NCUA Webinar: Internal Controls & Accounting Tips for Small Credit Unions (8/19/2015)

Kathryn Baxter: Good afternoon to our audience. We’re grateful that you’re on our call today. We have a very, very
exciting webcast for you today. My name is Kathryn Baxter. I’m going to be the moderator for today’s webcast. Of course, the title of the webcast is, “Internal Control & Accounting Tips for Small Credit Unions. ” As I mentioned, this is a fantastic webinar series, so you don’t
want to miss any of it. I’m joined today by my host, Dominic Carullo. Before I turn the console over to Dom, I’m going go make a few administrative announcements. As always, we’d like you to adjust the volume on your computer so that you can hear this webcast. If you’d like to resize these slides,
you can drag the bottom right-hand corner of your console. You will also need to allow pop-ups from this site. At any point in this webinar, you can ask our speakers a question using the Ask A Question feature on the left-hand side of the console. In fact, what we’d like you to do is to submit
questions all through the webinar. Don’t wait until the end. If you are aware of the name of the speaker who you would like to address the question to, please use that speaker’s name in your question. Also, we want you to pay attention as we get towards the end of the webcast, because what we’re
going to do is push out a survey to you. You don’t have to watch your email, just watch your screen. As always, in approximately three weeks this webcast will be close captioned for On Demand viewing. This is a webcast in which we’re going to offer a certificate for your training purposes. If
you’ll notice on your console, there are two magenta-colored icons toward the bottom right-hand side of your screen. One will show you the progress that you’re making in listening to this webcast. The other one is the quiz. The progress one will tell you that you need 45 minutes of viewing.
You’ll also need to answer 3 out of 4 poll questions. For this quiz, there are only 12 questions and you’ll need to answer 9 of the 12 correctly. As I mentioned, I’m joined today by my host, Dominic Carullo. Dominic always has a line that he loves to leave with
you, so Dominic, take it away. Dominic Carullo: Thank you, Kathryn. I love credit unions. Credit unions really rock. Hello, my name is Dominic Carullo and it is once again my pleasure to host the OSCUl monthly webinar. Today, we have
three NCUA specialists and they are here to discuss “Internal Control & Accounting Tips for Small Credit Unions. ” First off, here is our NCUA disclaimer. “This webinar is offered for
informational and educational purposes only. NCUA does not endorse any particular credit union or vendor, or their employees, products or services. ” Now, I would like
to introduce our speaker panel. First off, I’d like to introduce Carolyn Penaluna. Carolyn is a CPA and she works as a Supervision Analyst in NCUA Region IV. Welcome, Carolyn. Carolyn Penaluna: Hi. Thank you, Dominic.
Dominic Carullo: Next, we have Kerri Piekarski. Kerri is a Principal Examiner in NCUA Region III. Welcome, Kerri. Kerri Piekarski: Thank you, Dominic. Dominic Carullo: Last but not least, we have Mary Gay. Mary is a Principal Examiner in
Region IV. Welcome, Mary. Mary Gay: Thank you, Dominic. Dominic Carullo: Our agenda is as follows. After our opening remarks, Carolyn will start out by discussing internal controls. She’ll be followed by Mary, and Mary will talk about negative share accounts.
Kerri will then step in and talk about accounting for OREOs. Finally, Mary will come back again and she’ll discuss the proper use of the prepaid account. Following our presentations, we will answer questions that
you have posed to us today in the final half hour, and Kathryn Baxter will moderate the Q&A. Let’s get you involved with our very first poll question. Here it is. What is your asset size? If you’re less than $1
million, click in the top circle and so on and so forth. If you are not a credit union, please click on the bottom circle. We’ll give you a moment to answer and then we’ll go ahead and review the results. As Kathryn said, please get
your questions into us throughout the webinar. Also, to get your certificate of attendance, make sure you answer 3 of the 4 poll questions and take the quiz at the end. Okay, so let’s
see what we have here.. It looks like the majority of the folks out there are with credit unions between $10 million and $100 million, but we have a pretty good spread here. We have some small credit unions. We have some between $1 million
and $10 million. We also have some between $100 million and $500 million, and we have some very large ones out there. It looks like we have a pretty even spread throughout our audience. It is now my pleasure to introduce Carolyn Penaluna. As I said,
Carolyn is a Supervision Analyst in Region IV. Her bio as well as the bios for our other speakers are found using the tab at the bottom of your console. We also call that a widget. Carolyn, are you ready? Take it away. Carolyn
Penaluna: Thank you, Dominic. The Federal Credit Union Act and the Regulations require the Board of Directors ensure a credit union has internal controls to safeguard their assets and to provide for reliable financial reporting, such as the Call Report. This is important
to note. The internal controls do not guarantee that fraud will not occur, but they will make it more difficult to commit fraud and remain undetected. According to the Association of Certified Fraud Examiners 2014 Report to the Nation, the following
are the main factors allowing fraud to occur: Lack of internal controls Lack of management review Override of internal controls, a strong internal audit process can help find this Poor tone at the top; good tone is where the board, supervisory
committee and senior management educate employees on the importance of following the policies, procedures and ethical behavior. In other words, they lead by example. These factors help deter fraud. Competent personnel in oversight roles are employees who understand
what they are reviewing and know when something looks unusual or suspicious. Independent audits include the Annual Audit, Internal Audit, and periodic Supervisory Committee Audits. Employees need to be trained on what the expectations are for ethical
behavior and the consequences for breaking the rules. This is important. This education should include training on recognizing red flags and how to report unusual behavior and wrongdoing. Then, the reporting mechanisms include all the reports that the board, management and supervisory
committee need to perform in their oversight duties, as well as the reports necessary for internal controls, such as the file maintenance reports. Segregation of duties means one person does not control a transaction from start to finish. It is important to note
when there is not enough staff to allow for segregation of duties, management review, board oversight and periodic supervisory committee audits are essential. An example
of dual controls – I think we need to be on Slide 13, Dom – is it takes two people to open the vault or to fill the ATM. One person has the combination and
the other person has the key. One person should not have both the combination and the key. Going to the next slide, employees should have a unique password for each program; such as their networks, their share and
loan system, the wire system. They should not use the same password for everything. We should be on Slide 14. Employees should never share their passwords and this is why. If a fraudulent transaction occurred, you will not be
able to determine who actually performed the transaction. Proper use of passwords should enable the supervisory committee and the auditors to identify who performed the transaction. Now over to Dominic for a quick poll question.
