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CECL accounting: Audit and regulatory expectations

Mary Ellen Biery
July 7, 2022
Read Time: 0 min

What will auditors and regulators expect with CECL accounting?

A panel of CECL accounting experts described how auditors and regulators are viewing various aspects of implementation. 

You might also like this webinar, "Calibrating the loss experience to economic conditions."


Communication urged

Auditors say involve them early in CECL

With thousands of banks and credit unions pushing to implement the current expected credit loss, or CECL, accounting standard by the 2023 deadline, auditor and regulatory expectations are top of mind.

After all, external auditors and examiners will be asking questions soon enough about everything from segmentation to backtesting and monitoring, based on the supervisory and audit inquiries received by Abrigo’s public business entity clients already reporting results under CECL. Supervisory questions about CECL circulated in an examination preparation questionnaire to small depository institutions ahead of or during this year’s exam cycle show topic areas have centered on the source and length of forecasts, as well as qualitative adjustments, among other topics.

Internal controls, model development can benefit

Regulators, auditors, and other industry experts have repeatedly encouraged financial institutions since the CECL accounting standard was issued in 2016 to involve their auditors early on in the CECL adoption process. Doing so has several benefits, CECL experts during Abrigo’s 2022 ThinkBIG Conference reminded financial institution staff.

Ashley Ensley Dixon Hughes Goodman


The experts, who are auditors and CPAs from regional and national audit firms and Abrigo, said communicating throughout implementation can be helpful in areas such as internal controls, model development or selection, and model changes.

“I can’t stress enough how important it is to get your external auditor … involved in these discussions early on,” said Ashley Ensley, Partner at Dixon Hughes Goodman LLP.  “Your auditor can’t make decisions with you or for you, but they can consult, and they can tell you what they have seen in other institutions that has worked well.”

“Don’t wait until the day you adopt [CECL] and then call your auditor and say here’s what we came up with,” she said.

Abrigo Advisory Managing Director Neekis Hammond spoke on a CECL accounting panel at ThinkBIG


Ensley and the other CECL accounting experts at ThinkBIG shared a range of feedback from their work with 2023 adopters and institutions already reporting under the standard.

Their responses to several questions during a panel discussion shed light on the type of help they can provide as it relates to CECL implementation and CECL audit considerations.

Below are some of the questions and edited responses from the CECL accounting panel, which featured:

Sound methodology matters

Expectations for reserve levels

Should management expect an increase or a decrease in reserves following CECL implementation? Is there any obligation to have an increase? For years, this seemed to be an expectation for the expected credit loss model among many bankers, auditors, and regulators.

Graham Dyer Grant Thornton spoke at ThinkBIG conference on a CECL accounting panel


CECL accounting experts agreed that what influences whether there’s a change and the direction of any change in an institution’s reserve are the economic conditions, the nature of its portfolio, and the recoveries process, along with other factors.

“From a pure accounting perspective, I do not have any expectation about what your CECL reserve should be as long as it’s a good process,” said Dyer.

Anthony Porter spoke on CECL accounting panel at ThinkBIG


Porter agreed, noting that a sound methodology and an estimate that “makes sense for what it is at the time” are what matter. “Simply put, there’s no expectation,” he said.

Auditors noted that regulators, too, have pulled back on blanket statements from years ago that they expected allowances for credit losses to increase under CECL, and institutions with decreases would have some explaining to do.

“At the time our large public filers adopted, if they had told me their reserve was going to go down, I probably would have gone into audit panic mode because we were all conditioned to believe that it should go up because that's what we had heard,” Ensley said. “Now, it's really more about your documentation and your defined methodology that drives that model.”


What lessons have auditors and the rest of the industry taken into the current round of implementations from earlier adopters of the CECL accounting standard?

Ensley said a great example of a lesson or understanding is that the reserve doesn’t necessarily have to go up under CECL.

"We’ve learned from those early filers and adopters that ... you don't have to potentially look at every modeling scenario."

“I also think the thing we’ve learned from those early filers and adopters is that when you're modeling this, you don't have to potentially look at every modeling scenario,” she said. “In the beginning….it was running every portfolio, every pool, or every segment based on every modeling technique that you could come up with to then decide which one was the best.”

Now, Ensley said, “we're relying in some part on our experts who do this day in and day out to help guide us in what is the best methodology to apply to which pool.”

“That is one of the greatest benefits we have learned as we’ve worked through this adoption.”

Dyer said auditors have also learned that while some methodologies, such as the Federal Reserve’s SCALE tool and the WARM methodology, are mathematically simple, the assumptions within those approaches bring hidden complexity. Nevertheless, he added that it would be important for financial institutions to justify why those assumptions are more appropriate and relevant for their organization as of the reporting period, which can also add complexity.

Dyer noted that during a recent informal discussion with the Securities and Exchange Commission (SEC), he was asked about the number of registrants using SCALE. “I think there was some inherent concern about the use of that, and I think one of the reasons was if you think about SCALE, it pulls in the historic (data),” he said. “You're always at least one quarter behind in the data that you’re using, and if you're in a really unstable economic environment, how do you support that that data is reflective of the current environment? And if you're not sure to what degree it is, how do you know to adjust it to make it where it is reflective? How do you know what the [qualitative] factor is?”

