Understanding Bank Bribery Issues from a Board Member’s ...
Transcript of Understanding Bank Bribery Issues from a Board Member’s ...
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Understanding Bank Bribery Issues from a Board Member’s Perspective
January 27, 2016
Presentation for the National Association of Federal Credit Unions
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Presenter – Ken Welch, CPA • Principal with CliftonLarsonAllen LLP (CLA) • Over 38 years of experience, working primarily with credit unions and other financial institutions • Recent presentation and articles:
– Presentation: “Credit Union Risk Topics” – Article: “Alternative Investments for Credit Unions Section 701.19”
• Regional leader for CLA’s Credit Union and financial institutions practice in eastern region
• Bachelor of Science - Accounting, University of Maryland • Member of:
– AICPA – Maryland Association of CPAs – Virginia Society of CPAs
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Chuck Kelly • Senior Manager with CliftonLarsonAllen LLP (CLA)
• Over 13 years of experience, working primarily with credit unions and other financial institutions
• Recent presentation and articles: – Presentation: “TDR’s . . . And the Saga Continues” – Presentation: “GAAP Update and Upcoming FASB Guidance to Keep on Your Radar . . .” – Presentation: “Understanding CECL and Current Trends” – Article: “New Guidance May Simplify Goodwill Accounting for Credit Union Mergers” – Article: “Impact of New FASB Financial Instruments Guidance on Credit Unions”
• Master of Accountancy, Virginia Tech
• Member of: – AICPA – Maryland Association of CPAs
Today’s presenters
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Disclaimer
• The comments and opinions that we express during this presentation are those of the presenters. Best practice governance procedures are a combination of published law, regulation and risk alert guidance issued by the National Credit Union Administration and other federal and state regulatory sources and other industry guidance.
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Agenda • Federal Bank Bribery Regulations • NCUA Rules and Regulations • NCUA Financial Literacy Rules for Directors • Ethics Rules and Practices • Best Practices and Policies for the Ethical Institution • Legal Ramifications of Failing in your Governance Role • Identify and Analyze Potential Unethical Behavior / Fraud • Examiner and Auditor Expectations and How to Satisfy Them • How Should a Board Protect Itself Related to Conflicts of
Interests
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Federal Bank Bribery Regulations
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Federal Bank Bribery Act of 1985
– The Act was passed to prohibit employees and officials of financial institutions from accepting things of value that might influence their judgment. The Act is implemented by the financial institution by adopting a specific policy and other standards.
All employees and officials need to know the basics:
Any employee, officer, director, agent, attorney of a financial institution can not solicit, or accept, for themselves or a third party anything of value in return for any business, service, or confidential information, either before or after a transaction is discussed or consummated … with exceptions …
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Federal Bank Bribery Act of 1985 Continued
That could be interpreted to include receipt of commissions, gifts or
favors for procuring loans, service contracts, or the transfer of assets at discount below market . . .
Using one’s position within the institution to unfairly restrict opportunities to do business or obtain business with the Credit Union …
Failure of an official or director to
recuse themselves from decisions where they have a conflict of interest . . .
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Federal Bank Bribery Act of 1985 (Continued)
– Violations of the Act are punishable by:
◊ A fine the greater of $5,000 or three times the value of the commission / gift
◊ Or, imprisonment for five years
◊ Or, both
◊ Note: if the gift or commission does not exceed $100, then the fine will be limited to not more than $1,000, or imprisonment for one year, or both.
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NCUA Interpretive Ruling and Policy Statement 87-1: Guidelines for Compliance with Federal Bank Bribery Law – Federally insured credit unions are encouraged to adopt
internal codes of conduct or written policies to include provisions related to the bank bribery law.
– The credit union may specify circumstances in their policies when it is allowable to accept something of value without risk of corruption, such as: ◊ Acceptance based on a family or personal relationship. ◊ The benefit is available to the general public under the same
conditions. ◊ The benefit would be paid for by the credit union as a reasonable
business expense, if not paid for by another party.
