The Importance of Oversight [Credit Union Management]

How supervisory committees get the information and education they need.

Secretary and treasurer of the board at $422 million, 34,000-member Southland Credit Union (www.southlandcu.org), Downey, Calif., G. David Mills, is serious about supervisory committees.

"They're more important than the board, in my opinion," says the CUES Director member. "They're the people down in the ditches, doing the really hard work that needs to be done, and I think unfortunately they get short shrift in some credit unions."

Mills has high expectations for the three to five credit union members who agree to serve on their institution's supervisory committee. Treat the position with high respect, he says; be disciplined and dedicated in your work ethic. Have a goal to be more knowledgeable than any other volunteer in your credit union. And above all, ask questions of everyone in the organization.

Why is serving on this committee such a heady task? CUES member Sam Han, director of internal audit at $878 million, 84,5 00 -member Andrews Federal Credit Union (www.andrewsfcu. org), Suitland, Md., says, "Their main role is protecting members' money. Basically, that's the whole reason why the supervisory committee exists."

From that overriding purpose stems everything else they do: completing annual audits, verifying member accounts, reviewing internal controls, hiring internal or external auditors (if feasible), reporting to members, researching member complaints, meeting with federal examiners, and following up on corrective actions.

To accomplish all these tasks, the supervisory committee has to be organized, and it has to be plugged into the organization, Mills says, not to mention a base of key knowledge.

Resources at the Ready

So how can supervisory committee members learn everything they need to learn in order to make an accurate assessment of the credit union's financial condition? Well, for starters, it helps if the board appoints the right members for the job. Todd Sprang, partner at CPA firm Clifton Gunderson LLP (www.cliftoncpa.com), Oak Brook, 111., points out that when it comes to serving on a supervisory committee, not all financial knowledge is created equal.

"People make the assumption that because someone's a CPA or an accountant, they have a knowledge that is very applicable," he says. "That's not necessarily the case. Just as I specialize in financial institutions, other CPAs may specialize in other areas.

"Typically we find that while many supervisory committee members may be, in a broad sense, financially literate and be able to execute their responsibilities, they don't necessarily have the industry expertise or that training that people think they have. I think their fellow committee members and board members assume they have a higher level of expertise or a better grasp on the industry issues than it is probably fair to assume."

It helps if at least one person on the committee has financial experience that's specific to the banking industry and/or credit union movement, he says. The other members should have at least enough financial training to grasp the basic issues and ask the right questions.

Beyond that, the CU should offer learning opportunities to support the supervisory committee in their work. There are a great number of educational resources available, starting with NCUA's 367-page Supervisory Committee Guide for Federal Credit Unions (h Up:/ /H nyurl. co m/s up co m mgu ide), which breaks down the committee's duties in detail and includes a calendar of when various tasks should be completed. The guide also recommends additional ways to learn, including reading more publications (e.g., the Federal Credit Union Act and the Accounting Manual for Fe der al Credi t Unions, h Up:/ /ti nyurl. co m/ fcuacctingguide), holding conferences with the CU's federal examiner, observing day-to-day operations, and attending training.

$1.2 billion, 105,000-member Vantage West Credit Union (www.vwestcu.org), Tucson, Ariz., is a state- chartered CU, but holds both its board and supervisory committee to the financial literacy standard underscored for directors at federal CUs by NCUA Rule 701.4.

"Members of the credit union's board of directors and supervisory committee have internal training and attend seminars that are applicable to our duties," says board member Gary Smith, CCD, who was previously chair of the credit union's supervisory committee.

Members of the board and the supervisory committee are required to take eight online courses (from BVS Performance Systems, which has since partnered with CUES to deliver CU-specific online training, cuesbvs.org) and are encouraged to take as many more as they wish.

They also benefit from regular briefings by department heads. During these sessions, supervisory committee members hear about topics ranging from financial statements and lending procedures to loan servicing and marketing campaigns. The sessions are interactive, with question- and-ans wer periods.

In addition, Smith's board and CEO are members of CUES' Center for Credit Union Board Excellence (myccube.org), which is organized by topic areas, one of which is committees.

The 5300 call report - the quarterly data report the credit union submits to NCUA - is an additional source of information, says Mills. He suggests that committee members go back four or five years to see the recent history of the credit union's financiáis.

Vantage West CU is among credit unions that compile call report information into an internal report for the board of directors and the supervisory committee. At other institutions, internal auditors review call reports. For example, at Andrews FCU, Han reviews call reports and requires departments to resubmit them to NCUA if he finds errors. He reports his overall findings to the supervisory committee.

