Developing a CECL audit program to satisfy internal and external auditors and justify process

Developing a CECL audit program to satisfy internal and external auditors and justify process

By Matt Clohessy, SVP, Audit Manager, KeyBank

Could you please tell our readers a little bit about yourself, your experience and what your current professional focus is?

I’ve been in an internal audit role at mid-sized banks for the past 10+ years.  I’ve spent time in a wide range of portfolios through my audit career including digital banking, Information Security, depository and lending regulatory compliance, back office operations, accounting operations and wealth management.  My focus over the past few years has primarily been around Allowance for Loan and Lease Losses (ALLL), commercial loan review, commercial lending operations and credit risk governance

What, for you, are the benefits of attending a conference like the CECL Congress and what can attendees expect to learn from your session?

CECL will have direct and indirect impacts to many divisions within organizations; hearing from a wide range of professionals on the requirements and challenges for their respective disciplines at conferences such as CECL Congress helps to provide participants a more holistic view on the needs of their organizational partners.  My session will focus on providing some guiding principles to internal auditors and to provide recommendations for 1st and 2nd line participants insights to the types of expectations they may see from their auditors.

In your opinion, what is one of the best ways to satisfy internal and external auditors?

Getting your auditors involved early and often so that they have ample time to understand management’s intended post-implementation processes and practices and have an opportunity to share their thoughts, concerns and perspectives along the way so that there is time to make adjustments where needed while implementation activities are still being conducted.

What are some of the key challenges financial institutions face in regard to auditing and how can they overcome this?

As CECL is a principles based accounting pronouncement, you can expect to see a wide variety of practices across institutions.  While general auditing principles can be applied to determine if management’s intended post-CECL ALLL practices have well controlled designs, technical interpretations of CECL are still being discussed by the FASB’s Transition Resource Group (TRG), practice guidance is still being discussed by the AICPA’s Depository and Lending Institutions Expert Panel (DIEP) and authoritative guidance from banking regulators has not yet been released.  The lack of prescriptive guidance will require auditors to be more subjective in their assessment over whether the specific practices of a particular institution are reasonable and appropriate.

How could CECL impact the auditing process for financial institutions?

Specific to how internal and external auditors assess the ALLL, the more immediate impacts would be a significant level of involvement to understand and assess the post-CECL implementation operating environment and control structure around new processes.  Potential longer term impacts can occur to the extent that your financial institution is adding additional complexities and subjective measures to your post-CECL ALLL operating environment such as determining macroeconomic forecasts for use in econometric models.  There will be additional focus by auditors on subjective processes to assess the governance structures over how those subjective measures are determined and calibrated over time.

How do you see CECL impacting the financial risk landscape over the next 6-12 months?

As institutions start running preliminary results of their new CECL conforming ALLL models, the need for up front recognition of provision expenses could create downstream impacts to the profitability of certain product offerings.  Potential shifts in product offerings or strategies could create or change certain risks to an institution.  The impacts to capital management and planning could be significant as well depending on how much CECL impacts the ALLL balance that institutions will maintain and whether the existing thresholds that regulators allow for ALLL balances to be accounted for in financial institution capital requirements and stress testing measurements will stay as they are.


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