Dominic Carullo: Thanks, Carolyn. Here we go, Poll Question No. 2. How are your computer access levels set? The first choice, we set up our access levels specifically for each individual employee because some employees perform several
job function. Option 2: We set up our access levels based on specific job functions; for example, the loan officer, teller, MSR, accountant. Option 3: We are a small credit union and everyone has to be able to do everything. Finally: We utilize the
system defaults for our computer. If you are not a credit union, just click on N/A. Kathryn, How are we doing with the questions? Are we getting enough? Kathryn Baxter: Actually, we have a couple of questions that have already come in. I’m going to let our speakers know, you’d better get ready. Please
continue to bring in your questions to our speakers everybody. We appreciate it. Dominic Carullo: All right Kathryn. Thanks. Let’s see how we’re doing here with our poll. We’ve got a pretty sharp audience here. It looks like the vast majority of the folks out there have answered
both Option 1 and Option 2. As we expected, we have a lot of little small credit unions out there and they do need everyone to do everything, but we may have some suggestions for them going forward so let’s move on. Carolyn, it’s all yours Carolyn Penaluna: Thank you,
Dominic. As Dominic said, at the very small credit unions everyone does have to be able to do everything and that puts an emphasis on strong internal controls and supervisory committee involvement. Your computer access levels based on job function will provide for segregation of duties, because it limits the user to
only those functions pertinent to the job. For example, a teller would have access only to teller functions and not to lending and general ledger functions. The access should be limited just to those duties relevant to their position, and then the employees with higher system access will perform more sensitive
functions, or enter supervisory overrides so the employee can continue with the transaction. Finally, your system controls should allow for blocking an employee’s ability to perform transactions on their own account and on those accounts of any family members. The teller should be the only one
with a key to their outer drawer and should lock the draw whenever it will be unattended. The spare key should be in a sealed envelope in the vault with the teller’s initials or signature across the seal of the envelope. This same control applies for the key to the inner drawer for when the cash
drawer is locked in the vault. Employees should never share a teller cash drawer and they should count and balance their drawer each day. The supervisory committee and management should perform surprise counts of teller drawers and the vault. This is important. When you’re counting the vault,
you count the bills in a sample of straps and flip through all of the other straps to ensure the strap consists of the appropriate denomination. For the loan process, one person should not be able to approve, book and disperse a loan. This is difficult in a one- or
two-employee credit union, and in these instances a credit committee may be necessary to approve the loan. The supervisory committee and management should review file maintenance reports for changes to due dates, interest rates and other terms. As an internal control, the supervisory
committee should periodically review new loans granted and a sample of other loans based on various system reports, such as accrued interest greater than payment and paid-ahead loans. This is important. Always follow up on missing loan files. Missing files may simply be misfiled, or it may be a red flag.
When the missing file is found, the supervisory committee should compare the signatures on the loan documents to the signatures on the account card and trace loan proceeds and the source of loan payments. The review of dormant accounts with loans should include tracing to the
source of loan payment. Now, it could be a red flag if all the payments are cash and all the payments are posted by the same employee. Finally, ensure the total loans for the member trial balance agrees to the general ledger. The corporate credit card
policy should specify who is authorized to use the cards, who is required to review and approve cards, establish usage limits, and forbid personal usage. It should also require submission of the receipts from the merchant with explanations for the purchase written on the receipt. An
individual with higher authority should review the statement and receipts and approve it for payment. The supervisory committee should periodically review the statements and the receipts to ensure the approval was performed and documented. The limit for the credit card should be commensurate with the
expected usage. There is no reason to have a $25,000 limit on the card if the expected usage is to purchase ordinary office supplies. If the card will be used infrequently, it should be locked up in the vault and require signatures when the card is checked out and when it is returned. The expense
reimbursement policy is similar to the credit card policy. The expense reimbursement policy should specific what will be reimbursed, who is required to review and approve expenses, and require receipts and written explanations for the expenditure. Similar to the corporate credit card, an individual with higher
authority should review the statements and receipts and approve it for payment. Also similar to the corporate credit card, the supervisory committee should periodically review the expense reports and receipts to ensure the approval was documented. This is important. They should also make
sure the same expense was not charged to the corporate credit card. Before we go any further, Dominic has another relevant poll question for you. Dominic Carullo: Here we go. The system is a little bit
slow here, so we’re having an issue. What type of annual audit does your credit union obtain? Do you receive a CPA opinion audit; agreed upon procedures audit; perhaps you have a supervisory committee audit
completed by the supervisory committee; or perhaps the supervisory committee audit completed by an outside person. Again, if you’re not a credit union, just click on the final circle there. While we’re waiting, Kathryn, how are we doing with the questions? Are we getting enough?
Kathryn Baxter: We’re getting quite a few and we have quite a few good questions. As a matter of fact, we might entertain one before the Q&A. Dominic Carullo: Let’s take a look at the results here. The system is a
little bit slow today, folks. It looks like the majority of the folks out there are receiving a CPA opinion audit. That’s about 41%. We have 17% with agreed upon procedures audit. A very small percentage of
supervisory committee audits, but we do get a lot of supervisory committee audits completed by outside persons. That’s quite interesting. Okay, back to Carolyn. Carolyn Penaluna: Thank you, Dominic. For anyone who doesn’t think they need an audit,
we understand the inconvenience but it is necessary. In a small credit union with limited segregation of duties, an active supervisory committee and these audits are an essential part of the internal control. This is not a complete list of all the areas that should be reviewed
during annual and periodic audits. Please see the NCUA Supervisory Committee Guide for more information about supervisory committee audits. The insider account review includes board, supervisory and credit committee members, the employees and family members, which includes the grown
children, the grandchildren, siblings, spouses, parents, etc. The procedures performed should consist of tracing a sample of deposits and loan payments to source documents, as well as reviewing the transfers between all of those family member accounts. In our previous discussion
of the file maintenance reviews, it was suggested to look at all the loan-related changes. You should also look for backdating of transactions. This should be rare and is usually a red flag. Another item to look for is accounts being changed to “do not mail,” especially if it’s a dormant account, a
reactivated dormant account, or a new account. You want to review the share draft exceptions and overdrawn account reports to see if insiders and their family members appear frequently on the report. This can be an indication of financial distress, which is a red flag. The bank reconciliation is also often
used to hide fraud. A good internal control would be to have someone who does not have access to the bank account perform the reconciliation. Also, the supervisory committee can contact the bank directly to obtain a copy of the bank statement, or have it delivered directly to them and they can perform the
reconciliation. For the general ledger reviews, the reconciliations of all the balance sheet accounts, including the source documentation should be reviewed. We discussed the periodic loan reviews earlier. This review should include tracing the disbursements of loan proceeds for a sample of
the loans, because it could be a red flag if the proceeds of the loan pays off another member’s loan, especially if it’s an insider’s loan. The Call Report documentation should be supported with source documents, so the credit union needs to maintain these source documents, preferably in
a binder or some other type of system where it’s altogether. This will make it easier for the credit union’s independent person to verify the Call Report quarterly. It’s also easier for the auditors and examiners when they verify the Call Report. As a benefit, it’ll be less disruptive
to management during the audits and exam. Some credit unions use spreadsheets to organize and pull information together. These spreadsheets should be supported by system reports, which you can save as PDF files, and this will allow the credit union to maintain an electronic
Call Report folder. There are many internal fraud red flags. This is just a list of a few of them that are generally easy to spot. When someone is living above their means, they may be running up debt in order to finance this lifestyle. But, they may have won the lottery or had a rich
inheritance, or they may be committing fraud. You should listen to employees if they say they’re having personal problems or feel underpaid or unappreciated for what they do. Financial problems may be evident by the fact that they frequently overdraw their account, which you would see when you review the overdrawn account report. They
may have high debt and poor credit history showing late payments and a lower credit score on their credit report. The fraudster will not miss work, not even for vacations if they can help it. They will not want to cross-train anyone to perform their duties for fear they will be caught. The fraudster does not have the ethical
tone at the top; instead, they do not follow procedures and they’ll bend or break the rules. This is important. When you see several of these red flags or other red flags, you want to review the employee’s account and their family members’ accounts, and review their work transaction history for anything
suspicious. Hopefully, this part of the presentation assists you with reviewing internal controls at your credit union. Here’s my contact information and now, back to Dominic. Dominic Carullo: Terrific job, Carolyn. It is now my pleasure to introduce Principal Examiner
Mary Gay from NCUA Region IV. Mary will be covering the proper handling of negative share accounts. A little later she’s going to come back and she’s going to discuss prepaid accounts. Are you ready, Mary? Take it away. Mary Gay: I’m ready and thank you, Dominic.
