our financial institution practice - saltmarsh cpa
TRANSCRIPT
9/17/2015
1
PaulS.Allen,CPA,CGMA,ShareholderSaltmarsh,Cleaveland&Gund
BankExecutiveForum:AccountingUpdateSeptember25,2015
MajorAccountingProposalsUpdateOverviewofCOSORevisionand
FraudConsiderations
Since1944,Saltmarshhasbeenprovidingauditing,tax,andconsultingservicestoawiderangeoffinancialinstitutions.Ourstaffhaveworkedwithhundredsoffinancialinstitutionsoverourhistory,andcurrentlyserveover120financialinstitutions,ranginginsizefrom$20milliontoover$3billionintotalassets.
Servicestofinancialinstitutionsinclude: ExternalAuditandTax InternalAudit,includingLoanandDepositOps,FinancialReporting,CallReportReview,HR,Trust,InvestmentSecurities,IRR/ALM,LiquidityandALLLMethodology
Compliance ISReviews,includingPenetrationandVulnerabilityTesting LoanReview
OurFinancialInstitutionPractice
9/17/2015
2
DiscussionTopics
• BankingQuickUpdate• AccountingandReportingIssues:
• RevenueRecognitionStandard• Leasesproject• CECL(ExpectedversusIncurredLoss)
• COSOFrameworkRevision• FraudConsiderationsUpdate• CirclingbacktoEnterpriseRiskManagement(ERM)
• ProfitsReturn,ProblemLoansDecrease,NIMstabilize,consumerdelinquenciesandlossesverylow….what’snottolike?– Loandemandslow– Banksturningtoriskierloantypes,ordrivingCREConcentrationshigher
– Questionablewhethercostoffundscangolowerorstayaslowastheyare,pressuringNIM
– Nonbankmarketentrants(Apple?)
BankIndustryUpdate
9/17/2015
3
RevenueRecognition• RevenueRecognitionTopic606
– Arguablylessimpactoncommunitybanksthanmanyotherindustriesorlargebanks,butmayimpactrecordingsalesofrealestate,suchasREOsaleswheretheBankfinancesthesale(FAQ,oldFAS66downpaymentguidelinesstilluseful?)
– Manytypicalnoninterestincomeitemsscopedout– Questionsremainonapplicationonbundledservicesthatmixaservicefeeplusascopedoutfee
– EffectivedateWASin2016forpublic,and2017fornonpublic;nowproposedtodeferoneyear(periodsbeginningafter12/15/2017public,after12/15/18fornonpublic);earlyapplicationnotbefore12/15/16
MajorImpacts
TotheBank:
• Mayhavetocarefullyconsiderthetimingofrevenuerecognitiononbundledproducts
• Mayhavetodeferincomerecognitiononproductsthathavetraditionallyhitthebottomlineimmediately
• Morecomplicatedaccounting
ToYourCustomers:
• Expectmuchmoreofanimpacttomanufacturingorcontractors
• Maycausea(temporary)dropinincome,asrevenuerecognitiongetsdelayed
• Maycauseanincreaseinoperationalexpenses,foraddedcomplexityinaccounting
9/17/2015
4
LeasesProject• Status‐ Finalstagesofreviewandapproval,estimatedcompletionQ4of2015;ASUTopic842–revisionof2010ASUTopic840
• UndertheproposalsinthisED,alesseewouldreportassetsandliabilitiesforallleasesofmorethan12monthsonitsbalancesheet
• Doesnotapplytoleasesofintangibleassets,explorationoruseofnaturalresources,biological/timberassets,orserviceconcessionarrangements
• Canexcludeshortterm(12monthsorless)leases
•Keybalancesheetmetrics‐principally,increaseinassets‐maychange•Changestoleaserevenueandexpensesmayaffectotherkeymetrics,suchasearningsbeforeinterest,taxes,depreciationandamortization(EBITDA);lessorsmayhavetodefergainonsale•Debtcovenantsandborrowingcapacitymaybeaffected•Decisionsofwhethertoleaseorbuysignificantassetsmaybeaffected•PossibleimpactonCallReport/CapitalRatios(lowerleverageratio)•ImpactontheCreditdepartmentandhowitwillimpactlendingdecisions
Leases‐LikelyImpacts
9/17/2015
5
• Overview:newFASBpronouncementexpected,whichwillrevisittheissueofhowtocalculatetheAllowanceforLoanLoss,shiftingfromthehistorical“incurredlosses”basistothe“expectedlossesoverthelifeoftheloan”basis
• HasnotyetbeenissuedbyFASB,earliestlikelyissuancewouldbemid‐to‐late4th quarterof2015,probablyahealthytransitionperiod,likelyearliestforpubliccompaniesin2018,nonpublicin2019
• ExpectedimpactwouldbetorequirehigherlevelsofALLL,perhapsfrom1.5%currentaverageto2.00%average
• Willrequirealotmoredatagatheringandanalysis;significantimpacttothe“FAS5”reserve,notsomuchtothe“FAS114”reserve
CECLProposal
• Recognizeanallowanceforexpectedcreditlossesonfinancialassets– ExpectedCreditLossisdefinedas:
• “Anestimateofallcontractualcashflowsnotexpectedtobecollectedfromarecognizedfinancialasset(orgroupoffinancialassets)orcommitmenttoextendcredit.”
