Supervisory Committee Audits and Verifications, 5957-5960 [2019-03164]

Download as PDF 5957 Proposed Rules Federal Register Vol. 84, No. 37 Monday, February 25, 2019 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. 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: NATIONAL CREDIT UNION ADMINISTRATION I. Background and Legal Authority 12 CFR Part 715 RIN 3133–AE91 Supervisory Committee Audits and Verifications National Credit Union Administration (NCUA). ACTION: Notice of proposed rulemaking and request for comment. AGENCY: 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/RegulationsOpinions Laws/proposed_regs/proposed_ regs.html. Follow the instructions for submitting comments. • Email: Address to regcomments@ ncua.gov. 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, amozie on DSK3GDR082PROD with PROPOSALS1 SUMMARY: VerDate Sep<11>2014 16:08 Feb 22, 2019 Jkt 247001 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 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 § 715.7 of the NCUA’s regulations the reference to the ‘‘NCUA’s Supervisory Committee Guide’’ and amending in § 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. 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 1 82 FR 39702 (Aug. 22, 2017). 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. 3 12 U.S.C. 1761d; 12 U.S.C. 1782. 4 12 U.S.C. 1761d. 2 This PO 00000 Frm 00001 Fmt 4702 Sfmt 4702 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 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 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 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 The July 1999 rulemaking also adopted § 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 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. 7 12 U.S.C. 1782(a)(6)(D)(i). 8 12 U.S.C. 1782(a)(6)(D)(ii). 9 12 CFR part 715. 10 64 FR 41035 (July 29, 1999). E:\FR\FM\25FEP1.SGM 25FEP1 5958 Federal Register / Vol. 84, No. 37 / Monday, February 25, 2019 / Proposed Rules 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. amozie on DSK3GDR082PROD with PROPOSALS1 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 § 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. VerDate Sep<11>2014 16:08 Feb 22, 2019 Jkt 247001 • 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 chargeoffs. 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 § 715.9(c)(6) of the NCUA’s regulations. PO 00000 Frm 00002 Fmt 4702 Sfmt 4702 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 § 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 § 715.9(c)(3), § 715.9(d), and § 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 § 715.7(c). In addition, the proposed rule amends § 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 E:\FR\FM\25FEP1.SGM 25FEP1 Federal Register / Vol. 84, No. 37 / Monday, February 25, 2019 / Proposed Rules 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. 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 amozie on DSK3GDR082PROD with PROPOSALS1 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. 11 5 U.S.C. 603(a). U.S.C. 3507(d); 5 CFR part 1320. 13 44 U.S.C. 3501. 12 44 VerDate Sep<11>2014 16:08 Feb 22, 2019 Jkt 247001 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 § 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 1. The authority citation for part 715 continues to read as follows: ■ Authority: 12 U.S.C. 1761(b), 1761d, and 1782(a)(6). ■ 2. Revise § 715.7 to read as follows: § 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 § 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. ■ 3. In § 715.9 revise paragraphs (c)(3), (6), (d), and (e) to read as follows: § 715.9 Assistance from outside, compensated person. * * * (c) * * * PO 00000 Frm 00003 * Fmt 4702 * Sfmt 4702 5959 (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 § 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. ■ 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 § 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: E:\FR\FM\25FEP1.SGM 25FEP1 amozie on DSK3GDR082PROD with PROPOSALS1 5960 Federal Register / Vol. 84, No. 37 / Monday, February 25, 2019 / Proposed Rules • 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: Æ Loans Æ Cash on deposit Æ Investments Æ Shares Æ Borrowings • Test material equity, income, and expense accounts • Review key internal controls including, at a minimum: Æ Bank reconciliation procedures Æ Cash controls Æ Dormant account controls Æ Wire and ACH transfer controls Æ Loan approval and disbursement procedures Æ Inside account controls Æ Other real estate owned Æ 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 VerDate Sep<11>2014 17:24 Feb 22, 2019 Jkt 247001 DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA–2019–0017; Product Identifier 2018–NM–112–AD] RIN 2120–AA64 Airworthiness Directives; Airbus SAS Airplanes Federal Aviation Administration (FAA), DOT. ACTION: Notice of proposed rulemaking (NPRM). AGENCY: We propose to supersede Airworthiness Directive (AD) 2007–11– 11 and AD 2017–01–11, which apply to all Airbus SAS Model A318 and Model A319 series airplanes; Model A320–211, –212, –214, –231, –232, and –233 airplanes; and Model A321 series airplanes. AD 2007–11–11 requires an inspection to determine the serial number of both main landing gear (MLG) sliding tubes, repetitive inspections for cracking of the affected MLG sliding tubes and corrective actions if necessary, and eventual replacement of both MLG shock absorbers. AD 2017–01–11 requires identification of the part number and serial number of the MLG sliding tubes; inspection of affected chromium plates and sliding tube axles for damage; and replacement of the sliding tube if necessary. Since we issued AD 2007– 11–11 and AD 2017–01–11, it was determined that cracks were found in the MLG sliding tubes due to certain manufacturing defects that might not be identified using the current on-wing scheduled inspections. This proposed AD would retain certain requirements of AD 2007–11–11 and AD 2017–01–11. This proposed AD would also require repetitive inspections of affected MLG sliding tubes for cracking, replacement of cracked MLG sliding tubes, and eventual replacement of each affected MLG sliding tube. We are proposing this AD to address the unsafe condition on these products. DATES: We must receive comments on this proposed AD by April 11, 2019. ADDRESSES: You may send comments, using the procedures found in 14 CFR 11.43 and 11.45, by any of the following methods: • Federal eRulemaking Portal: Go to http://www.regulations.gov. Follow the instructions for submitting comments. • Fax: 202–493–2251. • Mail: U.S. Department of Transportation, Docket Operations, M– 30, West Building Ground Floor, Room SUMMARY: PO 00000 Frm 00004 Fmt 4702 Sfmt 4702 W12–140, 1200 New Jersey Avenue SE, Washington, DC 20590. • Hand Delivery: Deliver to Mail address above between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. For service information identified in this NPRM, contact Airbus SAS, Airworthiness Office—EIAS, RondPoint Emile Dewoitine No: 2, 31700 Blagnac Cedex, France; telephone +33 5 61 93 36 96; fax +33 5 61 93 44 51; email account.airworth-eas@airbus.com; internet http://www.airbus.com. You may view this referenced service information at the FAA, Transport Standards Branch, 2200 South 216th St., Des Moines, WA. For information on the availability of this material at the FAA, call 206–231–3195. Examining the AD Docket You may examine the AD docket on the internet at http:// www.regulations.gov by searching for and locating Docket No. FAA–2019– 0017; or in person at Docket Operations between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD docket contains this NPRM, the regulatory evaluation, any comments received, and other information. The street address for Docket Operations (phone 800–647–5527) is in the ADDRESSES section. Comments will be available in the AD docket shortly after receipt. FOR FURTHER INFORMATION CONTACT: Sanjay Ralhan, Aerospace Engineer, International Section, Transport Standards Branch, FAA, 2200 South 216th St., Des Moines, WA 98198; telephone and fax 206–231–3223. SUPPLEMENTARY INFORMATION: Comments Invited We invite you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under the ADDRESSES section. Include ‘‘Docket No. FAA– 2019–0017; Product Identifier 2018– NM–112–AD’’ at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD based on those comments. We will post all comments we receive, without change, to http:// www.regulations.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive about this proposed AD. E:\FR\FM\25FEP1.SGM 25FEP1

Agencies

[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]


========================================================================
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.

========================================================================


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.

-----------------------------------------------------------------------

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 regcomments@ncua.gov. 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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \11\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \12\ 44 U.S.C. 3507(d); 5 CFR part 1320.
    \13\ 44 U.S.C. 3501.
---------------------------------------------------------------------------

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