Let’s talk about negative accounts. In recent years credit unions have begun offering privilege pay or overdraft protection programs to their members. These programs provide an alternative to the previous methods for covering overdrafts; such as providing overdraft lines of credit, allowing members to
link various accounts, or simply paying overdrafts on an ad hoc basis. By ad hoc, I’m referring to situations where a credit union employee would exercise discretion as to whether or not to pay an item. The decisions to honor a draft were almost always done as an accommodation to the member. These methods,
however; the ad hoc, accounting linking, or overdraft lines of credit, are not the subject of the guidance I will provide during this presentation. Our discussion will focus on newer programs that we commonly refer to as “bounced check” or “overdraft protection
programs. ” These function as a credit service, so my discussion is intended to assist you in the responsible administration and reporting of items that remain unpaid. I will also discuss the timeframe requirements for
charging off overdrawn balances and the process for handling any fees that have been added to the accounts. Federal credit unions are subject to regulatory requirements that govern the establishment and maintenance of overdraft programs. The regulations require credit unions
offering an overdraft program to adopt a written policy that details the dollar amount of the overdrafts the credit union will honor per member and overall; the timeframes for a member to either deposit funds or obtain a loan to cover an overdraft; and the amount of the fee
and interest rates, if any, that the credit union will charge for honoring overdrafts. Kathryn Baxter: Which slide are you on, Mary? Mary Gay: I’m on Slide 34. Kathryn Baxter: Thank you. Mary Gay: You’re welcome. The regulations also describe the safety and soundness requirements that need to
be followed such as the establishing of a timeframe for charging off overdraft losses. Establishing a dollar limit on overdrafts that the credit union will honor, and establishing criteria for the amount and timing of fees the member will be charged for honoring. I’m moving to 35. It is important to know that whether
a negative balance occurs within the credit union’s formal overdraft protection program, or if the credit union does not offer a program but a member transaction causes an account to be overdrawn, if the member’s account is negative the credit
union has extended credit. Therefore, overdraft balances should be reported on regulatory reports as loans. We’re moving to 36. Because overdrafts are loans, any losses that result from overdrawn accounts should be charged off against the
allowance for loan loss account. However, unlike all other loans, the regulations require you to establish a time limit not to exceed 45 calendar days for a member to either deposit funds or obtain an approved loan from the credit
union to cover each overdraft. You must adopt a well-defined loss estimation process to ensure the timely recognition of overdraft losses, including the loss of any fees. Regarding fees, they can be included in the charge
off if you have recorded the fee with the overdraft balance as a loan and the losses are estimated and provided for through provision expense. For reporting purposes, credit unions must follow generally accepted
accounting principles and the instructions for NCUA 5300 Call Reports for overdrawn accounts. The financial impact of share overdrafts is reflected on the following pages of the Call Report. Under the Loan section
on Page 2, the number and amount of unsecured loans should be changed to include the number and amount of overdrawn share accounts of all types, regardless of the existence of an overdraft protection program for share draft accounts. Under the
Deposit section on Page 3 of the Call Report, the overdrawn accounts should be transferred from their respective share account designation and moved to Page 2. In other words, the amounts reported as share drafts are regular shares and should be changed to
reflect the transfer of overdraft balances to the Loan section. There should be no negative share balances included in the deposit account balance. Finally on Page 3, Line 30, you should report the dollar amount of negative shares that is included as loans on
Page 2. All overdrafts are subject to the safety and soundness considerations regardless of whether a formal program is in effect or not. Examiners will review your treatment of overdraft accounts and, if applicable, your overdraft payment
program during each examination. Programs that are found to pose unacceptable safety and soundness or compliance risk will be factored into the credit union’s CAMEL rating. Additionally, corrective action will be taken
where necessary. Now back to you, Dominic. Dominic Carullo: Here’s Mary’s contact information. Again, it is my pleasure to introduce another one of our NCUA Specialists. Kerri Piekarski is a Principal Examiner from NCUA Region III, and
she is going to provide us with a good overview of Other Real Estate Owned or OREOs. Kerri, take it away. Kerri Piekarski: Thank you, Dominic. Small credit unions often sell Other Real Estate Owned directly out of the loan category, mainly because this is simple. However, this is not
in accordance with GAAP. The Accounting Manual for Credit Unions has some good guidance on the accounting for Other Real Estate Owned, which is also known as Assets Acquired in Liquidation of Loans. This account reflects the fair value of assets acquired by the credit union in the liquidation of loans.
With real estate this would typically occur when the share of sale has been completed and the credit union has ownership of the property. Before we move on, Dominic has another poll question for you. Dominic Carullo: All right, Kerri, here we go. This is a pretty easy one,
yes or no. Has your credit union needed to account for OREOs over the past five years? We just want to see whether or not we are. Let’s see what we’ve got here. Do you know what? It looks like the majority of our folks out there have accounted
for OREOs over the last five years. So, this presentation is very relevant to our audience. Kerri, take it away. Kerri Piekarski: Yes, that’s not surprising given the environment that we’ve been operating in. After foreclosure, the record
should reflect the asset at the lower of fair value, minus the estimated costs to sell, or the cost at the time of foreclosure. If the fair value of the asset, minus the estimated cost to sell the asset is less than the cost of the asset, the deficiency should be
recognized in the valuation allowance known as “allowance for impairment loss. ” Keep in mind this is not the allowance for loan loss account. The offsetting entry would be to gain due to disposition/impairment of assets. If
the fair value of the asset increases and the fair value of the asset minus the cost to sell is more than the carrying amount, the valuation allowance should be reduced but not below zero. Again, the
offsetting entry would be to gain due to disposition/impairment of assets. If the number of loans that has been transferred to this account exceeds one, then it will be necessary to establish a subsidiary account for control purposes. The value of each
item should be adjusted to the lower of fair value minus cost to sell and you would reconcile the sub-ledger monthly to the general ledger account. Credit unions should also keep in mind that these repossessed assets are to be held temporarily.
