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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
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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
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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
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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
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• 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
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• Noearlyincorporationof“expectedloss”conceptsor“softadoption”
• NoartificialinflationofALLLtosmoothimpact• Don’twaittoprepare• Don’toverloadatadoption
– No“cookiejar”reserves
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• Updateofthe1992COSOFramework,the“2013Revision”
• COSO:CommitteeofSponsoringOrganizations(AmericanAccountingAssociation‐AAA,AICPA,FinancialExecutivesInternational‐FEI,InstituteofManagementAccountants‐IMA,InstituteofInternalAuditors‐IIA
• Moreofanupdateoftermsandatweak,thanamajorrevision
COSOFrameworkUpdate
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• Threeobjectives– Effectivenessandefficienciesofoperations– Reliabilityofreporting– Compliancewithlawsandregulations
• Fivecomponents– ControlEnvironment– RiskAssessment– ControlActivities– InformationandCommunication– MonitoringActivities
Whatwasretainedfrom1992
• Createsamoreformalstructure,establishes17Principals,organizedunderthe5components,andprovidespointsoffocusforeachprinciple
• Addsandrefreshesguidancewithineachofthe5components
• Includesguidancerequiringenhancedriskassessment,inclusionoffraudrisk,andconsiderationofERM
Whatwasaddedin2013
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• 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.
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Industry of Victim Organization
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We’re number one…
Initial Detection of Occupational Frauds
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Note importance of Tips as method of detection…value of audit discussion and inquiry of employees at various levels
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Source of Tips
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Note: Tips most common source of detection, majority from employees…so – do we encourage communication from our employees?
Effectiveness of Controls
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Can we afford NOT to have these controls in place and working?
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Control Weaknesses That Contributed to Fraud
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Behavioral Red Flags Displayed by Perpetrators
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Trust your judgment…top four red flags are what you’d think
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WhatisEnterpriseRiskManagement(ERM)?
Aprocessthatenablesmanagementtoeffectivelydealwithuncertaintyandassociatedriskandopportunity,enhancingthecapacitytobuildshareholdervalue,byconsideringtheinteractionofallriskstheentityfaces.
ERMQuestionHowmuchriskarewewillingtoacceptacross
theentireBank?RiskAppetiteDefinition:Theamountofriskabankiswillingtoacceptinpursuitofvalue.Itreflectsthebank’sriskmanagementphilosophyandinfluencesthecultureandoperatingstyle.Riskappetiteassists(thebank)inaligningthebank,people,andprocessesincreatingtheinfrastructurenecessarytoeffectivelyrespondtoandmonitorrisk.
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Typesofbankingrisk(weknowthese)
• CreditRisk• InterestRateandLiquidityRisk• RegulatoryRisk(compliance)• OperationalandTransactional• LegalRisk• TechnologyRisk• ReputationalRisk• MarketRisk
RecentFinancialCrisisWhatwentwrong?
InternalForces‐growth&profitabilityvs.riskOverlookingcontrolstomitigaterisk
ConcentrationsExternalForces‐competitionovertook
underwritingstandardsPropertyValueExpectations
ComplexityinFinancialInstruments
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• 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:
[email protected]
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Bill MasseyAlex Hager
Lee Bell Kristen Stogniew
Paul Allen
Denice Miller
Stephen Reyes
Nathan Botts