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NCUA IR 87-1: Guidelines for Compliance with Federal Bank Bribery Law (Continued)
– NCUA provisions prohibit officials, employees and immediate family members from receiving personal gain in connection with business transactions of the Credit Union
– Establish written policies on acceptable business practices
– Established policy may specify limits on reasonable value for entertainment and gifts
– Requires disclosure of receipt or offers in excess of reasonable value
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NCUA IR 87-1: Guidelines for Compliance with Federal Bank Bribery Law (Continued)
Exceptions for reasonable value include: • Gifts, gratuities, amenities based on relationships • Meals, refreshments, entertainment related to, or for, a business purpose • Loans on customary market terms • Acceptance of advertising or promotional material • Discounts or rebates or services that do not exceed the norm • Gifts for commonly recognized events (birthday, wedding, promotion,
etc.) • Recognition awards for service – civic, educational, charitable, etc.
Exceptions should be specified by policy
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LLP Conflict of Interest Examples
Avoid gray areas that are indicative of potentially divided loyalties and clouded judgement, and that may cast doubt on Board member’s integrity and ability to act in the best interests of the members of their credit union.
The following are just a few examples that MAY give rise to conflicts of interest. How would you view these cases?
– Romantic relationships between board members and high level management of the credit union.
– Board members also acting as a general contractor hired to refurbish their credit union’s branch facilities
– Board member, who is also a public accountant, hired as an internal audit consultant by their credit union
– Loan products with extremely low rates and qualifications tailored to the specific circumstances of a Board member(s)
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Polling Question #1 – True or False
Credit union directors, in some cases, are exempt from the provisions of the Federal Bank Bribery Act of 1985.
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NCUA Rules and Regulations
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Just in Case You Haven’t Had a Chance to Memorize NCUA Standard Bylaws…
• Article XVI, Section 4 of the 2006 revised FCU bylaws (Article XIX, Section 4 of the prior standard bylaws) states that no official, employee, or agent may in any way act on any matter affecting that person's pecuniary or personal interest or that of any business in which he or she is directly or indirectly involved. A board member must withdraw from any deliberations (often referred to as "recusal") on an issue affecting his monetary, business or personal interests, but will be counted for purposes of determining a quorum
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Director General Authorities
– Electronic Code of Federal Regulations (e-CFR) ◊ Title 12 – Banks and Banking
• Chapter VII – National Credit Union Administration – Subchapter A: Regulations Affecting Credit Unions – Part 701: Organization and operation of Federal Credit Unions – §701.4: General authorities and duties of Federal credit
union directors
- The Board is responsible for the general direction and control of the affairs of each Federal Credit Union
- May delegate the execution of operational functions
- Ultimate responsibility for direction and control is non-delegable
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§701.4: Duties of Credit Union Directors
– Carry out duties in good faith and in the best interests of the membership
– Administer affairs of the credit union fairly and impartially
– Have a working familiarity of basic finance and accounting practices
– Direct management’s operations in conformity with applicable laws
– We can all agree- this is common sense!
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§701.4: Authorities of Directors: Staff and Outside Consultants
– In carrying out its duties and responsibilities, credit union boards and committees have the authority to retain (at the expense of the credit union):
• Staff and outside counsel • Independent accountants • Financial advisors • Other outside consultants
– Required to present results to the board or committee
– Directors who lack knowledge are entitled to rely on information, opinions, reports or statements, including financial statements of trusted advisors …
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§701.4: Director Reliance
– A director may rely upon:
• One or more officers or employees of the credit union
• Legal counsel
• Independent public accountants
• Other persons (consultants/specialists) retained by the credit union
• A committee of the board of directors of which the director is not a member
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§701.33: Reimbursement, Insurance and Indemnification of Officials and Employees
– Electronic Code of Federal Regulations (e-CFR) ◊ Title 12 – Banks and Banking
• Chapter VII – National Credit Union Administration – Subchapter A: Regulations Affecting Credit Unions – Part 701: Organization and operation of Federal Credit Unions – §701.33: Reimbursement, Insurance and Indemnification of
Officials and Employees
– Official Defined
– Official Compensation
– Official Indemnification
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§701.21: Loans to Members and Lines of Credit to Members
– No officials may receive, directly or indirectly, any commission, fee, or other compensation in connection with any loan made by the credit union. ◊ Compensation, in the case of the above regulation, includes non-monetary
items, except those of nominal value.
– Board of directors approval is required for aggregate unsecured (not pledged by shares) loans to an official, or to which an official serves as an endorser or guarantor, in excess of $20,000.
