California DFI Assessing Penalties for Late Audit Reports
By Styskal, Wiese & Melchione
August 19, 2011
Considering the uncertainty in the economy and the complexity of work faced by many outside auditors, it is not surprising that some audits are behind schedule. But late audits can pose serious concerns for California credit unions.
California Financial Code Section 14252 requires that California chartered credit unions with $10 million or more in assets must obtain and file with the California Department of Financial Institutions (“DFI”) within 105 days after the end of the credit union’s fiscal year an independent CPA audit report. Section 216.3 of the Financial Code provides that for violation of Section 14252, the DFI may assess civil money penalties of up to $1,000 per day, but not exceeding $50,000. Those penalties can increase if the violation is “reckless” or “knowing.”
In our recent experience, delays in receiving audit reports from outside auditors can be attributed to auditors not completing their work on time. There are a number of factors that can lead to delays, though, some of which can be laid at the credit union’s feet. For example, delays in responding to information requests of auditors, inability of staff to fully explain Allowance for Loan and Lease Losses methodology, accounting errors, or other internal issues may lead to delays. We have observed the DFI attempting to assess penalties after 30 or more days after the due date, but that is not to say the DFI could not target credit unions for enforcement sooner.
The DFI has not attempted to allege that delays in submitting audit reports are “reckless” or “knowing,” and so penalties threatened have not been at the higher levels available to the DFI under the statute. But delays have negatively affected CAMEL ratings at some credit unions, as well as negatively affecting the credit unions’ relationships with their examiners. Where outside auditors have not yet opined on ALLL levels and other aspects of a credit union’s financials, regulators will often, understandably, be skeptical of the credit union’s reporting.
Completing an audit on time is important to managing the credit union’s relationship with its regulators (both DFI and NCUA) and to management of the credit union’s income statement. For these reasons California credit unions should push to receive their audits on time, and devote resources to managing their outside auditor relationships throughout the audit process. Additionally, credit unions should, to the extent possible, negotiate in their engagement agreements with auditors to shift the risk of penalties for late reports to auditors.