NCUA Office of Inspector General

 

NCUA Office of Inspector General
Material Loss Review
O.U.R Federal Credit Union

Summary
Prepared by NASCUS Regulatory Affairs Department
October, 2012

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NCUA's Office of Inspector General (OIG) has published a Material Loss Review (MLR) of O.U.R Federal Credit Union a federal credit union located (FCU) in Eugene, Oregon. The failure of the $4.3 million FCU resulted in $3.7 million loss to the National Credit Union Share Insurance Fund (NCUSIF).

The Federal Credit Union Act requires the OIG to perform a MLR when a credit union failure costs the NCUSIF in excess of $25 million or an amount equal to 10% of the total assets of the credit union at the time in which the NCUA initiated §208 assistance or appointed a liquidating agent. The OIG may also initiate a MLR as circumstances so warrant.

To view the O.U.R FCU MLR, click here.

Background

O.U.R FCU was chartered in 1969 to serve the residents of Lane County, Oregon who had participated in programs of the Lane County Department of Community Health and Social Services. In 2011, the year of its failure, the FCU had $4.3 million in assets and 2,184 members. According to the MLR, the federal credit union relied heavily on nonmember deposits and secondary capital. O.U.R FCU was deemed insolvent in May, 2011, after a specialist hired by the credit union discovered an imbalance of $1.6 million between the share accounts and the general ledger. The federal credit union was placed into conservatorship on June 24, 2011, and liquidated on December 2, 2011.

What Caused the Failure of O.U.R FCU

The OIG found the following contributed to the failure of the FCU:

• Suspicious Activity on behalf of the FCU's Manager

The OIG concluded that the manager of O.U.R. FCU engaged in highly suspicious activity dating back to perhaps as early as 2005. The MLR cites inconsistent or incomplete financial reports in Board packages without satisfactory corresponding explanations. The OIG cites examples such as large balance transactions made by the manager into an account that had been closed for several years and numerous transactions posted by the manager into various accounts before and after hours. Ultimately an independent auditor uncovered a $1.6 million imbalance between the member share subsidiary and the general ledger.

• Ineffective Oversight by the FCU's Board of Directors

The OIG noted serious deficiencies in oversight by O.U.R FCU's Board of Directors (Board). In particular, the MLR cited governance issues such as undisclosed related party activity, incomplete minutes, and the Board's lack of understanding of financial results. The OIG also cited a general lack of due diligence on the part of the Board in developing strategy, managing risk, and following-up on examination findings.

In addition, the OIG cited untimely Call Report filings, any indications of Supervisory Committee activity utterly lacking, and no evidence of the FCU ever having received a full opinion audit.

• Weak Control Environment

The OIG concluded that O.U.R FCU lacked internal controls and had a weak control environment that allowed for 1) inaccurate account reconciliations, 2) control deficiencies in cash handling, and 3) a lack of timely recording of transactions, preparation of
account reconciliations, and monthly financial close. The MLR concludes that the situation at O.U.R FCU was exacerbated by a lack of competent accounting staff and the manager’s unrestricted access to the general ledger.

In fact, the OIG was so critical of the FCU's lack of internal controls and Board oversight that it characterized the ability to commit fraud at the FCU as "ever present." Among the specific shortcomings cited by the OIG were that 1) accounting staff failed to keep bank reconciliations up to date, 2) staff lacked sufficient training to complete financial reports in a timely manner, 3) the manager was allowed to write and sign checks and make deposits and other transactions, 4) reconciliation of subsidiary accounts to general ledger only occurred annually, and 5) subsidiary loans were not reconciled to the general ledger. In addition, the OIG noted that the FCU had no controls over vault cash, no dual access controls, and allowed the manager sole control over accounting, and financial reporting.

• Inaccurate Accounting

The OIG found deficient accounting and financial reporting practices at O.U.R FCU resulted in inaccurate accounting, unsupported journal entries, lack of timely closing of its books. The OIG also found the credit union suffered from infrequent and irregular posting of transactions, month-end processing was not performed in a timely manner, and financial statements were so inaccurate as to have materially isled the Board and NCUA examiners.

NCUA Missed Opportunities to Mitigate Loss to the NCUSIF

The OIG determined that NCUA's examination procedures with respect to O.U.R FCU were inadequate. OIG found that NCUA examiners failed to reconcile member share account, insufficiently assessed the FCU's internal controls, and failed to question incomplete reports and suspicious activity on behalf of the manager. In general the OIG concluded that NCUA examiners repeatedly afforded O.U.R FCU too much latitude. As an example, the OIG cites an examination of O.U.R FCU in 2008, when the NCUA examiner accepted an excuse from the manager that the AIRES download of share accounts was unavailable, and accepted a substitute report from the manager. The OIG notes that a direct AIRES download from the system of share accounts mitigates the possibility of account manipulation and in the current case might have uncovered that manipulation of share accounts much earlier.

The OIG reports that NCUA examiners repeatedly raised concerns about the FCU's management and inability to timely file accurate reports and meet strategic plans, but in each instance accepted explanations from the manager. In fact the concerns were not elevated for supervisory action (LUA) for two years.

The OIG also cited NCUA examiners for failing to conduct any discernible peer group comparisons for the FCU that might have identified inexplicable variances. OIG also noted its failure to find any indication that examiners had completed or utilized AIRES Red Flag checklists during contacts with O.U.R FCU.

Perhaps the OIG's sharpest criticism focused on what it characterized as the examiner failure to properly evaluate the internal control environment of the FCU. Citing NCUA examiner guidance, the OIG noted, with respect to a credit union's internal controls, examiners are expected to:

1. Determine whether the credit union has implemented efficient and effective operations and risk management systems
2. Determine whether the credit union accurately records transactions
3. Determine timeliness and reliability of financial reporting;
4. Determine whether the credit union complies with regulations, internal policies, and internal procedures; and
5. Assess whether the credit union has implemented adequate internal controls to safeguard assets.
Corrective Measures Recommended by the OIG

After conducting its MLR, the OIG issued the following four recommendations (the first two of which are repeated from the February 2012 MLR of Vensure FCU):

1. Remind examiners to fully evaluate questionable items in financial data consistent with a reasonable risk assessment and evaluation of the level of risk exposure, and to seek assistance from Supervisory Examiners or other specialists when significant risk issues are identified.

2. Develop additional off-site triggers for Call Reports and other financial performance reports, including specific procedures to require supervision examiners to review and sign off on those items raised as “red flag” issues to ensure such items are fully investigated by examiners.

3. Remind examiners to obtain an AIRES download, when available, for loan and deposit subsidiary ledgers to manually reconcile balances to the general ledger.

4. Remind examiners to expand examination procedures when they detect red flag issues such as ineffective board oversight, weak internal controls, lack of segregation of duties, inaccurate financial reporting, and late financial filings.