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§703.17: Investments and Deposit Activities
– (a)No FCU’s official, senior management, employee or immediate family members may receive anything of value in connection with investment transactions.
This prohibition does not include compensation for employees.
– (b) An FCU's officials and employees must conduct all transactions with business associates or family members that are not specifically prohibited by paragraph (a) of this section at arm's length and in the FCU’s best interest.
Note: §703 does not specifically apply to SCFICUs
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NCUA Financial Literacy Rules for Directors 701.4 (b) (3)
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Financial Literacy Requirements Effective January 27, 2011,
NCUA Regulation 701.4 (b) (3), all FCU directors must have the ability to read and understand their credit union’s basic financial statements to facilitate their role in providing supervision of the institution.
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Understanding Risk
Regulatory Definitions of Risk
Risk is fundamental to operations of a credit union
Examiners, should not insist that the credit union eliminate risk, rather should ensure credit unions identify and manage their risks
The desired reward for taking risk is stable profitability and increased net worth
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LLP Seven Risk Categories
Any product or service may expose the credit union to multiple risks; these categories are not
mutually exclusive.
Credit Liquidity Interest Rate
Compliance Strategic Transac
tion Reputat
ion
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LLP Seven Risk Categories
Credit Risk
Risk of default on repayment of loans or investments
Interest Rate Risk
Risk that changes in market rates will negatively impact the income statement and balance sheet
Liquidity Risk Risk of inability to fund obligations as they come
due, or to strategically invest as planned
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LLP Seven Risk Categories
Transaction Risk Risk of fraud or operational problems in
transaction processing
Compliance Risk
Risk of violations and non-compliance with laws and regulations
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LLP Seven Risk Categories
Strategic Risk Risk of adverse business decisions through
management’s actions or inactions
Reputation Risk Risk of negative public opinion or perception
leading to a loss of confidence and/or severance of relationships
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What Should We Do With Risk?
Properly Manage Risk
Control
Measure
Identify
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Understanding Financial Statements Key Balance Sheet Items: • Total Assets • Earning Assets vs. Non-Earning Assets • Yield on Earning Assets • Maturity of Earning Assets (Liquidity) • Relationship of Yield to Maturity • Risk vs. Yield (Term and Collateral) • Long Term vs. Short Term Assets • Cost of Funds (Dividends on Member Deposits) • Equity
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Understanding Financial Statements Key Income Statement Items: • Yield on Loans and Investments • Comparative Results Between Periods YR to YR /
Month to Month • Trends in Performance • Net Income • Spot Significant Variances • Unanticipated Results Must be Explained • Budget vs. Actual, The Budget as a Tool • Know Where Income and Expense Items Originate
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Understanding Financial Statements FINANCIAL BUZZ WORDS/PHRASES: • Loan to Share Ratio = Loans/Shares • Cost of Funds = Average Dividend Rate Paid on
Member Accounts • Charge-off Rate = Net Charged-off Loans/Average
Loans • Delinquency Rate = Delinquent Loans/Average
Loans • Depreciation = Expense an Asset over its Useful Life
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Understanding Financial Statements FINANCIAL BUZZ WORDS/PHRASES: • Yield = The Rate Earned on an Asset over Time,
Usually one Year • Net Spread = Difference on Earned Assets over Cost
of Funds • Trend = Result over Time either an Increase or
Decrease in Performance • Variance = Difference or Change in Comparative
Totals
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LLP Best Practices - Stay Informed
Review Call Reports and Financial Performance Reports
See how you stack up with your peers: http://researchcu.ncua.gov/Views/FindCreditUnions.aspx
Attend Board Meetings
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LLP Best Practices - Clean-up the Financial
Literacy “Stuff” • Many Board packets contain way too much
detail information • Many contain schedules or analysis that no
one can remember where it came from or how to use it
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Best Practices - Board Packets
• Only include relevant information • Provide summary information
– If anyone wants details these can be provided later or discussed at meeting
• Make it visual • Allow time to review and study
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Best Practices – Example Non Visual Data • Jan 1.30 1.55 • Feb 1.38 1.30 • Mar 1.47 1.10 • Apr 1.56 1.20 • May 1.62 1.22 • June 1.71 1.28 • July 1.73 1.28 • Aug 1.70 1.37 • Sept 1.70 1.25 • Oct 1.69 1.19 • Nov 1.67 1.11 • Dec 1.58 1.04
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LLP Financial Literacy
If a matter is mentionable it is manageable:
I suggest you develop a list of questions for management with responses to be reported to the Board
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Polling Question #2 – True or False
The Board has the ultimate responsibility for the direction and control of a credit union, a responsibility that cannot be delegated to management.