– Considersmoreforward‐lookinginformationthanispermittedundercurrentU.S.GAAP
• Basedonrelevantinformationaboutpastevents,currentconditions,andreasonableandsupportableforecasts thataffecttheexpectedcollectibilityofthefinancialassets’remainingcontractualcashflows
• Includesquantitativeandqualitativefactorsspecifictoborrowersandtheeconomicenvironmentinwhichtheentityoperates.Inadditiontoevaluatingtheborrowers’currentcreditworthiness,theassessmentincludesanevaluationoftheforecasteddirectionoftheeconomiccycle
– Theprobablethresholdandtheincurredlossnotionareremoved
10
9/17/2015
6
11
•
–
–
–
–
–
–
–
–
12
9/17/2015
7
• Noearlyincorporationof“expectedloss”conceptsor“softadoption”
• NoartificialinflationofALLLtosmoothimpact• Don’twaittoprepare• Don’toverloadatadoption
– No“cookiejar”reserves
13
• Updateofthe1992COSOFramework,the“2013Revision”
• COSO:CommitteeofSponsoringOrganizations(AmericanAccountingAssociation‐AAA,AICPA,FinancialExecutivesInternational‐FEI,InstituteofManagementAccountants‐IMA,InstituteofInternalAuditors‐IIA
• Moreofanupdateoftermsandatweak,thanamajorrevision
COSOFrameworkUpdate
9/17/2015
8
• Threeobjectives– Effectivenessandefficienciesofoperations– Reliabilityofreporting– Compliancewithlawsandregulations
• Fivecomponents– ControlEnvironment– RiskAssessment– ControlActivities– InformationandCommunication– MonitoringActivities
Whatwasretainedfrom1992
• Createsamoreformalstructure,establishes17Principals,organizedunderthe5components,andprovidespointsoffocusforeachprinciple
• Addsandrefreshesguidancewithineachofthe5components
• Includesguidancerequiringenhancedriskassessment,inclusionoffraudrisk,andconsiderationofERM
Whatwasaddedin2013
9/17/2015
9
• Muchmorerobustriskassessmentprocess,“enhancedriskassessment”,moredynamic,deeperdiveintooperationalrisk;introduces“velocity”and“persistence”ofriskinadditiontoimpactandlikelihood
• Formalrequirementtoconsiderfraudriskasintegralelementofcomprehensiveriskassessment
• Considerationofoutsourcedserviceproviders(12of17principlesrelatetoOSP)
ImpacttoCommunityBanks
Excerpted Slides from the 2014 Global Fraud Study, to focus on the United States, and, where possible, the Banking Industry.
9/17/2015
10
Industry of Victim Organization
19
We’re number one…
Initial Detection of Occupational Frauds
20
Note importance of Tips as method of detection…value of audit discussion and inquiry of employees at various levels
9/17/2015
11
Source of Tips
21
Note: Tips most common source of detection, majority from employees…so – do we encourage communication from our employees?
Effectiveness of Controls
22
Can we afford NOT to have these controls in place and working?
9/17/2015
12
Control Weaknesses That Contributed to Fraud
23
Behavioral Red Flags Displayed by Perpetrators
24
Trust your judgment…top four red flags are what you’d think
9/17/2015
13
WhatisEnterpriseRiskManagement(ERM)?
Aprocessthatenablesmanagementtoeffectivelydealwithuncertaintyandassociatedriskandopportunity,enhancingthecapacitytobuildshareholdervalue,byconsideringtheinteractionofallriskstheentityfaces.
ERMQuestionHowmuchriskarewewillingtoacceptacross
theentireBank?RiskAppetiteDefinition:Theamountofriskabankiswillingtoacceptinpursuitofvalue.Itreflectsthebank’sriskmanagementphilosophyandinfluencesthecultureandoperatingstyle.Riskappetiteassists(thebank)inaligningthebank,people,andprocessesincreatingtheinfrastructurenecessarytoeffectivelyrespondtoandmonitorrisk.
9/17/2015
14
Typesofbankingrisk(weknowthese)
• CreditRisk• InterestRateandLiquidityRisk• RegulatoryRisk(compliance)• OperationalandTransactional• LegalRisk• TechnologyRisk• ReputationalRisk• MarketRisk
RecentFinancialCrisisWhatwentwrong?
InternalForces‐growth&profitabilityvs.riskOverlookingcontrolstomitigaterisk
ConcentrationsExternalForces‐competitionovertook
underwritingstandardsPropertyValueExpectations
ComplexityinFinancialInstruments
9/17/2015
15
• Top5EnterpriseRiskstoWatchfor:– Cybersecurity– Businessinterruptionandsupplychain– Talentmanagement– Crisisresponse– Compliancewithnewregulations
• 2014wasyearof“emergingrisks”– Cyberattacks;Ebola;InstabilityinEasternEurope;ISISandheightenedterrorismrisk
Re:RA‐ 2015RisksperIIA(RichardChambers,President‐ IAA2015Update)
Questions?
Paul S. Allen, CPASaltmarsh, Cleaveland & Gund
Phone 1-800-477-7458, ext 1401Email:
9/17/2015
16
Bill MasseyAlex Hager
Lee Bell Kristen Stogniew
Paul Allen
Denice Miller
Stephen Reyes
Nathan Botts