Step Five of Seven Steps to CECL Compliance
Part five of a seven blog series
Step 5. Assess impact of ICFR (Internal Control over Financial Reporting)
In our first four blogs addressing the Seven Steps of CECL preparation, we have discussed automating the process, modeling, developing reports and documenting processes. CECL will also require banks to add processes that assess the impact of expected loan losses on an array of internal controls.
“It is expected that additional detail processes will be required to ensure that factors underlying loss expectations are appropriately identified and tracked,” wrote Michael Gullette of the American Bankers Association in his paper,CECL Implementation Challenges: The Life of Loan Concept. “Such factors may include appraisals underlying loan-to-value ratios on collateral and analyses performed during underwriting. While work like this may currently be performed operationally at many banks, this is expected to be a new process with a financial audit, as it is not currently assumed that the loan origination transaction creates a loss expectation.”
Are your controls designed in such a manner as to prevent material misstatement? Are they operating as designed? If that’s not properly documented, your auditors and regulators will not be able to determine whether your CECL model is designed effectively.
“First, you must identify where your internal controls should be, then document that,” noted Grant Thornton’s Graham Dyer. “Then match what they should be to what they are currently and supplement accordingly.”
Revising controls includes redeveloping and validating disclosures. Disclosures will all be different under CECL.
“Vintage analysis may become the basis for credit quality evaluation,” Gullette wrote. “Disclosures related to credit quality may need to expand to address each critical vintage. This could increase the current GAAP-based disclosures four-fold or more.”
For SEC-registered institutions, new disclosures will need to be developed to address changes in credit metrics, Gullette added. “Bankers, auditors and investors . . . must devise and rely on other types of metrics in order to evaluate the reasonableness of credit loss forecasts.”
