Audits typically are prosaic matters, filed by accountants, readby accountants and swiftly forgotten. Not so the recent audit ofNCUA’s Temporary Corporate Credit Union Stabilization Fund,announced by the agency on Dec. 27, a day when many are onvacation.

Despite the timing of the release to coincide with a nationwidegap in attention, a firestorm has erupted about the audit and, morebroadly, the NCUA’s handling of the huge losses incurred in themeltdown of five corporate credit unions that the NCUA conserved in2010.

For its part, the NCUA applauded the audit, “The Stabilization Fund’s clean auditopinion by an independent body demonstrates our commitment torobust financial reporting,” said NCUA Board Chairman Debbie Matzin a prepared statement.

The applause stopped there, however, and what has followed is awave of criticism and a torrent of questions from critics of theaudit.

Throwing down a gauntlet was industry expert Chip Filson, who,in a blog on his company’s website (creditunions.com), asked apointed question about what might loom as the audit’s most salientdetail, how much is the industry’s IOU? Why did “the contingentliability for losses increase from $6.4 billion as of December 2009to $7.8 billion?” wrote Filson.

The audit performed by a leading firm, KPMG, addressed this in afootnote. “The increase in the aggregate contingent liability from2009 to 2010 of approximately $1.4 billion is primarily a result ofincreased losses in the previously conserved CCUs and threeadditional CCUs, all five of which were [conserved] during2010.”

But, groused Filson, “For more than 18 months the NCUA hadpresented the $6.4 billion contingent liability for the TCCUSF inthe financial statements released in open board meetings. In publiccomments during the campaign to have credit unions voluntarilyprepay TCCUSF assessments, NCUA board and staff reaffirmed thisestimate.”

Filson continued, “At the Dec. 15, 2011 open board meeting(seven days before the audit’s release), NCUA published its TCCUSFstatement from Nov. 30, 2011, which showed the $6.365 billionfigure.”

His bigger point: Was the agency caught by surprise with theincrease, and if so, how?. Or was it being disingenuous?

A sharp question, but that $1.4 billion may be just the tip ofan expensive iceberg, said a number of industry experts andcorporate credit union executives.

Industry consultant Marvin Umholtz pointed out that the value ofthe underwater securities in the NCUA’s portfolio is inherently unclear and, therefore, thelosses arguably could turn out to be much higher still.

That is, $7.8 billion in losses may be just the beginning,suggested Umholtz. “The uncertainties about how deep the holereally is will haunt the industry for years to come,” he said.

Haunting just may be the apt word. Pete Duffy, managing directorat Sandler, O’Neil, said that a continuing concern at the largercredit unions where he consults is that “the wide bandwidth anduncertainty about how potential losses are calculated.” Heelaborated that his clients have been contemplating sizableinvestments–opening new branches, for instance–but a roadblock forsome has been the uncertainty about the losses and how deepindividual credit unions may have to dig.

A senior executive with a corporate credit union, who requestedanonymity because he was not authorized to speak on the record onbehalf of his institution, said the estimates offered by the NCUAare inherently vague.

“Read the notes to the report and note the loss recognitionestimates are based on modeling that can have dramaticallydifferent outcomes,” the executive said. “It will take 10 to 20years to figure out how right or wrong they are compared toactual.”

Another corporates executive focused on a more fundamentalissue. Is the KPMG audit report in fact clean–as proclaimed by Matzin her statement–or is it a qualified opinion? Superficially, thatquestion appeared to be answered in the audit. Wrote KPMG, “In our opinion, the financial statements referred toabove present fairly, in all material respects, the financialposition of the TCCUSF.”

The NCUA, in its commentary, touted that verdict as offering aclean opinion.

Yet the audit, pointed out several experts who had closelyanalyzed it, is characterized by an unusual density of longfootnotes and opinions throughout, along with persistent criticismof the NCUA’s handling of the crisis. That is what a corporate CEOnoted in his comments. “The audit expresses an unqualified opinion,but given that it contains a sufficient deficiency in internalcontrols over the corporate system resolution program, it is notwhat would, in my experience, be called a clean opinion. Given thefact that the survival of many small credit unions may well dependon accurate estimates of losses, I can’t think of anything morecritical to credit unions than the prompt establishment offunctioning internal controls over this program.”

“The solvent corporates have worked hard to restore and maintainconfidence in the system, and we don’t want to see that workendangered by internal control deficiencies that can be addressedand solved,” he added.

The NCUA, for its part, in response to a request from CreditUnion Times, has offered comments in response to its critics.In particular, in response to complaints about the vagueness of theestimated liabilities faced by credit unions, the NCUA Office ofPublic and Congressional Affairs wrote in an email, “To date,credit unions have paid $5.6 billion in depleted member capitalwhen the corporate credit unions were liquidated and another $3.3billion in assessments. At the Aug. 29, 2011, open board meeting,NCUA provided its estimate that credit unions would be assessedanother $1.9-$6.2 billion in assessments. The range is wide giventhe complex and illiquid nature of the legacy assets.”

As for the Umholtz complaint about not knowing how deep theblack hole of losses can go, the NCUA wrote, “Credit unions can goto NCUA’s website, click under Credit Union Resources andInformation, and select Corporate System Resolution Costs to findNCUA’s most recent estimates on the full cost of the corporatecredit union resolution. NCUA has regularly communicated that theseestimates will change over time with new information about theeconomy and actual performance on the complex underlying legacyassets. NCUA will update total cost estimates on its web sitesemi-annually.”

Finally, with regards to the $1.4 billion jump in contingentliability reserves noted by Filson, the NCUA said, “The 2010reserve increased by $1.4 billion over 2009 levels based on updatedloss projections and accounting for new guarantee obligations in2010 as part of the corporate resolution process. Further, NCUAdisclosed beginning on Sept. 24, 2010, an estimated range ofremaining stabilization fund assessments of $7 to $9.2 billion. The2010 TCCUSF audited financial statements show a net position ofnegative $7.5 billion, which is within the range reported.

As to what all the to-and-fro over many billions of dollarsmeans, NAFCU President/CEO Fred Becker indicated that, from his chair,there are two realities. The first is that “the securities aretainted. It should surprise no one that it is difficult to put avalue on these securities,” Becker said. There are and willcontinue to be uncertainties about the size of the liabilitiesbecause no one knows the value of off-setting securities.

Becker’s second point, “It’s questionable that the agency is astransparent as it could be.”

And that is not likely to change any time soon.