Maintaining property in an income-producing manner is beyond the permitted powers of a federal credit union. To help illustrate these concepts we’re going to walk through some accounting entries. First of all, we’re
going to assume we have a loan with an outstanding balance of $100,000. We’re also going to assume that we acquired the property through a foreclosure sale at $75,000, and we have a difference of $25,000 that we need to recognize. The accounting
entries would be to debit assets acquired in liquidation of loans for $75,000. We would debit the allowance for loan loss for $25,000, and this is to charge off the remaining loan balance. Then, we would credit
loans for $100,000. Next, we’re going to assume that our OREO has now declined in value again and we need to recognize another loss. We’re going to debit the loss due to an impairment of assets by $20,000, and we’re
going to credit the allowance for impairment losses for $20,000. Dominic Carullo: Kerri, I’ve got a question. I’m a little confused here. Why are we debiting loss on the impairment of assets this time, when the last time we recognized the value went down,we debited the allowance for loan
loss account? Kerri Piekarski: That’s a very good question, Dominic. The reason is, is because it’s no longer a loan. It’s now an OREO, or an asset and it needs to be recognized through this impairment account. Dominic Carullo: When it was a loan and we had to devalue it, we went through the allowance for loan loss account.
Once we created the OREO, we debited the disposition/impairment of asset expense account. Is that correct? Kerri Piekarski: That’s correct. Dominic Carullo: Okay. Kerri Piekarski: Now, we’re going to assume that we have sold the OREO and we sold it for $50,000 and it’s time
to get the OREO off the books. The accounting entries to do this would be to debit cash for $50,000; debit the allowance for impairment loss for $20,000, and this is just to offset the entry that we made on the previous slide; and we do have another
loss of $5,000 that needs to be recognized. That would be loss due to disposition of assets. Then, we would credit assets acquired in liquidation of loans for $75,000. Now, I’m going to turn it back to Mary, who is going to discuss
accounting for prepaids. Mary Gay: Thank you, Kerri. You can think of prepaid expenses as costs that have been paid, but have not yet been used up or have not yet expired. The amount of prepaid expenses that have not yet expired are reported on your balance
sheet as an asset. The principle of accounting that governs the recognition of prepaid assets is the “Matching Principle. ” The Matching Principle states that expenses should be recognized in a rational and systematic manner. This is a key concept for accounting for prepaid assets, because costs are spread over many periods.
The costs are recognized and recorded when they can be matched with the revenues they help to generate. In other words, expenses shouldn’t be recorded when they are paid. They should be recorded as the corresponding revenues are recorded. As the amounts expire, the asset is reduced and an
expense is recorded for the amount of the reduction. Therefore, the balance sheet reports the unexpired cost and the income statement reports the expired cost. The amount reported on the income statement should be the amount that pertains to the time interval shown on the
statement’s heading. Using the Matching Principle, the cost of an asset is linked to the periods over which the benefit was derived. Moving to an example of that on Slide 59, a common prepaid expense is the 12-month premium for insurance. The insurance
company requires payment in advance and the amount paid is recorded on the credit union’s books as prepaid insurance, an asset. For the 12-month policy period, the credit union issues monthly income statements and those will report insurance expense that is 1/12
of the amount paid. On the balance sheet, the amount of prepaid insurance will be reduced by the amount that was debited to insurance expense. From time to time, we see items on the credit unions’ balance sheets that are identified as prepaid. But upon investigation, we discover
the account balance represents the accumulation of charges being set aside to fund future purchases. Prepaid accounts cannot be used for this purpose. That’s it on prepaids and I’m back to Dominic. Dominic Carullo: Here’s Mary Gay’s contact information.
If you have questions about this webinar, feel free to contact our office and here is the contact information for OSCUl, the Office of Small Credit Unions. Let’s move forward here. We have a little bit of an advertisement here, a little
marketing push here. We have four more webinars coming up this year. On September 16, we have “Participation Lending in a Safe and Sound Manner. ” Then in October is a very interesting topic, “Data Mining – Golden Nuggets for your Marketing
Campaign. ” In November, we’re going to discuss “Auto Lending. ” In December, we’re going to touch on “Getting Started in Mortgage Lending. ” We have some wonderful webinars coming up in the next few months. Kathryn
Baxter: Dom, thank you. Here is the survey that Dom has pushed out. We’d like everyone to take the survey now before we go into our Q&A. It should take you only a few minutes. I want to remind everyone, if you want to take the quiz so that you can
get a certificate, you had to be on this call for 45 minutes. You had to answer 3 out of the 4 poll questions. You had to answer the poll questions on your computer. You could not email the answer to us. You had to answer it on your computer by selecting one of the radio buttons.
In order to tell if you’ve met those qualifications, there are two magenta-colored icons at the bottom of the screen. The first one will show you your progress. The second one is the quiz. Once you take the quiz, you’ll be able to go to the other one and print your
certificate. If you also want to print these slides, you can use the green folder. It’s another icon at the bottom of your screen to print the slides. We will not be emailing the slides out, but you can print them out. Now, if our speakers are ready, we have a ton of questions. Because Mary was the first
speaker, Mary would you like to get put in the hot seat first? Mary Gay: I’ll get put in the hot seat. What have you got? Kathryn Baxter: Actually, you weren’t the first speaker. I’m sorry, but I’m going to ask you the first question. You were the third speaker, so your memory should be fresh,
right? Mary Gay: Okay, I think it is. Kathryn Baxter: Okay, Mary, here’s your first question. Question No. 50: The credit union wants you to repeat what you said about charge-off fees with respect to the negative shares, I believe. Mary Gay: What I said in the presentation
is that these can be charged off if they have been added to the loan and if you’re estimating the loss of fees through the provision expense account. Generally speaking, however, because of the quick turnaround on these, most people will simply reverse the
charge of the fee before they charge off the overdrawn amount. However, to be clear, fees may be added to the balance and charged off as long as in our policies we have established criteria for adding fees to overdrafts and charging off the entire balance. They can be charged off. I don’t see
it done very often, but you are allowed to do that. Kathryn Baxter: Fantastic. Now, here’s another very interesting question for you, Mary, and then I’ll take you out of the hot seat and I think I’m going to go to Carolyn next. Here’s a question, Question No. 47: The credit union wants to know if after a certain amount
of time is it possible to charge interest on overdrafts? Mary Gay: You’d have to convert the overdraft to an approved loan, and by approved loan I mean you need to document a loan in the ordinary course of business. An overdraft is not eligible to be charged interest. If the
question is, within the 45 days can I compute or add an interest charge to the overdraft, the answer is no, you cannot. However, within the 45 days, you can provide the member with an approved loan that charges interest. Kathryn Baxter:
Fantastic, Mary. Now, let’s see if we can get some answers from Carolyn. You had quite a few questions on the audits when Dom pushed out that survey. Here’s one question, Carolyn. Are you ready? Carolyn Penaluna: Yes, ma’am. Kathryn Baxter: Question
We’ve had this question a couple of times. What is the difference between agreed upon procedures and the supervisory committee audit? Carolyn Penaluna: The supervisory committee audit is the audit that is typically performed either by the supervisory committee or a paid third party
who is not a licensed public accountant. Those audits have to meet the requirements in the NCUA Supervisory Committee Guide, which details the procedures that have to be performed. The agreed upon procedures audit is performed by a licensed accountant, which is usually the CPA firm,
and they have specific standards that they have to adhere to when they perform these. They also will be performing the same procedures as the supervisory committee audit, but they may also perform additional procedures. Kathryn Baxter: Fantastic. On that same note Question
31, Carolyn, the credit union said, how often does an audit have to be performed? Carolyn Penaluna: The audit is supposed to be performed every year, so that should be about every 12 months. Kathryn Baxter: Thank you. Let’s move on to Kerri. Kerri, are you ready?
