

undercapitalized• Failure to monitor MBLs

• Recommended Action:• Monitor limits quarterly• Review the MBL policies/monitor compliance• Loan file review and continuous credit reviews

25

13. LIQUIDITY13. LIQUIDITYFinding: • Inadequate liquidity

controls • Poor Asset/Liability

Management (“ALM”) programs in place to monitor liquidity positions

• Lack of Leveraging limits

Recommended Action:• Management monitoring

of liquidity positions• Discussions with

management regarding liquidity and interest rate risk

26

14. CONCENTRATION RISK/EXCESSIVE

GROWTH

Finding: • Certain loan portfolios growing excessively• Inadequate controls in place to monitor lending

concentrations• Transfer of underwriting and approval of authority to a

third party vendor

Recommended Action:• Review of loan policies• Implement monitoring controls to monitor concentrations and

third party vendors

27

• Finding: • Supervisory Committee provided

little or no internal control reviews• Certain individuals were

dominating• Segregation of duties issues

• Recommended Action:• Investigate repeat findings from

External Auditors and other examiners

• Review segregation of duties

15. FRAUD

28

Other Thoughts/Ideas

29

• Cash• Fixed assets• Life insurance investments• Accounts payable and accrued

liabilities• Share, share draft and

certificate accounts• Borrowings• Other?

WHAT ELSE HAVE YOU

SEEN IN YOUR

CREDIT UNIONS?

30

Thank you! Carrie Kennedy, CPAAssurance Services Partner – Financial Institutions(509) 777-0160carrie.kennedy@mossadams.com

Dustin Birashk, CPAAssurance Services Partner – Financial Institutions(425) 303-3023dustin.birashk@mossadams.com