Auditors and examiners emphasize CECL model clarity
Mark Scriven, Principal with Elliott Davis, noted that the Public Company Accounting Oversight Board’s (PCAOB) practices often have a trickle-down effect on non-public companies. The board’s current emphasis on key controls is shaping a general focus by auditors on controls related to the allowance for credit losses (ACL), and financial institutions should take notice.
Many companies have a CECL committee to oversee the allowance, but panelists emphasized that a major focus in exams and audits is whether management truly grasps the nuances of its CECL model.
“You can’t just have this committee check the box and say, CECL has been reviewed,” Scriven said. Regulators and auditors will look for signs of genuine oversight and vetting of model inputs, not just a formality.
Data is one major area of focus in audits and exams that should be addressed by an institution’s controls, panelists recommended. They urged institutions to know details on the data used by the model and whether it is complete and accurate.
For instance, if data queries are used to generate loss forecasts, examiners may ask: What’s the query logic? How does the reviewer know that that query logic hasn’t been modified? Is anybody double-checking or recreating the balances by segment?
Similarly, if external macroeconomic data is used, how is potentially contradictory evidence to that data being considered and discussed?
These questions underscore a simple truth, the experts counseled: a CECL model is only as strong as the data and processes behind it.