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Ethics Rules and Practices
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Ethical Corporate Governance
Boards of Directors and Other Officials Must Be: – Ethical and have Integrity
– Informed
– Proactive
– Investigative
◊ Skeptical, not cynical or argumentative
– Accountable
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Key Components of Ethical Governance
• Communication and Information • Disclosure • Awareness
• Accountability
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Communication and Information
To be in fact ethical, and act ethically, you have to be informed and you must acknowledge your understanding
• Control environment - tone at the top, competence, good policies
• Assess Risk – identify, mitigate, participate • Activities – procedures, safeguards, security,
authorization • Monitor
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Best Practices and Policies for the Ethical Institution
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Whistle Blower Program
Establish a Whistleblower Program in a credit union is not a legal or regulatory requirement, however it is a highly recommended industry best practice – Normally the Supervisory Committee is Responsible – Confidentiality – Immediate Response is Important
Key Tips: – Communication via: web, phone, or mail – Advertise accessibility on web, print, account statements – Reminders to directors, employees periodically
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Train and Educate
A significant barrier to effective ethical governance is lack of knowledge of the industry or what is customary Suggested Guidelines: • Training, training, training, should be a monthly
function • Educate Officials as to requirements of laws,
regulations and policy so they don’t misstep • Focus on decision making ethical analysis techniques
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Legal Ramifications of Failing in your Governance Role
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Top 10 Reasons D/O Get Sued
1. Approving self-serving, improvident or excessive loans
2. Failing to comply with regulatory directives 3. Failing to supervise management properly 4. Failing to authorize and conduct periodic audits 5. Failing to implement internal control procedures
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Top 10 Reasons D/O Get Sued 6. Authorizing improper payments or expenses 7. Improperly maintaining and monitoring liquidity
reserve requirements 8. Failing to attend Board meetings on regular basis 9. Extending too much investment in a limited area
(concentration risk) 10. Failing to exercise independent judgment
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Identify and Analyze Potential Unethical Behavior / Fraud
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Evaluation
Life is Full of Assessment and Evaluation
• Studies have shown that many individuals behave “ethically” due to the threat of penalty or discovery
• Therefore, ethical policies and programs must be established and must be enforced
• Evaluations, even self-evaluations, encourage ethical behavior and performance
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What is IT?
Unethical behavior is hard to define, it can take many shapes and look very different from case to case BUT:
– If it looks like a duck, – If it acts like a duck, – If it sounds like a duck, – If it smells like a duck,
IT is Probably a DUCK, You’ll know it when you see it
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Fraud – Be Skeptical, Be Informed, Ask Questions
Don’t
Take Anything
For Granted
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Fraud and non Ethical Pressures/Incentives
• Inability to pay one’s bills
• Drug or gambling addiction
• Need to meet earnings
• Need to meet productivity targets
• Peers / Family / Life situation
• Status symbols - big house, new car, etc.
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Fraud and non Ethical- Opportunity
• Trusted employee • Long time employee • Isolated duties • Poor internal controls
• Lack of segregation of duties
• Lack of vacation policy
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Fraud and non Ethical- Rationalization
• I was only borrowing the money • I was entitled to the money, “. . . they owe me!” • I had to steal to provide for my family • I was under paid • My employer is dishonest and deserved it • I need it more than they do • I’ll pay it back
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How Fraud is Discovered
0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00%
Internal Controls
Notified by Emp.
