Get Ready for CECL: Leverage Your Auditor Relationships
No less than three presenters at the MST 2017 National ALLL Conference warned attending lenders not to seek approval for the CECL methodologies they choose from their regulators or auditors. “Their job is not to approve but to criticize,” attendees were told.
“Better said,” contended Walter McNairy, an auditor and Managing Partner of Financial Services with Charlotte, North Carolina-based Dixon Hughes Goodman, “your auditor is obligated to be independent and your regulators’ primary role is to ensure compliance and good corporate governance.”
“That means we have to walk a fine line with our clients,” McNairy said. “But it doesn’t mean they shouldn’t be proactive in engaging us in conversation. Regular consultative sessions will pave the way not only to a more certain, more efficient transition to CECL, but better compliance all around.”
Financial institutions are confronted with three new accounting standards with effective dates beginning in 2018, McNairy pointed out. In addition to CECL, there are new leasing and revenue recognition compliance initiatives to plan. That’s making for a lot of work and many vital decisions. While auditors won’t be prescriptive with institutions, there are several ways banks and credit unions can leverage their auditor relationships in support of their standards compliance efforts, McNairy offered:
- Advisors suggest financial institutions start their transition to a CECL model by examining their current model. Tweaking, instead of changing, could make the process easier and less costly.
“Run your thinking past your auditors,” McNairy said. “They will likely have input that will help you make better decisions or tweaks. Tweaking or changing your model, they might also be able to identify an issue that could leave your methodology open for criticism or keep it from being compliant. It’s better to know that before the dust settles on your new model.”
“Permission is not ours to give,” he added, “but we want to add value and provide input as key decisions are made. Our second set of eyes, if you will, will help management come to the best solution for the bank.”
- “Your auditors work with dozens of financial institutions of various types and sizes, so why not take advantage of what we’re seeing, of how other institutions are dealing with the same issues.”
Based on their broad experiences, auditors will have a laundry list of considerations that can be very helpful to a bank or credit union to make sure it covers all the bases and addresses all the important issues in transitioning to CECL.
“Again we won’t tell you what to do, but we can help you understand what the requirements are, what the standard says and how to apply it to your situation and institution.”
- Auditors can also provide value other than from an accounting perspective if institutions consult with them early enough. In the case of an acquisition, for example, the audit firm can help the financial institution understand the complexities of the tax effects of the transaction.
- Banks subject to Sarbanes-Oxley testing typically deal with hundreds of internal controls.
“Your auditors can examine your control matrices and help you determine where to focus your attention and how to hone in on what’s really important to your compliance,” McNairy explained. “Banks have a tendency to add controls year after year, but their inventory of controls might need streamlining to improve their focus on the most critical controls. It’s addition by subtraction.
“We tell our banking clients, especially the publicly traded banks, we want to meet with them every quarter before they close their books. Once the books are closed, the press release is out and the results have been presented to the board, it’s too cumbersome to make changes. It’s better to get feedback in advance.”
“When you present your CECL model to your regulators,” he concluded, “they are likely to ask if you received outside input. They will appreciate that you have been proactive in working with advisors, and that you have vetted your CECL estimation process with your auditors.”
About Walter McNairy, CPA
Walter is the Managing Partner of DHG Financial Services. He leads a team of 35+ partners and more than 300 audit, tax and consulting professionals. As the Managing Partner, Walter oversees the work done for clients throughout DHG’s footprint and serves as Engagement Quality Review Partner for many of DHG’s largest banking clients. He is considered a thought leader in the industry and helps develop DHG’s strategic approach to knowledge share within DHG Financial Services. Walter was a speaker at the 2017 National ALLL Conference.
Many thanks to Walter for sharing his expertise in this article.
Redirect your panic around CECL to preparation. Learn more in this MST on-demand webinar with Regan Camp, Managing Director of MST Advisory Services. CECL: Don’t Panic – Prepare. View this on-demand webinar today.