By Ray Birch
ARLINGTON, Va.—The role of the supervisory committee is receiving less emphasis at credit unions today, and that could not be happening at a worse time, contends one audit and legal expert.
The reason: the risks to credit unions are at their highest levels, according to David Reed, partner at Reed & Jolly, PLLC.
“I think what's going on, from my perspective, is we have a situation where many credit unions have drifted away of an appreciation of what the supervisory committee does, and some supervisory committees have lost track of what their true purpose is,” said David Reed, who consults with credit unions on board and supervisory committee training. “This shift is happening when change is occurring in the industry at its fastest pace ever. There has been more change in financial services in the last five years than possibly the previous 30.”
Reed said he is concerned over a number or risks, but in particular those related to digital services and fraud. It’s a scenario he described as “daunting.”
“As your management team puts in controls and protocols to manage risk, the supervisory committee comes in with its flashlight to make sure policies set by the board are being followed and processes are in place to guard against conflict of interest and fraud. It looks in those dark corners that the board does not,” said the former supervisory committee member.
Can’t Be Box-Checkers
Reed said what he is now seeing more often is some supervisory committees just doing the same thing every year and checking the box.
“They say ‘OK, we’ve got to do an audit. We're going to do member verification, and that's it’,” he explained. “Some boards of directors don't know that the supervisory committee can be a really strong asset, meaning if they are unsure of something, if they think something doesn't smell right, they can turn to the supervisory committee. But for some reason, I am not seeing as much of that today.”
Instead, Reed said what he is seeing is an increasing level of discomfort and anxiety—even animus—between staff and the supervisory committee, sometimes between the board and the supervisory committee.
“I think that's putting credit unions in a precarious situation,” stated Reed.
David Reed
Some Recommendations
Reed offered some recommendations to connecting the board with the supervisory committee.
“One time each year just get the board and the supervisory committee together, the whole group, and do a quick recap of what (the supervisory) committee did this past year,” said Reed. “The committee should state what their goals were, what they did during the year, how they communicated with the board and ask if the board liked that…Maybe bring management in, too. Ask if they thought the committee overstepped its boundaries. Did they place management in an awkward position, did they come in at the end of the month and pull people off task? Do something as simple as that and it is going to provide more balance to the system.”
Given the increasingly complex and fast pace of financial services, the need for a strong supervisory committee has never been greater, said Reed, pointing out digital crimes are not only harder to detect, they can quickly victimize a credit union.
“With all the products and services that we're offering virtually, with all of our people connecting virtually, with us allowing all these different access points virtually, that increases risk,” stressed Reed.
Another Issue to Watch
Meanwhile, Reed said there is another issue that needs to be at the top of the list for supervisory committees—fees, which have become a new focus by the CFPB and also the source of class-action lawsuits, particularly around overdraft fees, Reed stated.
“The CFPB is very active now. They are looking at different products and services that have been in place for years that financial institutions have relied on for revenue for years, and they’re saying, ‘We don’t like this anymore’,” explained Reed. “NCUA, of course, follows the course of the CFPB, which leads us to our next risk, which is litigation.”
To avoid being targeted by class-action lawsuits, Reed said policies and procedures need to be followed even more closely in the new environment, with the supervisory committee key in making sure those policies are enforced.
Lighting the Dark Corners
Reed reiterated that that supervisory committee is the board’s “flashlight.”
“As I said, they can look into those dark corners where the board cannot,” he said. “I'm a certified fraud examiner, which means I'm a bit naturally suspicious. Whenever I read a story in publications like CUToday or the local newspaper regarding internal fraud, I always look at it and think, how could that have been prevented? What was the key point of compromise? Did somebody just get too comfortable with that payroll manager…In the vast majority of those situations I think to myself that a more active supervisory committee could have helped.
“I think credit union management teams have been doing very good jobs, and I think the supervisory committees are very committed,” continued Reed. “But I see an opportunity for us to focus a little bit more on training the supervisory committee and finding ways to foster greater collaboration with the supervisory committee. I think this is the time for that to happen.”