Credit Unions have continued to service their members throughout the challenging times of Covid-19. Now with 30 September around the corner, it is time to plan for the year end audit and how you can be fully ready for the external auditors arrival.
These are considered below under the following headings:
- Compliance with public health guidance requirements
- Year end cash count
- Property valuations
- Loan provisioning
- Going concern and viability
- Contingent liability - Accrued interest on top up loans
- Reserves management and member distribution
- Systems and Controls
Compliance with public health guidance requirements
Since the onset of the pandemic, we have all had to alter the way we do our normal day to day work. This has involved many outsourced providers completing work remotely and not visiting the Credit Union. It is normal practice for the year end audit to be completed onsite and if this is the case for year end 2020, there is an obligation to ensure that an appropriate risk assessment is completed to allow for appropriate social distancing if the auditor is onsite. Where this is not possible, consideration needs to be given to facilitating the audit remotely and Credit Unions need to ensure that they have the appropriate IT infrastructure in place to facilitate this.
Year end cash count
The year end cash count is an important piece of audit evidence to substantiate the year end cash on hand and check the robustness of cash-handling policies and procedures. Similar to the facilitation of the year end audit onsite, Credit Unions need to ensure there are appropriate procedures in place to facilitate this onsite work.
Some credit unions will be reliant on value in use calculations to support the carrying value of the property included on the balance sheet. While there has been no indication that property values themselves have declined due to the pandemic, the underlying assumptions in the projections that support the carrying value of the property need review to ensure that they are robust and reflect the current and realistic future level of activity in the loan book, investment returns and overheads
The principles in the Central Bank’s provisioning guidelines issued in 2018 continue to be relevant to the assessment of the provision at year end 2020. In order to recognise a provision of losses in the loan book, there needs to be objective evidence of a loss event.
A conservative approach needs to be taken to the provision calculation, and include a consideration of the impacts of impairment triggers such as Covid-19, Brexit and the Economic recession, and a clear articulation of this review, including:
- payment breaks
- potential lending concentration risks
- demonstrating objective evidence of impairment, either individually or as a group
With Ireland officially entering back into recession, there is the potential for future losses in the loan book that have not yet become evident, i.e. the incurred but not reported losses and this needs further consideration.
The Central Bank circular has said that the approach needs to be rigorous and prudent, and the level of distress not underestimated
The auditor will expect a clear and articulate method for calculating the provision and this, supported by a robust loan book review, completed in accordance with the stated policy. The Credit Union will be required to justify the methodology used and the basis of any additional provisions on specific categories of loans being mindful that general provisions are not permitted.
Going concern and viability
The business model of credit unions continues to be challenged and Credit Unions need to have robust Strategic plans in place which demonstrate viability as a standalone credit union or articulate a merger strategy to either facilitate a merger or find a partner.
This strategy should be supported by realistic projections for a period of at least 3 years with the projections being stress tested for best, worst and most likely outcomes. Covid-19 has presented challenges in terms of financial forecasting as there has been volatility in loan demand, provision requirements, overheads and investment returns. The stressed worst outcome projections needs to articulate and take into account worst case outcomes in respect of Covid-19, Brexit and the economic recession.
Covid-19 will require additional disclosures in the financial statements around the going concern assumption. It is therefore essential that there are robust projections to support the assumption.
Contingent Liabilities – accrued interest on top up loans
The issue of a potential liability for accrued interest on top up loans first came to light at September 2018 and the Central Bank have advised credit unions in its year end circular that any notes included in the financial statements should be updated to reflect the current situation.
The auditor will expect credit unions to have been proactive in undertaking a review of historical agreements to assess whether or not there is any liability to members. If a liability exists, then a reliable estimate should be made and this amount should be accrued in the financial statements. Where it is determined that there is no liability, this should be considered sufficient evidence to remove the contingent liability note from the financial statements.
Reserves management and member distributions
All credit unions are required to have policies and procedures in place in respect of reserve management. The pandemic has seen a significant increase in the volume of savings which in turn is affecting reserves management due to the requirement to hold 10% of reserves in a regulatory reserve on an ongoing basis.
Credit Unions should assess their ability to pay a return to members and the impact that this will have on reserve levels at year end. A prudent approach should be taken to ensure that the longer term ability to retain reserves is not affected by the payment of a short term distribution to members.
The Central Bank year end circular has stated that they expect there to be no distributions this year and a valid submission will have to be made to the Central Bank to do otherwise.
Systems of Control
The auditor will require evidence that there is an effective internal control framework, and that there are monitoring systems and controls in place on an ongoing basis. In particular, they will need to see evidence of:
- Comprehensive policies and procedures, proper accounting records, effective segregation of duties, and cash management processes
- Any open RMP’s, management letter points, Risk, compliance and Internal audit points are dealt with
- Potential vulnerabilities in IT systems are reviewed including cyber risks and extension of processes to facilitate remote working and remote access to member services. They will want to see that processes and controls incl. security measures, have been reassessed and associated risks identified and managed
We are living in uncertain times – get your accounts finalised and signed off and most importantly, plan well with your auditor.
Please do reach out to our Credit Union Team if you would like to discuss further any aspect of planning for your year end audit. Please contact our team on (01) 6440100 / (090) 6480600:
- Michelle O'Donoghue, Audit & Business Advisory Director
- Ronan Kilbane, Audit & Business Advisory Partner
- Colm O'Grady, Audit & Business Advisory Partner