Your CECL Committee: Who’s Invited?
For financial institutions, the path to CECL compliance starts with establishing a CECL committee, whose job it is to guide the institution through the process of transition to estimating their allowance in compliance with the new Current Expected Credit Losses accounting standard. Broad committee representation is recommended because CECL will require input from more departments of the institution – that is, more people and positions will participate, at some level, in the CECL allowance process.
So, who should you invite to join your CECL committee? My ideal team would include the following:
Executive Management/Board: The highest-level management should be involved, including the chief executive officer – though in a larger institution, a chief operating office might substitute for the CEO – as well as the chief financial officer, the chief credit officer, and some members of the at-large board or the audit, credit or risk management committee of the board.
Accounting representation: The individual at the institution who prepares the calculation would, of course, be an integral member of the committee. Other representatives of Accounting may include the controller and/or the chief accounting officer – those with responsibility for reporting and disclosures for CECL. In institutions where the CFO is more intimately involved in the ALLL calculation, typically the case in banks of less than $1 billion in assets, this area of representation might be limited to the CFO and the controller, for example.
Credit and Lending representation: The chief credit officer will want representation from these areas – a credit administration manager, credit analysts, chief lending officer, all of whom are involved in underwriting policies and procedures. In addition, in some financial institutions, the credit administration or credit risk area, rather than accounting, is directly responsible for the allowance calculation.
Loan operations and internal audit are two areas of the financial institution that may be overlooked but should be included in an ideal CECL committee:
Loan Operations representation: The department is the first line of defense in ensuring data is captured for CECL. Because loan ops typically books the loan in the system at loan origination, it is important that the staff knows the data fields that need to be completed for each loan. In some cases, financial institutions will discover in reviewing some of the widely-considered methodologies, that certain required fields have historically not been populated (renewal date, needed for the vintage method, for example). If a financial institution wants the ability to move to another methodology at some point in the future, they’ll need to identify the fields and start populating them to begin creating some historical data. Loan Ops will put that plan into action. The department might not be able to help from a historical perspective, but will be key to ensuring the right data is maintained going forward.
Internal Audit representation: As the independent party that oversees risk management, governance and internal control processes, IA will ensure the CECL process is working in accordance with board-approved policies and procedures. With CECL, IA’s role will be more important because with so much more data, more checks and balances are needed. IA may perform audit procedures such as reviewing the allowance on a periodic basis to determine if related controls are appropriate, including controls over the data sources, formulas and spreadsheets; how data is entered into the model; that there is proper segregation of duties among personnel involved in the allowance calculation; and that controls over the institution’s and third-party systems, including the allowance software, are working as intended. As the institution’s most significant management estimate, the allowance requires particularly strict internal controls. Is there appropriate oversight of the process? Are user controls in place? Is the data clean, are the formulas working, are linkages set up appropriately? IA may validate the model; test formulas, linkages, the balances being used; review the supporting ALLL documentation; and follow the process trail to final output to determine if the calculation is properly supported by underlying assumptions and documentation.
Other areas: Representatives from IT, risk management and/or compliance will round out the ideal CECL committee.
CECL will affect the institution enterprise-wide. It will affect and require considerably more input from multiple departments. Populating your committee with representatives from those departments will ensure a smoother transition to CECL implementation and a more effective CECL process in the years that follow.
About the Author
Paula King is Senior Advisor for MST Advisory Services, part of a team of subject matter experts assisting financial institutions nationwide in the interpretation and application of Current Expected Credit Loss (CECL), the new allowance accounting standard. Paula has held executive positions, including as Chief Financial Officer, in the banking industry for more than 25 years. In addition, she co-founded and served on the board of directors of a financial institution. She has been responsible for SEC and financial reporting, strategic planning and capital raising efforts and has served as a Chief Risk, Operating, and Compliance Officer. Paula has extensive experience in the preparation and reporting of the allowance for loan and lease losses, including ensuring compliance with regulatory and audit requirements, and creating allowance policies, procedures and processes.
Read more in our blog Forming a CECL Steering Committee 101.