Lastly, Mills recommends learning a little bit about risk management and comparing the credit union to similar and competing institutions. "For basic ratios, we look at '10 above and 10 below' in our region, which is southern California," he explains. "You can do that with [financial analysis software such as] Callahan & Associates, Inc.'s Peerto-Peer" (www.creditunions.com).

Person to Person

Some of the best resources for supervisory committees are human. Obviously the board can be a source of information. Mills recommends supervisory committee members sit in on board meetings, read past board minutes, and hold at least a couple of joint meetings with the board per year. It's important not just for keeping up with current events, he says, but also for learning the CU's internal culture.

Vendors can be another source of enrichment. Sprang says when outside parties, such as auditors, compliance experts, and attorneys, appear in front of the committee, they often spend so much time going over reports that there is very little time left for discussion.

He suggests asking these vendors to submit reports seven to 10 days before the meeting, so supervisory committee members have time to read and understand them. That way, these professionals can spend just a few moments going over their reports, and far more time talking with the committee, answering questions, and putting the credit union's financiáis in a larger context.

"They should use the rest of the time to really ask and probe those vendors as to what else they're seeing in the industry," he says. "How does their institution compare to others? How is their management team reacting compared to others? Then they really get a better sense of where they stand within the industry, and of what best practices those vendors might see within the industry that [the CU is] not taking advantage of currently."

Supervisory committee members also benefit from talking with members of the management team or participating in other committees within the credit union, says Sprang. When they do so, they should be careful to avoid a "silo mentality." Any discussion may be relevant to their auditing work.

"They may participate in a conversation that may be vitally important to assessing the risk and oversight of the organization, for supervisory committee purposes," he points out. "But because they've maintained that silo mentality, they don't carry over that thought process and think, 'Boy, this is something we should be talking about in supervisory committee.' Instead, the discussion begins and ends in that other committee. And usually those are the things that can end up tripping you up in the end."

Tougher Times

Until recently, the supervisory committee at Andrews FCU had five members, as specified by its board policy (NCUA requires at least three). One supervisory committee member resigned a couple of years ago, Han says, "so we had four members until the annual meeting last April. Our new chair wanted to have an odd number - three or five. Because it was not easy to recruit a new one quickly, he made a decision to have three members provisionally and let the last-joined member serve on another committee."

Andrews FCU isn't alone in finding that recruitment can be tough. "In times such as this, the people with the skill set or qualifications to participate on a board or the supervisory committee are usually pretty successful businesspeople themselves," Sprang says. "And right now, those organizations that they work for outside the institution can be under some pressure, or may have mounting responsibilities. So they can't necessarily devote a lot more time to their responsibilities to board or committee membership."

In addition, tougher economic times have made it more difficult for staff to manage portfolios, maintain capital, and keep institutions running in a safe and sound manner. Good candidates for supervisory committees recognize this, and are wary of getting themselves more work than they can manage.

And supervisory committee members cannot be yes-men, Sprang stresses. "In times when the credit union is experiencing some difficulty, it's tough for management teams to remain objective. It's also tough for supervisory committees to remain objective. But that is the most important time for them to remain objective.

"Many times, the flaw I see is that they follow management's lead too often and are overly optimistic about their prospects for the near term. They also don't really recognize where they stand in relation to their peers. That way, they end up making some statements or taking some actions that really aren't the best for the institution."

Still, supervisory committees that understand the industry, educate themselves, ask hard questions, and involve themselves in the regulatory process can be extremely effective at the job.

"When an examination starts, they should be up-front and participating, not just waiting until the results have come in and dealing with the consequences," says Sprang. "They don't need to be involved to the extent that management is involved, because their job is not to manage the institution; it's to have an oversight role. But in that oversight role, they really need to understand the process from beginning to end."

Resources

CUES' Supervisory Committee Development Seminar is coming up in February at The Cosmopolitan of Las Vegas. Learn more and register at cues. org/Sup ervisoryComm itte e.

Also in February at The Cosmopolitan of Las Vegas, CUES will offer its Director Risk and Compliance Seminar. Learn more and register at cues.org/DirectorRisk.

Find videos and articles about supervisory committees on the Center for Credit Union Board Excellenceat/?ffp:# tinyuri.com/supercommcontent. Not yet a CCUBE member? Sign up fora 30-day free trial of the content at myccube.org. Click "Join Now."

Jamie S we d b e rg is a freelance writer based in Georgia.