Credit Unions in Ireland
Author:
Kevin Morris
[Fulltext] The country's Credit Unions are obliged to prepare their financial statements to year-end 30 September annually. In this context the time is approaching for all auditors to commence preparation of the audit-planning memoranda for use on their audit of financial statements for the year ending 30 September 2000. The author, Kevin Morris FCA, being directly engaged in the audit of a significant number of credit unions sets down some fundamental markers which may be of interest to Chartered Accountants
Economic Factors
The continuing trend of buoyant economic performance has contributed to the increased demand for credit from all our financial institutions. We are all very much aware at this stage, that like other financial institutions, the growth levels in both savings and lending has been very significant within the Credit Union movement over the last five years. The increased savings and loan limits introduced by the Credit Union Act 1997 have further fuelled this increase. As a result, credit unions are now being asked to handle larger individual transactions, be it of a savings or lending nature. In the majority of community based cases the administrative framework of the Credit Union, comprising a voluntary Board of Directors and a mix of both paid and voluntary staff, has not been strengthened to match these larger levels of business. The auditor must consider this factor in the planning of the audit approach and some specific areas to be considered will include:
· Level of expertise at board level in assessment of investment opportunities for members' savings
· Level of expertise at board level in assessment of loan applications, more of which are being processed for small business investment, non-residential property, and listed shares investment
· Level of expertise in assessment of revised interest rates in the light of perceived pressure from other financial institutions. Expertise is particularly required in the preparation of sensitivity analysis of the effect of changes in savings interest rates, which will occur as an automatic fallout from lending interest rate adjustments.
The audit plan must be adapted to allow the auditor to assess the controls established within each Credit Union to reflect the changed environment in each of the above areas. Sectoral lending reports and assessment questionnaires must be designed and produced by the management of each Credit Union and requested in advance of the year-end reporting deadlines.
Interim Audit
Each registered Credit Union must hold an Annual General Meeting before 31 January 2001, which leaves a four-month reporting interval at year-end. In many cases, there is a preference at board level to hold the AGM prior to the Christmas break. This, combined with the requirement to send each member a copy of the printed audited financial statements with the statutory notice of the AGM, can lead to pressure in meeting audit sign-off deadlines. These practical difficulties should leave the auditor in no doubt that interim audit work has to be undertaken preferably at the six monthly stage of the financial year. Past experiences have shown that certain fundamental audit procedures are best undertaken at interim audit stage, e.g.:
· Sample curcularisation of members for confirmation of savings and loan balances
· System testing of loan application procedures
· Review of internal work undertaken by the Supervisory Committee
· Analytical review of six-month management accounts
Under section 60 ( c ) of the Credit Union Act 1997 the Supervisory Committee is required to make a comparison as between the credit union records and the members' records, of a sample of at least 10% of members' balances on an annual basis. This is a valuable internal audit function and should be carefully reviewed by auditors at inerim audit stage. In cases where the Supervisory Committee has not undertaken this work, the auditor should insist that it be undertaken prior to the financial year-end.
All Credit Unions are obliged to prepare a schedule of loan arrears as set out under Resolution No 11 of 1987. The interim audit provides an opportunity for a detailed assessment of the calculations of these arrears reports which, if incorrectly calculated, can have a material effect on the reported surplus for the year.
Business Plan
The economic position of the Credit Union movement has changed radically in recent years. Like all medium-sized businesses, it is imperative that management prepare a business plan. The time is now opportune for all credit unions that have not yet undertaken preparation of a business plan to do so. This is particularly important in the light of the significant changes occurring with the Credit Union movement both from a regulatory and operating framework. Consideration of matters including employment of staff, levels of expertise required, the suitability of premises, and e-commerce developments are now very relevant. Strategic planning, and in particular a medium-term business plan, should be prepared to consider at a minimum each of the above matters. The preparation of projected financial and cashflow reports is fundamental to any business plan and, given the changing environment vis-Ã -vis interest rates and loan limits, it is now a fundamental requirement for any Credit Union to have a well-prepared business plan.
The business plan will give the board of directors a form of direction in this time of change. The plan will be an integral part of audit procedures in the area of the going concern review.
Internal Controls
In the light of the recent growth in almost every Credit Union it is important that internal controls be reviewed for their continued adequacy. This review should be undertaken by all Credit Unions as part and parcel of the business plan as referred to above and, in the opinion of the author, it may require input from the auditors to each Credit Union. This is particularly relevant in the light of the requirement under Section 122 (1) (b) of the Credit Union 1997 which requires that the auditor report on any material defects in the systems of control to the Registrar, in writing. This is a section which, at the time of writing, is under discussion and may shortly require further clarification from the Registrar.
Ilcutech Deposit
A significant number of Credit Unions have signed up for inclusion in the centralised computer project named Ilcutech. Deposits of amounts representing £10-£20 per member have in some instances been paid to date and treated in the financial statements as deposits on account or alternatively capitalised as fixed assets. No delivery date has yet been agreed by Ilcutech and no timetable agreed for implementation of systems. In the light of the ongoing uncertainty concerning the implementation of the system or confirmation of the ultimate final costs to individual credit unions, the treatment of this expenditure in financial statements prepared to 30 September 2000 requires particular attention and should be discussed with directors before any final decisions are reached concerning dividend policy or interest rebate policy.
Summary
The Credit Union movement has moved to a new level in recent years. The organisation within each Credit Union now requires review and, in certain cases, radical upgrading. The internal controls and level of expertise in management require constant upgrading. These factors must be considered by auditors in the preparation and implementation of the audit plan.
Accountancy Ireland Vol 32 No 4 August 2000