Kerri Piekarski: Yes. Kathryn Baxter: We had quite a few questions about an OREO account and I’m going to stay away from the joke. Here is what a credit union said with Question 10: They said when a property is sitting in the OREO account for over a year and they
know the property needs to be reevaluated and adjustments need to be made, but they want to know do the adjustments flow through the all or unrealized gain or loss account? Kerri Piekarski: That’s a very good question. After you transfer it to the OREO account,
you no longer use the allowance for loan loss account and the loss would be recognized through the Loss due to impairment account. Kathryn Baxter: That was quick. Dominic Carullo: By the way, you may see that same question on the quiz, so
pay attention. Kathryn Baxter: Here’s another question for you, Kerri. It’s Question No. 86: The question is at what point is a subsidiary account established for OREOs? Kerri Piekarski: You should do it if you have more than one definitely.
That’s how you’ll keep track if you have several different properties and you would agree this back to the general ledger account. Kathryn Baxter: All right, so now let’s hop back to Carolyn. Are you ready, Carolyn? Carolyn Penaluna: Yes, ma’am.
Kathryn Baxter: Here is Question No. 20: The credit union says, please explain what a dormant loan account is. Carolyn Penaluna: Hopefully, I said dormant accounts with loans. If not, that’s what I meant to say. It would be a dormant account where no activity is occurring in their
regular share account, or if they have a share draft account and they have no activity occurring, but they have a loan with the credit union. That would be what I was speaking about. Kathryn Baxter: Now, on the same note, Question No. 19, the credit union wants to know: What is a dormant loan? Carolyn Penaluna: That’s the same
thing. It’s not a dormant loan. It is a dormant account that has a loan. So there’s no activity occurring in the regular shares or share draft accounts, but they have a loan and, hopefully, they’re making payments. Kathryn Baxter: Let’s switch a little bit here, Carolyn. I still want to keep you on
the line. This question is with respect to corporate credit cards. Question 22: The credit union said, when receipts are required for corporate credit cards, should the detailed receipt be required to verify purchases? Carolyn Penaluna: Yes. We say that they should provide the receipt from the
merchant, so that’s the detailed receipt. That is preferred over just getting the receipt that you get when you get the credit card receipt. It’s fine to attach also the credit card receipt, but you also definitely want the detailed receipt from the merchant so you know what was
purchased. Kathryn Baxter: Now, let’s pop over to Mary again. Mary, are you there? Mary Gay: I’m here. Kathryn Baxter: Mary, when you were talking about negative shares, Question 46, the credit union said: What are Call Report requirements? Mary Gay: The Call Report requirements
for negative shares show up on Page 2. On the unsecured loans, we’re going to adjust the balance of our unsecured loans that we’re reporting. We’ll adjust it to include the amount of any negative share balances that were outstanding at the Call Report date. That’s on Page 2. Then moving to Page 3
where we’re reporting the amount of deposit accounts we have at the end of the period, we’re going to adjust that number as well, because it should not be reported with the inclusion of any negative share balances. Those are the Call Report requirements. We’ll adjust unsecured
loans and we will adjust our share balances, both in regular shares and in share drafts as applicable. Kathryn Baxter: On the same note with regard to an overdraft, here’s a good question. Question 42: The question is, is the requirement to charge off an
overdraft or create a loan within 45 days only applicable to share draft accounts and not savings accounts? Mary Gay: That comes up pretty often and the answer is that if it’s an overdrawn account, then we do have an extension of credit, whether it was
through a share draft or a regular share transaction. That being the case, the 45-day rule applies to either. It also applies for those credit unions that don’t offer share drafts. There are some credit unions who will experience overdrawn accounts. I was in a credit
union recently that only has regular shares; however, their members have debit cards. Those debit card transactions can result in a negative regular share balance. The guidance that we’ve discussed regarding negative shares would apply there as well. Kathryn Baxter: Fantastic.
Now, I’m just going to open this question up to the panel. We have a very honest credit union person here. Question 34, they said that they are a newbie. What in the world is a Call Report? Who wants to answer that one? Carolyn Penaluna: This is Carolyn. I’ll go first.
Every credit union is required to file a quarterly Call Report, which we also call the 5300 Report. If you are a smaller credit union, you will only have to fill out probably 10 or so pages of that Call Report, because the rest of it may not be applicable. If you are a larger one, you’re going to be
filling out probably 20 pages. It asks for all types of financial information, as well as some operational information. In addition to that, there is also an online profile that you would have to complete every quarter. Kathryn Baxter: Fantastic. Now, let’s see if I can – we’ve
already answered a couple of those questions. Carolyn, since you’re on the line, here is a good question for you. Question No. 18: The question, is there a requirement or regulation to provide file maintenance reports, or is this a recommended best practice? Carolyn Penaluna:
The file maintenance is not specifically listed in regulations; however, it would fall within the regulatory requirement for strong internal controls to safeguard the credit union’s assets and to provide for accurate financial reports. It is also a best practice, but there is almost no
way that you can say that you have good internal controls if you are not reviewing the file maintenance reports. Kathryn Baxter: Very good, okay. Let’s go to Kerri. She looks kind of lonely. Kerri, Question No. 86: The question is at what point – did I already ask you this at what point is a subsidiary
account established in OREOs? I already asked you that question. Kerri Piekarski: Yes. Kathryn Baxter: My fault, I’m sorry. Let me give you another one that might be a little bit better. Let me jump back to you, Kerri. Question 68, how’s that? How would you set
up an allowance for impairment losses? Kerri Piekarski: That would be set up by – it’s actually the account that you use to recognize the value of the asset when you’re writing it down to the lower fair value less the cost of sale. You would debit, assuming
that we’re trying to recognize an impairment you would debit loss due to impairment of assets. Then the offsetting entry would be the credit to the allowance for impairment loss. Kathryn Baxter: Here’s another question for you regarding OREOs. Question
The credit union wants to know for OREOs in particular, please define “held temporarily. ” Kerri Piekarski: Normally, all OREOs should be held temporarily. You’re not supposed to hold these long term. Sometimes credit
unions will rent these in the meantime while they’re trying to sell it, but you should always actively be trying to sell the property. Kathryn Baxter: That sounds good to me. Mary? Mary Gay: Yes. Kathryn Baxter: Here’s a question for you. It’s a share account question.
