Solutions for ineffective Supervisory Committees

Someone once said “the first step is always admitting you have a problem.” When it comes to ineffective supervisory committees, the credit union space definitely has a problem.

Heather Anderson, co-founder, OmniChannel Communications, Inc., aptly pointed it out in her July 21, 2016 blog post, Fraud Killed Almost All Failed CUs in Q2. Heather also correctly points out that for the most part, it’s a smaller credit union problem.

We see the headlines, and while I’m not keeping track of the year-over-year change of reported credit union fraud, the number seems to be a lot higher these days. It’s mind-boggling to consider how long some of these internal fraud schemes have gone on. In these cases, especially, I have to ask where the heck the supervisory committee was at these credit unions.

Five common problems we see

As part of the compliance work we do at Your Credit Union Partner, we see many supervisory committee issues. Most fall into the following five areas:

  • Lack of commitment and high turnover. These credit unions never really get a good audit program off the ground, or create any consistency. The people they do train leave not long after the training, and they always seem to be starting over.
  • Ineffective audit scope of work. Their primary audit focus is very limited to cash counts and checking for new member qualifications. It’s what they’ve always looked at, and it has always worked. But they are only scratching the surface.
  • Lack of confidence in what they’re doing. These committees lack experience, training, and probably have committee members who don’t have the right aptitudes for an audit role. They’re afraid to ask questions, and they lack the confidence to articulately defend their work. Because they lack confidence, they get walked over by examiners and they’re also more likely to spend more time with auditors and examiners who are not convinced they know what they’re doing.
  • Lack clarity on what to look for, and why what they’re looking for is important. These are the committees who look at what they were told to, and then check off boxes. I’ve witnessed examples where folks were checking off boxes, and when asked couldn’t tell me why they were checking them off! Scary!
  • Little or no training. These struggling committees receive sporadic training whenever there is a free league or NCUA webinar. It’s usually good training, but it happens so infrequently that much of what was learned is lost and never really influences behavior. Credit unions and supervisory committee members need to take training and their roles seriously. Members who are not willing to invest time in training should probably step down.

It’s in situations like these that fraud occurs. These visible weaknesses become easy pickings for someone (or a group of someone’s) who want to take advantage of the credit union.

A simple but effective solution for smaller credit unions

Unfortunately, this article has a word limit, so I’m not able to include a long list of solutions. But I will offer one best practice that I believe could help scores of smaller credit unions build out stronger supervisory committee teams.

Three years ago, $27.6-million IBEW 76 Federal Credit Union (Tacoma, Wash.) found itself with a completely new supervisory committee – a group of individuals who were committed to doing a good job for the credit union, but didn’t know where to begin. In their search of the most effective and affordable training solution, CEO Sheila Augustine selected a retired credit union veteran to work with the committee. The consultant began with a review of the previous supervisory committee’s scope of work and past issues, and recommended improvements, making sure the review included everything necessary for a robust internal audit. Next, the consultant taught the committee at each of the following internal audits what to review and, most importantly, why they needed to review it. During the course of a year, the consultant worked with the committee, teaching and mentoring through each of the audit functions. The results are fantastic! There has been no turnover on the supervisory committee, the team knows what it’s doing and members are more confident when speaking with examiners. The results are apparent in the squeaky-clean regulatory exams and CPA audits received since the training began. For this credit union, this form of supervisory committee training was the most effective and most affordable.

Why we need to solve the problem

Besides the cost of the fraud itself, these problems cost us in other ways, too. Ineffective supervisory committees have a higher maintenance cost. Consider the time expended to recruit due to high turnover. You’ll also spend more time with auditors and examiners – the good ones can smell weakness a mile away. Don’t throw stones at me, but maybe this is why some examinations last three weeks and require six examiners. I know firsthand the correlation between effective and well-functioning supervisory committees, and cleaner examinations and audits. This effectiveness breeds confidence, and eliminates and reduces fraud.

I believe credit union charters matter. I fight to protect them and the legacy each has created by helping members over a long period of time. I can’t imagine the shame of being a CEO or Board Member responsible for losing a decades-old credit union charter, all because I couldn’t detect and protect against large-scale internal fraud that sunk the ship.

Smaller credit unions have enough challenges facing them; we need to do a better job developing and leveraging our supervisory committees. I realize it isn’t easy, but we really don’t have a choice – our charters depend upon it!