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Top 10 Financial Statement Audit Findings….and then some
Jennifer Blake, Senior Manager
Louise Hanson, Partner
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The material appearing in this presentation is for informational purposes
only and should not be construed as advice of any kind, including, without
limitation, legal, accounting, or investment advice. This information is not
intended to create, and receipt does not constitute, a legal relationship,
including, but not limited to, an accountant-client relationship. Although
this information may have been prepared by professionals, it should not be
used as a substitute for professional services. If legal, accounting,
investment, or other professional advice is required, the services of a
professional should be sought.
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AGENDA
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SNAPSHOT AGENDA
• Internal controls over financial reporting
• Investments
• Loans and allowance for loan losses
• Other real estate owned
• Compensation arrangements
• Other accounting
• Regulatory hot buttons
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INTERNAL CONTROLS
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1. SYSTEM ACCESS AND CONTROLS
• Issues we have seen in practice:
o Too much access
o Template access settings
o Supervisory access
o Terminations
• Thoughts for recommended action
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2. SEGREGATION OF DUTIES
• Issues we have seen in practice:
o Incompatible duties leading to error
o Posting/reconciling
o Access to assets and reconciling
• Thoughts for recommended action
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INVESTMENTS
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3. INVESTMENTS
• Issues we have seen in practice:
o Lack of timely investment valuation
o Incorrect recording of amortization and accretion
o Incomplete consideration of OTTI
• Thoughts for recommended action
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LOANS AND ALLL
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4. LOAN BOARDING
• Issues we have seen in practice:
o Information not input into system correctly Variable versus fixed interest rates
o Lack of functional independent secondary review of loan information input into core system
• Thoughts for recommended action
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5. LOAN FOOTNOTE
• Issues we have seen in practice:
o Information coming from different sources doesn’t reconcile to the general ledger
o Information for loan footnotes not complete
o Lack of controls around support
• Thoughts for recommended action
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6. ALLOWANCE FOR LOAN LOSS CALCULATION
• Issues we have seen in practice:
o Calculation errors (spreadsheet controls)
o Charge-offs input into wrong loan classifications
o Information not flowing properly through the schedules
• Thoughts for recommended action
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7. IMPAIRED LOAN ACCOUNTING
• Issues we have seen in practice:
o Lack of adequate support for value of impaired loans Fair value of loan
Discounted expected future cash flows
Fair value of collateral
o Lack of timely support for fair value
• Thoughts for recommended action
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OTHER REAL ESTATE OWNED
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8. OTHER REAL ESTATE OWNED
• Issues we have seen in practice:
o Lack of adequate support for value of OREO Appraisal
BPO/AVM
o Lack of timely support for fair value
o Incorrect accounting for sales of OREO
o Incorrect account for other OREO related costs
• Thoughts for recommended action
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COMPENSATION ARRANGEMENTS
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9. ACCOUNTING FOR COMPENSATION ARRANGEMENTS
• Issues we have seen in practice:
o Lack of communication with accounting department
o Incorrect accounting for deferred compensation
o Other considerations
• Thoughts for recommended action
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OTHER ACCOUNTING ITEMS
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10. SUSPENSE ACCOUNTS
• Issues we have seen in practice:
o Inadequate monitoring of suspense accounts
o Lack of action taken on reconciling items Issues impacting member accounts
o Lack of accountability
• Thoughts for recommended action
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REGULATORY HOT BUTTONS
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11. THIRD PARTY DUE DILIGENCE
• Finding:
o Lack of due diligence over vendors
o Over reliance on vendor
• Recommended Action:
o Revisit and update policy surrounding vendor selection
o Obtain SSAE 16 reports and monitor vendors’ controls and performance
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12. MEMBER BUSINESS LENDING (MBL)
• Finding: o Violations to regulatory MBL limits
o Lack of MBL policies or inadequate policies
o Underwriting of MBLs despite being undercapitalized
o Failure to monitor MBLs
• Recommended Action: o Monitor limits quarterly
o Review the MBL policies/monitor compliance
o Loan file review and continuous credit reviews
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13. LIQUIDITY
• Finding: o Inadequate liquidity controls
o Poor Asset/Liability Management (“ALM”) programs in place to monitor liquidity positions
o Lack of Leveraging limits
• Recommended Action: o Management monitoring of liquidity positions
o Discussions with management regarding liquidity and interest rate risk
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14. CONCENTRATION RISK/EXCESSIVE GROWTH
• Finding: o Certain loan portfolios growing excessively
o Inadequate controls in place to monitor lending concentrations
o Transfer of underwriting and approval of authority to a third party vendor
• Recommended Action: o Review of loan policies
o Implement monitoring controls to monitor concentrations and third party vendors
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15. FRAUD
• Finding: o Supervisory Committee provided little or no internal
control reviews
o Certain individuals were dominating
o Segregation of duties issues
• Recommended Action: o Investigate repeat findings from External Auditors
and other examiners
o Review segregation of duties
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QUESTIONS?
Jennifer Blake
(509) 777-0173
Jennifer.blake@mossadams.com
Louise Hanson
(425) 303-3037
Louise.hanson@mossadams.com
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