Question No. 14: The credit union wants to know if an account is negative for more than 30 days, but there has been an effort from the member to bring that account positive through monthly payments can we delay charging it off? Mary Gay: That’s an
easy one. No, you can’t; 45 days is the timeframe. Carolyn is pointing something out that may help the questioner. Of course, within the timeframe we do have the opportunity in working with that member to offer him a loan, so we could convert it to
a loan if that helps the questioner at all. If the question is strictly do I have more time to allow this member before I charge off that unpaid amount, the answer is no, you don’t have more time. You either have to pay it off through an approved loan or pay it off in cash or charge
it off. Kathryn Baxter: That makes sense to me. Since you have Carolyn there, Carolyn are you ready for another question? Carolyn Penaluna: Of course. Kathryn Baxter: I think Mary was setting you up. Here’s a good question for you. This is an excellent question as a matter of fact.
Question 26: The credit union wants to know besides matching signatures and payments, what other things should you be looking at to make sure straw loans aren’t being made? Carolyn Penaluna: If I was looking for straw loans, I would have the loan file out and I would look to see that there was
a credit report. I would make sure that the name and address matches the stuff on the application and matches the account card. I would probably Google the address to make sure it is a valid address. I would look at the member’s identification information when we first opened their account, and I would also be
looking at their account history. At least I would know whether this was a real person who lived at the address that they provided us and that we had done some type of identification for them. I would be looking at their credit report to see if that fell within our policies and procedures. Then a little later, I’d be
looking at the payments to see the source and trace it to the source. Are they actually the ones who are submitting the payments, or are the payments coming from a dormant account. Kathryn Baxter: That sounds good to me. Let’s ask you another question, Carolyn. This is a common
question we get with respect to small credit unions. Question No. 16: The person wants to know how do you separate duties for a one- to two-person credit union? Carolyn Penaluna: That will definitely depend on each credit union and the capabilities of the personnel. Typically,
I’ll see one person who is usually the manager who is doing the accounting and who approves the loans. The other person usually does the teller functions and processes the loans. Ideally, it is a supervisory committee or an independent third party that would come in to do the bank reconciliations.
If not, possibly the person who has the teller duties could be trained to do the month-end reconciliations for the bank account. The manager who has the accounting functions would probably have to do daily balancing of that account, but the month-end should be performed by someone else.
If possible, maybe the other employee, but better would be the supervisory committee. Kathryn Baxter: Now let’s bounce back to Kerri. Kerri, we have quite a few OREO questions, so I’m going to let you answer those. Question 65: You answered this in your presentation, but I
think it requires that you state it again. The credit union wants to know can an OREO be rented while awaiting sale? Kerri Piekarski: The answer is yes; however, you still need to actively market the property. For federal credit unions you are only able to hold
this temporarily. You should always be actively marketing the property. Kathryn Baxter: Don’t go away, Kerri. We have another question for you. The credit union wants to know, Question 66: How often do you recommend valuing OREO account assets? They’re looking for a recommendation,
I guess. Kerri Piekarski: I would recommend valuing it at least quarterly. If you feel like the property is depreciating or it’s declining in value and you’re not getting results from your marketing efforts, then you may need to revaluate it and lower the carrying value. Kathryn Baxter:
I’m going to ask the next question to Dominic, because he looks so sad sitting there. Dominic, this is a common question that we get. This is Question No. 69. Do you want to pull it up? Dominic Carullo: I have it here. Kathryn Baxter: Question 69: The credit union wants to know and said they have two people who are watching this training session now
and they want to get certificates. Is that going to be a problem? Dominic Carullo: I really don’t know the answer to that. Kathryn Baxter: Would like me to answer it? Dominic Carullo: I would love you to answer that. Kathryn Baxter: Okay. I’ll answer that question for them, Dom. Here’s the answer just succinctly. Your certificate will be predicated upon the
IP address of your computer. If you have two or more people at the same computer, whoever registered and whoever’s email account was used to register, is the one who will receive the certificate. However, once we archive this, you can go back in and take this information all over again and
receive your own certificate. I think this is the first time I’ve ever answered a question. It’s pretty exciting. Let me get back to Mary. Mary, are you there? Mary Gay: I’m here. Kathryn Baxter: Mary, this is a good question too. Question 51: Would you say that the discretionary
payment is not utilized often and is not given to all credit union members? Mary Gay: By its very nature, it is a discretionary payment. It is infrequent and it is absolutely, in my experience, done on a case-by-case basis. Kathryn Baxter: The next question,
Mary. The credit union wants to know should they create an allowance for the negative shares? Mary Gay: Actually, just from a bookkeeping perspective, I actually think it’s a lot cleaner recordkeeping when you have an account dedicated to the
accumulation of losses related to negative share accounts. Now, that’s just my perspective. There is no reason that a credit union should be required to do this. Your negative share balances will be reflected in the allowance for loan loss account. If you want to use the 719 Allowance
for Loan Loss Account and not create a subsidiary that only houses negative shares, you can certainly do that. You don’t have to. I just think it’s a cleaner transaction trail when my credit unions establish a subsidiary to the 719 that only reflects transactions related to negative shares. Kathryn Baxter:
I think Dom wants to interject something there. Dominic Carullo: Mary, I just have another question for you. Can you tell us what a discretionary payment is? Mary Gay: It’s exactly that. Before we had privilege pay and overdraft protection, you’d been a credit union that offered share drafts and the member would call in
at 8:00 in the morning and say, “You know something, I wrote this check yesterday. I know my payroll won’t hit until tomorrow. Is there any way you could pay that draft for me?” At the discretion of the person who has the authority to make that decision, the draft may have been paid or it may
have been turned around and sent back. That’s a discretionary payment. It varies case by case. As the first question on this topic indicated, it’s not necessarily offered or provided to everybody who had an overdraft. It wouldn’t necessarily have been provided every time. It literally was at the discretion of
the person in the credit union who had the authority to make the decision. Dominic Carullo: That’s a good answer. Thank you. Kathryn Baxter: Excellent answer as a matter of fact. I’m going to see if Kerri would like to – we have some pretty heavy questions on these OREOs. Are you
ready? Question No. 74: The question is what’s the difference between allowance on impairment losses and a specific reserve on the property as it goes through the foreclosure process? Kerri Piekarski: I would think those would probably be the same thing.