Internal Audit
Mgmt. Investigation
Notified by Customer
Accident
Anonymous Letter
External Auditor
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Examiner and Auditor Expectations and How to Satisfy them
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Credit Union Governance Must Comply
• Federal Credit Union Act
• NCUA Rules and Regulations
• Bylaws
• Applicable Laws and Regulations
• Board of Directors
– Board Policies
• GAAP
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Good Governance Requires
• Defined Roles for Board and Management • Compliance with NCUA Rules and Regulations • Active Risk Assessment and Communication • Effective Supervisory Committee Audits • Management Integrity and Attestation • Performance Evaluation Process • Qualified and Attentive Participation • Promoting Financial Transparency • Financial Training (Now an NCUA Mandate)
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Policies and Procedures • Document retention • Whistle-Blower protection • Conflict of interest policies and practices • Dishonesty/Fraud/Ethics policy statement • Document accounting policies and procedures
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LLP SOX - BEST PRACTICE Recommendations
(Credit Unions are Not Subject to SOX)
• Get expertise on the Board and committees,
• Renew ethics, fraud and conflict of interest policies regularly,
• Establish whistle blower provisions,
• Establish charters for all committees,
• Establish a governance policy (qualifications, responsibilities, access, continuing education, evaluation)
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Statement of Auditing Standards 99 FRAUD • SAS 99 auditor’s responsibility for fraud detection
– Auditors have a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud
• SAS 99 management’s responsibility with respect to fraud – Management continues to be responsible for designing
and implementing company internal controls to prevent, deter, and detect fraud.
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Polling Question #3 – True or False
The NCUA has mandated that Board members must have the ability to read and understand their credit union’s basic financial statements
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How Should a Board Protect Itself Related to Conflicts of Interest?
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Executive Summary
– Good Tone At The Top – Attract Good People – Make Decisions With The Best Interests of the
Membership or Credit Union – Establish Fraud, Ethics, Training and Governance
Policies – Periodically Evaluate and Assess – Establish a Whistle Blower Program – Establish Accountability
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Adopt a Governance and Financial Literacy Policy OBJECTIVE: • To provide a defined development program through
which new volunteers can achieve "qualified" status as a credit union Official or Director.
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Governance and Financial Literacy Policy GOAL: • Candidates interested in becoming volunteers must complete an
application of their qualifications. Those not already possessing the necessary qualifications must successfully complete a qualifying Volunteer/ Directors governance and financial literacy course which meets the standards cited in NCUA Regulation 701.4 within 6 months of election or appointment as a volunteer or Director.
• Volunteers are encouraged to participate in committees to broaden his/her knowledge, experience and understanding of the industry.
• All credit union volunteers to be in compliance with the duties of Federal Credit Union Board of Directors detailed in NCUA regulation §701.4.
• A board member is responsible for understanding the specific activities in which his or her credit union engages. A board member must understand how these activities generate changes in credit union’s financial statements, and perhaps most importantly, the various risks associated with these activities that could lead to financial loss.
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Adopt a Governance and Financial Literacy Policy TRAINING • It is up to each volunteer to achieve a satisfactory level of proficiency in carrying out the
responsibilities of their position by utilizing the number of references and resources available.
REQUIRED READINGS Volunteers upon election or appointment should complete the following readings: • Credit Union Bylaws • Federal Credit Union Act • Credit Union Strategic Plan • Most recent Annual Report • Current financial statements • Current list of Officials and Committees • Current Standing Committees • Organization chart showing supervisory positions • Board Policies • Mission Statement and Service Philosophies • Volunteer Participation Code of Ethics / Fraud / Conflict of Interest must be read and signed 76
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Adopt a Governance and Financial Literacy Policy ORIENTATION • For new volunteers and directors the credit union will arrange for an
orientation program which includes Credit Union Philosophy and the History of Credit Unions.
OTHER TRAINING • BSA courses. • Regional and National Conferences - Refer to Travel and Conference Policy
for who is authorized to participate and which conferences. • A trip report is required for all training taken by Board members, a single
trip report can be presented for multiple travelers.
INDUSTRY PUBLICATIONS - (To be routed to volunteers)
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Final Note It is also worthwhile to note that NAFCU has published a Credit Union Director Handbook designed to help credit union volunteers understand their role and responsibilities, and to provide additional insights to readers about how the credit union system works. You can access this handbook using the following link: www.nafcu.org/boardhandbook/
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Ken Welch, CPA Principal Calverton, Maryland Direct 301-902-8569 Mobile 703-623-6486 [email protected] Chuck Kelly, CPA Senior Manager Baltimore, Maryland Direct 410-308-8076 Cell 410-908-5078 [email protected]
Questions?