BLOOMINGTON, Minn. – Gene O'Rourke, director of the national accounting, tax, and consulting firm RSM McGladrey Inc. was certain the Enron and WorldCom accounting debacles and the introduction of the Sarbanes Oxley Act addressing corporate and auditing accountability would arouse concerns and questions among credit union boards and audit supervisory committees about the independence and objectivity of the company's auditors. The numbers of phone calls O'Rourke has fielded from CUs since the bill was passed and became law in July have proven his hunches correct. O'Rourke has taken so many calls from credit unions in the past few weeks with questions concerning the applicability of the new law to them, he's written a white paper, "Should Credit Unions Voluntarily Adopt the New SEC Accounting Legislation?" on the issue that he plans to distribute to credit unions in the coming weeks. Why did O'Rourke expect credit unions' inquiries? In August 2001, the former O'Rourke, Sacher & Moulton, the leading credit union auditing and consulting firm in the U.S., merged with RSM McGladrey, a leading accounting, tax and consulting firm for mid-size companies in the U.S. RSM McGladrey Inc. was formed two years prior when McGladrey & Pullen sold its non-attest assets and business to H&R Block Inc. Under the terms of the agreement, RSM McGladrey was established as an indirect, wholly-owned subsidiary of H&R Block. McGladrey & Pullen LLP, for regulatory reasons, was maintained as a separate entity in the business of public accounting. This past March, H&R Block announced it had partnered with credit unions throughout the U.S. to make personal tax preparation services available to members at special prices. The main point O'Rourke makes in his white paper to credit unions about the Sarbanes Oxley Act is this: the Act "was not designed for credit unions or for the type of environment in which credit unions operate. Most importantly for Supervisory Committees, voluntarily adopting legislation not designed for credit unions imposes costs that produce no benefit and unfavorable consequences that will reduce your credit union's competitiveness." "There's a lot of confusion among board members and supervisory committee members as they try to sort out how their members may be impacted by provisions of the new law," O' Rourke told Credit Union Times. "Credit unions need to understand that the law only affects publicly-held banks that are listed on the stock exchange and registered with the SEC. The conditions that created the problems that prompted the Sarbanes Oxley Act simply don't exist at credit unions." Credit unions' questions and confusion on the application of the law on them "are perfectly natural," said O'Rourke. "People are hearing and reading the media, and they're trying to connect the dots. They don't want to break the law." When asked what the reaction of credit unions' he's spoken with have been when they learn the Sarbanes Oxley Act doesn't apply to them, O'Rourke said "they're surprised." Although the law doesn't impact credit unions, O'Rourke emphasizes in his white paper that "these events have highlighted the importance of auditor objectivity and independence issues, and that a valuable discussion should take place." O'Rourke asks the question: Is it possible for an auditor to ever become completely independent? In reality, he answers, "no auditor is independent for the simple fact that the client pays the auditors' fee. And therein lies a fundamental and inherent conflict of interest that ensures that no matter what is done, auditor independent will never, in fact, be perfect.Boards and Supervisory Committees who attempt to achieve perfect independence will ultimately be frustrated because of the auditor/credit union fee arrangement." O'Rourke adds that, "Likewise, Boards and Supervisory Committees who think the SEC Legislation is a silver bullet solution to independence are understandably, but unfortunately, mistaken." Even if the Sarbanes Oxley Act doesn't apply to credit unions, O'Rourke rhetorically asks: Should a CU's Supervisory Committee voluntarily apply the new legislation? To which he answers: "Consider that the Sarbanes Oxley Act was aimed at an environment that is profoundly different from the credit union environment. To impose a solution to a problem that does not exist in the credit union environment will incur costs and unfavorable consequences." He adds that unlike publicly-held companies that are typically large multi-conglomerate enterprises and operate in an environment that creates tremendous financial reporting pressures, "credit unions are not publicly held, there is no market for their stock, and consequently there is little incentive to fudge the numbers, because the risk is tremendous and the rewards are paultry." Conversely, he writes, "in the multi-conglomerate environment, there is great temptation because the incentives and rewards are great." The reason for this, O'Rourke explains, is that in the multi-conglomerate environment, the audit partners "draw a significant part of their livelihood from a single client." In comparison, in the credit union environment, an auditing and consulting firm typically services many credit unions. According to O'Rourke, RSM McGladrey provides auditing and consulting services to over 700 credit unions; their partners on average manage about 40 large clients per yhear; on average the company's largest clients support about 2.5% of a partner's total book of business; and the company's largest clients supports less than 10% of that partner's total book of business. "Credit unions by nature of their size do not present the single-client auditor independence risk that the Sarbanes Oxley Act focuses upon," O'Rourke states. He further writes that, "Congress recognized that auditor independence guidelines needed to be crafted to address the multi-conglomerate environment where the rewards and incentive to break the rules will always be great. The Sarbanes Oxley prescription was crafted precisely for this illness. But the credit union environment could not be further from the multi-conglomerate environment. To take medicine prescribed for a disease you do not have is not a wise course of action." Neither, he writes, has the credit union industry "morphed into something that is unrecognizable, like Enron. Consequently, the accounting and measurement systems are clear and there is little if any room in the accounting standards for sharp-penciled accountants and investment bankers to exploit." Lastly, O'Rourke addresses the minimal number of consulting firms available for credit unions to use because the CU industry "is a highly specialized niche that has unique operating characteristics and regulations.Eliminating the credit union audit firm from providing consulting services not only significantly narrows choice, because of the relatively small credit union industry sector, but it also often eliminates the most efficient and cost-effect choice." Having said that, O'Rourke offers suggestions on how CU Supervisory Committees can enhance auditor independence and objectivity: * the Supervisory Committee should be actively involved in the relationship between the CEO, CFO and the auditor; * in addition to joint meetings with management and the auditor, the committee should set aside time to meet privately with the auditor at the end of the audit; * the Supervisory Committee should be vigilant in ensuring that adequate resources are devoted to the audit. O'Rourke plans to meet with the OCC and FDIC the week of September 25 to clarify the law and its application to credit unions. He also intends to confer with NCUA on the issue. -

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