“If you’re in a really benign, stable, plain-vanilla economic environment, that's not such a hard thing to think about justifying, but if you’re in a pretty dynamic economic environment, that gets more and more challenging, and it's something that you’re not thinking about,” Dyer said. “Your friendly neighborhood auditors might show up and start kicking the tires, and that’s a hard conversation to have.”

How are TDRs handled for institutions reporting results using the CECL accounting standard? What’s the big change?

Hammond noted that the Financial Accounting Standards Board (FASB) recently revised the standard to eliminate special accounting treatment for troubled debt restructurings. As a result, the days of a group of TDRs sitting in a different reserve are behind institutions.

Instead, institutions will begin tracking and disclosing within the financials modifications of loans to borrowers.

Porter said the changes would require some learning within the accounting and lending departments to understand the nuances of tracking and updating disclosures on loan modifications, given the subjective nature of determining whether a modification represents an extension of an existing loan or a new loan.

For more information on the changes related to TDRs, see this whitepaper, FASB TDRs and Disclosures Update.

Multiple scenarios used

Economic scenarios in CECL accounting

Are financial institutions running multiple economic scenarios through their models?

CECL accounting experts said some institutions they work with are developing reasonable and supportable forecasts to use in CECL using multiple economic scenarios. Some panel members said this practice is becoming more common among clients.

Ensley described a client that runs multiple economic scenarios based on some forecasting data for a blend of economic modeling. “They then apply certain percentages to those economic scenarios, so they may take 40% of one scenario and 60% of a more severe scenario, depending on the economic outlook,” she said. The practice introduces an element of what could be considered a bit of a qualitative or subjective assumption, considering management must make the decision to use 40% vs. 50%, for example, or to use one scenario vs. another. “But it is becoming more common,” she added.

Hammond said Abrigo uses an alternate economic scenario with clients to help calibrate a delta or spread between best-thinking forecasts. Management can then determine where the institution’s risk is within that range and how much of the delta should be taken, he said. “We’ll use an alternate economic scenario to stress the model -- what does a worst-case scenario look like, and not just annualized loss rates but what is a worst-case CECL number,” Hammond said.

That approach can help set up qualitative factor adjustments, noted Dyer. “You’ve got, ‘Here’s my allowance under a bad scenario; here’s worse. Mine should fall somewhere in the middle.’ And that starts to put some quantitative bounds around it,” he said.

See more of the CECL audit discussion in this video.


Dyer said a majority if not almost all of his firm’s clients are doing multiple economic scenarios, particularly for secured portfolios. “I think the reason is that – for unsecured portfolios, this is not as true –but for secured portfolios, you tend to have cliff effects. …You can experience some degree of increasing credit risk without experiencing loss because you’ve got collateral to absorb that loss, but there’s a point at which it tips over, and then you start experiencing losses.”

Some institutions using multiple economic scenarios to come up with a single, consensus scenario to run through the model found that the scenario “didn’t hit that cliff effect, whereas if they run those multiple scenarios, one of those scenarios captures losses after the cliff effect, and they weight it to some amount then you have that amount showing up in your credit losses,” Dyer said. “I think once people see that play out, they say, ‘Ah, I like that better. It doesn’t take all that much more to do it. I’m going to do that.’ I think we’ve seen people migrate over time to that, to where at least in our client base that’s the predominant approach.”

Do auditors and regulators expect institutions to perform CECL model validations?

A lot of clients get model validation up front as part of selecting a CECL software vendor, and they also validate models on an ongoing basis or as changes are made, Dyer said. “That falls right in line with that Fed bulletin on model risk management, so I think there is some regulatory expectation that those things are happening,” he said. “Whatever validation you do to satisfy that, my experience is it tends to be useful for audit purposes as well. “

Ensley said most clients that have implemented CECL had received multiple validations. Those that have decided to defer the validation to every other year do so with sound processes in place. “They have very well-documented change management and controls and testing over those change management controls, which allows them to potentially defer that validation,” she added.

Hammond noted that model validation firms have said they see a lot of efficiencies in Abrigo’s models and asked panel members whether they, too, see efficiencies in familiar models vs. homegrown models developed by the institution as they perform audits and validations. He also asked whether certain methodologies receive particular criticism.

Ensley said her firm absolutely sees efficiencies in familiar models. Dyer said he doesn’t encounter methodologies themselves that are subject to criticism. “It’s that there may not have been full consideration of some of the assumptions implicit in that methodology, and that’s where the criticism is,” he said.

More FAQs

Other questions answered by CECL auditors

In addition to the questions discussed above, experts also provided input on:

  • Whether 2023 CECL adopters are running behind
  • Taking an overly complex vs. overly simplistic approach to CECL
  • Who at an institution should be involved in the CECL implementation project
  • Auditor expectations for performing model validations, and other topics

Access video of more of their panel discussion here.

Learn more about CECL accounting with this webinar, "Calibrating Loss Experience to Economic Conditions"

keep me informed Watch Webinar
About the Author

Mary Ellen Biery

Senior Strategist & Content Manager
Mary Ellen Biery is Senior Strategist & Content Manager at Abrigo, where she works with advisors and other experts to develop whitepapers, original research, and other resources that help financial institutions drive growth and manage risk. A former equities reporter for Dow Jones Newswires whose work has been published in

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