They’re both valuation accounts. I’m assuming the specific reserve is. I’m not familiar with that account. If it’s used to value the property to offset your entries to the gain/loss due to disposition of assets, then I think what they probably mean is that it’s the same thing, basically. Carolyn Penaluna:
This is Carolyn. I would like to interject something. They may be talking about the allowance for loan loss when you have the individual impairment for losses. They may have been in their allowance for loan loss besides having their pools of loans. They may have a specific individual
impairment which maybe they’re calling the specific reserve. It’s before it’s been fully repossessed or foreclosed on, so that way it falls within the allowance for loan loss. Kathryn Baxter: We have another OREO question. These OREO
questions are pretty tough. Are you ready, Kerri? Our other speakers chime in, too, like you did Carolyn. Here’s Question No. 75: You may have answered this already, but bear with me while I try to recite this. When writing down an OREO after it’s
been foreclosed and recognized as an asset, is it necessary to establish an allowance for impairment account, or could you simply credit the OREO asset to bring the balance down? Kerri Piekarski: I think this may vary with the accountant or examiners. Technically, according the Accounting
Manual, you should be using the allowance for impairment account. I have seen in practice where they would actually just make the entry to the asset account.. Kathryn Baxter: Would you think it would be cleaner to use the allowance for impairment account. Kerri Piekarski: I think it would be cleaner, especially
if you are holding the property longer than a couple of months. Kathryn Baxter: Okay, very good. Let’s jump back to Carolyn. Carolyn, here’s your question. Question 17: The credit union says should employees be required to disclose all their familial relationships so account controls can be set up correctly? Carolyn
Penaluna: Yes. There is a fallacy in setting this up, because the credit union has to rely on the employee to tell them who all their family members are, so they may not disclose all their family members. Preferably, you have something in writing where they have to fill it out and sign it saying these are all the ones they know
of. They have to do this is as an ongoing process because additional family members may come in and open accounts, or the same family member that they disclosed with one account may open up a whole completely different account under a different member number. This may be an annual process where you have to ask them, but yes, they
should obtain all the family members. Kathryn Baxter: We have a couple more questions with regard to that. This is a dual-control question, Carolyn. Question 32: Here’s what the credit union wants to know. They said that regarding teller cash keys that they currently lock the spare key in a
key box with dual control. Does this sound like its sufficient? Carolyn Penaluna: Yes, that would be sufficient as long as they have dual control. Kathryn Baxter: That was quick. Let’s jump back to Mary. Mary Gay: I’m here. Kathryn Baxter: Mary, we have Question 83, and
here’s what the credit union says. If the credit union has a large attorney expense that isn’t recurring, can it be listed as a prepaid expense? Mary Gay: Read it again. I’m not certain I understand the question. Kathryn Baxter: Here’s the question. Apparently, the
credit union has a large attorney expense that’s not recurring, so they want to be able to list it as a prepaid expense. Would this be okay? Mary Gay: No. Kathryn Baxter: That’s it? Mary Gay: To make certain that the questioner is clear, the answer
to that is no. That wouldn’t be appropriate and I’ll tell them why. If you remember from the presentation, we talked about the Matching Principle and that principle states that we incur a cost, we pay a cost, and the benefit from
the cost that we paid will benefit us over future periods. It sounds like from their question they want to pay in advance of an actual benefit. They anticipate that they will have a charge from this attorney; however, it hasn’t occurred yet. They simply want to establish
essentially a reserve for it so that when the cost is presented they will have money set aside to pay it. That is not appropriate. That is not a prepaid. Kathryn Baxter: Dominic wants to chime in, too. Dominic Carullo: Mary, a little follow up here. What about if a credit union
pays a retainer to an attorney and those monies will be utilized moving into the future? Mary Gay: Do I have a period certain over which that cost will expire? For instance, does the retainer retain an attorney who I can call on for the next 12 months or
6 months or 24 months? Is the retainer tied to a future period of time? Dominic Carullo: That’s interesting, because I would think the retainer would be utilized as the services are provided that it may not be on a particular calendar time. It may be just as
services are provided. I guess if it’s as services are provided and not on a specific time, then we would not be allowed to maintain that as a prepaid account? Mary Gay: It wouldn’t be an asset. It would be an expense. It would simply be an expense of the credit union that would be recognized in the current period.
Dominic Carullo: Thank you. Mary Gay: You’re welcome. Kathryn Baxter: These are excellent questions that we have. We have a lot. We’re going to entertain as many as we can. Keep them coming in. Even if we don’t get to them on the call, once we post this or archive this webcast, the Q&A will be posted along with the webcast. Now, I’m going
to go back to Kerri. Kerri, you’ve got a lot of questions. This is a good one, too. Are you ready? Kerri Piekarski: Yes. Kathryn Baxter: Question No. 91: Are repossessed autos handled in the same manner as the procedures you discussed for OREOs? Kerri Piekarski: I’m going to answer that
yes. Often though, repossessed autos aren’t held very long and sometimes credit unions are able to sell them right away and it never really gets to the point of transferring it to a different account. If you have an indirect loan program where you have numerous repossessed autos,
then yes, you would follow the similar accounting steps. Kathryn Baxter: I’m going to break my rule for a second. I want to jump back to Mary. Mary, this is an interesting question, Question 84. Then Kerri, I’m going to come back to you. The credit union says if we do not have an overdraft
program and the share account is negative, do we still write it off to the all, if uncollectable? Mary Gay: We do. A moment ago I answered a question and we talked a little bit and I gave you a little anecdotal information about credit unions where they only offer regular share accounts. They
don’t even offer share draft accounts. However, in the ordinary course of business, we do from time to time see overdrafts in regular share accounts. It doesn’t happen often, but I can tell you that it happens. To that questioner, the answer is you will handle the negative balance the same
way you would have handled it if you had an ODP program or if you had a share draft program. The guidance that I provided you will apply to any unpaid overdraft balance. Kathryn Baxter: Excellent, okay. Now I’m going to jump back to Kerri.
Then Carolyn, I’m coming to you so you’re not getting off the hook. Kerri, you have Question No. 61: They wanted you to explain the impairment loss account. They want to know if this account has to be funded each month and, if not, does
it clear out? Kerri Piekarski: No, it would not be funded each month. This is basically the offset account to when your OREO has declined in value and you’re going to debit your loss due to impairment. Then you would credit the allowance for impairment loss. How the account would
clear out is when you actually sell the property, and then you would make the accounting entry to reverse that with the proceeds from the sale. Kathryn Baxter: Let’s see, this questioner of No. 73 wants
to go to Slide 52. Can we bring up Slide 52? This is Question 73. They have a question about the slide. While we’re looking for that, I’m going to repeat the question. The question is it appears the allowance
for impairment loss could have a debit balance at certain times. Is this true? If so, do we call this an intangible asset? Kerri Piekarski: No. It shouldn’t have a debit balance, because you should never bring the value up more than your original cost. I
don’t think we had that example.. Carolyn Penaluna: That’s why it’s actually showing the allowance for loan losses and not the allowance for the impairment loss. So it’s still a loan. Kerri Piekarski:
The first time that we make the accounting entry is to transfer it to an OREO account. Kathryn Baxter: Now, let me jump over to Carolyn. Carolyn, the credit union wants to know Question 27. They want to know do they always have to keep the corporate
credit card in the vault? Carolyn Penaluna: No, they do not always have to keep it in the vault; that’s when it’s infrequently used it needs to be locked away somewhere. If you have officials who are purchasing supplies or whatever frequently, they may carry the card with them.
