CREDIT UNION AUDIT RULES REFLECT NEW LOW IN REGULATORY REQUIREMENTSOn December 31, 1996, new rules went into effect that permit audits of Federally insured credit unions to be performed by unlicensed, unregulated persons. The rules are established by the National Credit Union Administration (NCUA) and relate to audit and verification requirements of the Federal Credit Union Act, which state that a supervisory committee audit is required at least once every calendar year.

Promulgation of the new rules was motivated by deficiencies noted by NCUA in the supervisory committee audits it had been receiving. Such audits were often performed by unlicensed persons (members of the credit union's supervisory committee) on a volunteer basis or by an internal auditor. The new rules, in effect, selectively borrow and steal from portions of generally accepted auditing standards in order to improve the quality of audits, while at the same time permitting the performance of such audits by unlicensed persons. The extent of the borrowed procedures varies depending on whether the auditor is compensated.

For example, the new rules establish "Standards for Performing Supervisory Committee Audits" that are applicable for all audits under the rules as follows:

a) The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor commensurate with the level of sophistication and complexity of the credit union under audit.

b) Reasonable care is to be exercised in the performance of the audit and the preparation of the report.

c) The work is to be adequately planned and assistants, if any, are to be properly supervised.

d) The person or persons performing the audit must attain a sufficient understanding of the internal control structure to plan the audit and to determine the nature, timing, and extent of tests to be performed.

e) The person or persons performing the audit must, through inspection, observation, inquiry, and confirmation obtain sufficient evidence to afford a reasonable basis for the financial statement elements, accounts, or items under audit.

The rules go on to set the scope of the audit--which includes such things as "assessing the level of control risk"--and additional procedures if the audit is performed by an unlicensed person on a compensated basis. An "opinion audit" performed by an independent, licensed, certified public accountant satisfies the full requirements of the new rules.

The NCUA has written the rules in an attempt to keep the costs of the audits, especially to smaller credit units, from substantially increasing. The AICPA in objecting to the new rules has proposed other solutions, such as agreed-upon procedures, to satisfy the requirements within a reasonable cost framework. But the NCUA is determined not to regulate out non-CPAs from doing this type of work.

The AICPA, in its information release on the subject, points out that most states prohibit nonlicensed accountants from performing audits of financial statements and suggests nonlicensed persons doing audits under these new rules may be inappropriately practicing public accounting, which should be reported to state regulators.

The most alarming aspect of the issue is that the NCUA has such little understanding of the judgment and skills that enter into a GAAS audit that it thinks it can selectively pick and choose standards and procedures and then expect an unlicensed person to be able to perform under them.

It is incumbent upon the AICPA to be more aggressive in dealing with the NCUA on this issue. Surely there are other ways for the NCUA to accomplish its objectives rather than to begin establishing its own auditing standards. The GAO, in developing the "yellow book" standards, uses AICPA GAAS as the starting point and builds on them. What the NCUA is doing certainly flies in the face of the savings-and-loan crisis and the very essence of licensing professionals to protect the public interest. *