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Accounting Due Diligence

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					Evaluating Third Party
    Relationships

      Richard Handrick
    Supervisory Examiner
         Region IV
           What Will We Cover?

o   Letter to Credit Unions 07-CU-13 &
    Enclosure - Supervisory Letter 07-01

o   Elements of An Effective Program

o   Questions

                                           2
           Vendor Relationships
o   Credit Unions Utilize Vendors for
    •   Lending Services (Centrix, Zopa, CUSOs,
        CUDL)
    •   Regulatory Compliance (BSA & OFAC)
        (Bridger)
    •   Electronic Services (Data Processing, Internet
        Banking, Bill Pay, Credit Card) (DI, PSCU,
        Checkfree)
    •   Asset Liability Management (c.Myers,
        Corporates)                                      3
       Elements of An Effective
              Program
o   Risk Assessment and Planning

o   Effective Due Diligence Review

o   Measuring, Monitoring, and Controlling Risk



                                                  4
        First Element of an Effective
                  Program
o   Planning and Risk Assessment
    •    Expectations for Outsourced Functions
    •    Criticality of Relationship
    •    Staff Expertise
    •    Cost-Benefit Relationship
    •    Insurance Coverage
    •    Impact on Membership
    •    Exit Strategy
                                                 5
        First Element of an Effective
                  Program
o   Planning and Risk Assessment
    •    Does the credit union’s plan include measurable
         and achievable goals?
    •    Do the credit union’s financial projections
         address a range of outcomes?
    •    Do the financial projections fit into the overall
         strategic and ALM framework?


                                                             6
    Second Element of an Effective
              Program
o   Due Diligence Consideration
    •   Background Checks
    •   Business Model
    •   Cash Flows
    •   Financial Condition
    •   Contract and Legal
    •   Accounting


                                     7
            Due Diligence
          Background Checks
o   Consider the Vendor’s Past Experience
o   Request References from Other Clients
o   Review Past Legal Concerns, if Applicable
o   Ensure Licenses and Certifications are In
    Place and Current
o   Secure References from Other Sources


                                                8
             Due Diligence
             Business Model
o   Vendor’s Business Plan
o   Credit Union and Vendor Responsibilities
o   Conflicts of Interest Between Vendor and
    Credit Union
o   Vendor Third Party Relationships



                                               9
               Due Diligence
                Cash Flow
o   Cash Flow
    •   Understand Cash Flow Process (Member to
        Vendor to Credit Union)
    •   Reporting Mechanism
    •   Annual Audit Tests




                                                  10
             Due Diligence
    Financial/Operational Condition
o   Ability to Fulfill Contract Commitment
o   Audited Financials, if Available
o   Information from Other Financial Sources
o   Requirements for Independent Audits, Other
    Reviews in Contract



                                                 11
             Due Diligence
             Contract/Legal
o   Address all Required Areas
o   Legal Opinion from Attorney with
    Appropriate Expertise and Independence
o   Compliance with State and Federal laws




                                             12
                Due Diligence
                 Accounting
o   Accounting
    •   Adequate Accounting Infrastructure
    •   Compliant with Generally Accepted Accounting
        Principals
    •   CPA Guidance




                                                       13
        Third Element of an Effective
                  Program
o   Measuring, Monitoring, Controlling Risk
    •    Policies and Procedures
            Limit Vendor Activities and Risk
            Establish Program Limits
            List of Approved Parties
            Staff Responsibilities
            Program Oversight
            Reports/Reports to Management


                                                14
          Measuring, Monitoring,
            Controlling Risk
o   Monitoring
    •   Timely Reports
    •   Contain Sufficient Information
    •   Provided to Management/BOD
    •   Annual Audit Tests Accuracy
    •   Infrastructure to Monitor Performance
    •   Assign Oversight to Appropriate Staff


                                                15
         Measuring, Monitoring,
           Controlling Risk
o   Controls
    •   Member Data Communicated and Stored in
        Secure Manner
    •   Measure Compliance with Contract
    •   Quality Control Procedures
    •   Evaluation of Program



                                                 16
                Summary
         3rd Party Relationships
o   Outsourcing Increases Risk
o   Officials Responsible for Sound Operations,
    Safeguard Assets and Member Information
o   Sound Risk Management, Planning, Due
    Diligence, Measurement, Monitoring, and
    Control


                                                  17
Questions




            18

				
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