Kathryn Baxter: Let’s stay on the topic of the corporate credit card. Question 33: Apparently, the credit union said they’re not being provided receipts for the corporate credit card expenses, so really what should they do? Carolyn Penaluna: There are a couple of
things. They should have policies and procedures which require it. They should be able to go to a supervisory authority in their credit union and explain the fact that somebody is not providing them the receipts and let them handle it. The other thing that they could do is they could also contact the credit card processor to see
if they could obtain the credit card receipt, not the merchant receipt, and then from there they could actually try and contact the merchant to see if the merchant has a copy of the receipt. It would be very rare, I think, for the merchant to provide a copy of
the actual receipt, though. Kathryn Baxter: Let’s bounce back to Mary. I’m sorry, Mary, just a second. Let me stay with Carolyn one more time and then I’m going to come to you. Carolyn, here’s a question with regard to an
audit. It’s Question 94. The credit union wants to know, and please answer this question as specifically as you can, they said can a person who has more than 10 years’ credit union experience perform an audit? Carolyn Penaluna: It would definitely depend on what the type of experience was and who they were performing
the audit for. If someone had more than 10 years of experience as a teller, I don’t think that would qualify for doing an audit. They certainly wouldn’t be able to do the audit for the credit union that they work at. None of the employees would be able to do the audit for the credit union they work at, unless they are
the internal auditor. If they were a CFO at a credit union and had 10 years of experience at that and they wanted to help out another credit union and do the supervisory committee audit for them, I think that would be appropriate. You’d have to look at what their background and skills and knowledge are before I
would consider that. Kathryn Baxter: Very good, okay. Mary, I’m going back to you. Stand by, Kerri, you’re going to get some more. Mary, Question 76. This is an excellent question with regard to negative shares and they being reported on the 5300 report. The question is how would the
negative share accounts be reported on the 5300 as loans? Mary Gay: Remember, we’re going to adjust the unsecured loan balance by the amount that is negative share balance at the end of the period. I’ll give you an example. This may help the questioner. At
the end of the period when we’ve brought our share trial balance, we observe that there was $100 in negative share account balances. What we’ll do is, we will add $100 to loans on the unsecured loan line on Page
2, and we’d also add $100 to the balance of our shares on Page 3. That is how we would report it on the Call Report. We’d also change the number. In my example, there was $100
negative and let’s just say it was one account. We’d add one to the number of unsecured loans and we’d add $100 to the balance of unsecured loans. On Page 3 where we’re reporting our deposits, we would
deduct one from the number of shares and add $100 to the balance of shares. That would be the entries that we would make for our Call Report to balance. Kathryn Baxter: Okay, very good. Mary Gay: Can I add one thing to that, because sometimes this is confusing.
Kathryn Baxter: Please do, yes. Mary Gay: I hope the example made sense to the questioner. I also want to say this. These are Call Report entries that I’m talking about. I am not suggesting that credit unions should adjust their general ledger at the end of the period to accommodate these Call Report entries that I just
described. If anyone is listening, this isn’t a suggestion that you do anything to your general ledger. Your financials are okay to report exactly as they are. In this case, the negative shares would be reflected in your deposit balances. That’s okay, but for Call Report purposes we
need to make these adjustments. Kathryn Baxter: Mary, I have another question for you. This is Question 77. This is in regard to prepaids. The credit union wants to know if prepaids need to be approved at board meetings? Mary Gay: Remember, a prepaid
asset is an expense paid in advance and, of course, credit unions always have their expenses approved by the board of directors. Whether it be at the beginning of the year when we approve the budget, by definition we approve expenses that will be incurred throughout the year. In some
of my small credit unions, we still see all expenses being brought to the board on a monthly basis and we get the approval that way. Since a prepaid asset is simply an expense paid in advance, I’m going to assume that they have been approved by the board of directors. Now, if the
questioner was specifically asking if I want to purchase – and my example in the presentation was insurance – if the questioner is asking do I need to go to the board to get the purchase of an insurance policy approved, then I believe that I’ve answered it by answering the more general question
of how do expenses get approved. If that’s not the questioner’s true question, they might want to weigh in again so that I can try this again. I think that answers that question. Kathryn Baxter: Yes, it was very in-depth as a matter of fact. I’m going to bounce away, Mary,
and I’m going to hit Kerri with a nice tough question. This is Question 80. There seems to be some confusion on the credit union’s part with the difference between the ALLL account and the allowance for impairment. They want to know where on the balance sheet does the
impairment loss sit? Kerri Piekarski: That’s a good question. It should sit on the asset side. It’s basically a valuation account that would go against the asset acquired in liquidation account. Then on the Call Report, you would report the net of the two
accounts. Kathryn Baxter: Fantastic. Let’s jump to Carolyn quickly, because we’re running out of time. Are you there, Carolyn? Carolyn Penaluna: I’m here. Kathryn Baxter: Question 88; take a look at Question 88. The credit union is talking
about employee account reviews. They want to know what are the critical areas that they should review, for example overdrafts, transfers, backdating and fee refunds. You mentioned quite a few, but they want to know very critical areas they should look at. Carolyn Penaluna: I would definitely say if you’re
looking at the account and you see frequent overdrafts, that would be one thing. It would just be telling you one, that they have some financial distress. Transfers, I would always be looking for transfers if they’re going into another person’s account. Sometimes the transfer is just between their own savings account into their own share draft
account and that’s okay. I would be more concerned about the transfers between their account and a different member account number, because not only would that possibly be between family members, it could possibly be between a dormant account or a reactivated dormant account. Backdating I would always be concerned, because like we said those
should be very rare, so why would they need to backdate anything? Fee refunds, unless I saw it real frequently I would not be as concerned, but it would depend on what would be the situation and what information do they have on it. Again, on the finance side it’s a sign of financial distress and would probably have me also maybe pulling
some of what we might call their transaction history, an employee’s transaction history like the teller work or whatever, just to kind of see what kind of work that they are doing. If you happen to see that they’re doing a lot of change of addresses, having to put in override codes for a lot of dormant accounts, that would
have me possibly digging really deeper into that type of activity. Kathryn Baxter: I think I’m going to be able to give the last question to Mary. Kerri is so happy that I’m not asking her anymore questions. This is a question that’s reoccurred a
couple of times, Mary. Off of the top of your head, Questions 121 and 122, can you cite the regulation for the 45-day charge-off rule for negative shares? Mary Gay: I can’t do it off the top of my head, but I’ve got it in my notes. Carolyn can recite it
for you. Kathryn Baxter: Carolyn can, great. Go Carolyn. Carolyn Penaluna: 701.21. Kathryn Baxter: Do that one more time, Carolyn. Carolyn Penaluna: 701.21. Kathryn Baxter: Well, I think we are fresh out of time. We still have a ton of questions.
These questions will be answered and they will be placed online when we archive this webcast. We are keeping the console open so that people can finish their quiz. You should be able to print your certificate if you’ve answered 9 out of 12 quiz questions correctly; you’ve
been on the call for 45 minutes; and you’ve answered 3 out of the 4 poll questions. If you haven’t done any of that or if you have multiple people on the computer listening and trying to take the quiz, you’re going to have an issue. But, we will see you all next
month. For my NCUA crew here, we thank Franz and Curtis of OCIO and my buddy, Dominic Carullo, who is a wonderful host; Kerri, Mary and Carolyn. I’m Kathryn Baxter. Thank you, we’ll see you
next month for our next webcast. Have a wonderful day and a fantastic week!

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