CUNA Comment Letter

Draft Chapters for AICPA Combined Audit and Accounting Guide

July 2, 2002


Ms. Sydney Garmong
Senior Manager
Professional Standards and Services, DC
File 2373
American Institute of Certified Public Accountants
1455 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-1081

RE: Draft Chapters 2 and 17 for the Proposed AICPA Combined Audit and Accounting Guide

Dear Ms. Garmong:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on draft Chapter 2 (Industry Overview – Credit Unions) and Chapter 17 (Equity and Disclosures Regarding Capital Matters) of the American Institute of Certified Public Accountants’ (AICPA’s) proposed Combined Audit and Accounting Guide, Certain Financial Institutions and Entities That Lend to or Finance the Activities of Others. As a national trade association, CUNA represents over 90 percent of the nation’s more than 10,300 state and federal credit unions.

CUNA commends the AICPA for its consistent efforts to provide clear, complete accounting guidance and standards for financial institutions. While CUNA appreciates the importance of having accounting principles that treat financial institutions equitably, we do not support integrating the existing AICPA Audit and Accounting Guides - Banks and Savings Institutions (BSI Guide), Audits of Credit Unions (CU Guide), and Audits of Finance Companies (FC Guide) - into a combined Guide. The AICPA, through these proposed accounting changes in the new Guide, seeks to represent credit unions as banks or other for-profit financial institutions. This approach flies in the face of Congress' separate treatment of credit unions and is in direct opposition to the distinct regulatory framework established for credit unions. The AICPA's proposed accounting treatment in the new Guide would jeopardize this distinct treatment of credit unions by making them appear similarly situated to other financial institutions when that is simply not the case. CUNA reiterates our strong belief that the special circumstances of credit unions, in fact, warrant retaining a separate CU Guide. While credit unions do engage in many of the same financing activities that banks, finance companies, and savings institutions do, they also have unique characteristics that should not be ignored. Any guidance on financial reporting by credit unions should clearly recognize the differences between credit unions and for-profit financial institutions in terms of organization and structure (cooperative associations, owned and democratically controlled by their members) as well as mission (providing low cost credit to their members).

While CUNA supports the retention of a separate CU Guide, we recommend the following revisions to the 2 draft chapters.

I. Chapter 2: Industry Overview – Credit Unions

In the discussion of the responsibilities of the supervisory committee that appears in section 2.09, it notes, "The supervisory or audit committee is responsible for ensuring that…elected officials carry out their duties properly." Part 715.3 of NCUA Rules and Regulations, General Responsibilities of the Supervisory Committee, states that "[t]he supervisory committee is responsible for ensuring that the board of directors and management of the credit union (1) Meet required financial reporting objectives and (2) And establish practices and procedures sufficient to safeguard members’ assets." Given the supervisory committee oversight responsibility over management set forth in the NCUA rule, we suggest that this oversight over credit union management also be covered in Section 2.09’s description.

Section 2.15 includes the sentence, "To enhance member services and profitability, many credit unions have become much more aggressive in the areas of fees and charges, real estate, short-term construction, and business lending." We suggest that the sentence be changed to the following: "To enhance member service, build capital and reduce risk, some credit unions have become more active in the areas of fees and charges, real estate, short term construction, and business lending." We believe that this sentence more accurately describes credit union efforts to expand their activity in those areas. If you choose not to use this modified sentence, we urge you to change the word profitability to earnings because credit unions do not operate to make a profit. Instead, credit unions must generate sufficient earnings to build net worth for safety and soundness reasons. In addition, we suggest that the word "aggressive" be replaced with "proactive" in the sentence in Section 2.16: "As a result of these developments, some credit unions have experienced significant asset growth and have sometimes entered into higher risk transactions, including aggressive lending, leveraged securities transactions, and acquisitions of complex financial instruments."

We would like to recommend two changes to Section 2.18. First, the section states that "[m]ost credit unions are affiliated with the [credit union] system through membership in their state credit union leagues. In turn, credit union leagues belong to the Credit Union National Association, Inc. (CUNA), the principal trade association for credit unions in the United States…." In order to be accurate, we recommend those sentences be changed to read: "Most credit unions are affiliated with the [credit union] system through membership in their state credit union leagues and in the Credit Union National Association, Inc. (CUNA). Credit union leagues also belong to CUNA, the principal trade association for credit unions in the United States…." Second, the section indicates that "[o]n a national level, for-profit affiliates of CUNA (including the CUNA Service Group, the CUNA Mutual Insurance Group, and the CUNA Mortgage Corporation) provide a wide variety of products and services to credit unions on a fee basis." CUNA Service Group has not been in operation since 2000; and CUNA Mutual Insurance Group and CUNA Mortgage Corporation are, in fact, not affiliates of CUNA. An accurate rephrasing of the statement would be: "CUNA Strategic Services, Inc. (CSSI), the for-profit affiliate of CUNA, partners with league service corporations to provide products, services and technology to credit unions throughout the U.S. CSSI provides e-business services to the credit union movement through its for-profit affiliate CUNA Network Services, LLC (CNS). CUNA Mutual Insurance Group and CUNA Mortgage Corporation also provide a wide variety of products and services to credit unions nationally on a fee basis, though neither is affiliated with CUNA."

II. Chapter 17: Equity and Disclosures Regarding Capital Matters

In Section 17.29, it states that "The equity section of a credit union’s statement of financial condition generally consists only of retained earnings and other comprehensive income." This sentence incorrectly implies that shares cannot be classified as equity. In 1999 NCUA promulgated a final rule revising Part 741.6 of its rules (12 C.F.R. §741.6) implementing the Credit Union Membership Access Act’s (CUMAA’s) statutory mandate that Call Reports filed by credit unions having assets of $10 million or more be consistent with generally accepted accounting principles (GAAP). (While CUMAA also gave authority to the NCUA Board and state credit union supervisors to require credit unions under $10 million in assets to also follow GAAP, NCUA’s rules do not require them to do so.) NCUA has determined that the application of GAAP is inappropriate for the classification of members' shares. Therefore, NCUA has not changed its practice of collecting members' share data in line items between liability and equity. Members' shares continue to be classified as "shares" on the Call Report. Furthermore, in NCUA’s Accounting Manual for Federal Credit Unions, which sets forth regulatory accounting practices for credit unions with assets under $10 million, it specifically states that shares are still to be classified as equity in the Statement of Financial Condition. We urge AICPA to revise this section of Chapter 17 to indicate that NCUA permits credit unions to classify shares as equity.

Thank you for the opportunity to share our comments. If you have any further questions, please contact Mary Dunn or Catherine Orr at (202) 638-5777.


Mary Mitchell Dunn
Associate General Counsel

Catherine A. Orr
Senior Regulatory Counsel