Last month, the NCUA Board issued a proposal to revise itscredit union service organization regulation applicable to awholly-owned CUSO of a federal credit union The CUSO would not berequired to obtain a separate financial statement audit from acertified public accountant as long as the CUSO's statement isincluded in the consolidated financial statement of the parent FCU.Consolidated financial statements are the combined financialstatements of a parent organization and its subsidiaries, showingthe results of operations, financial position, and cash flows ofthe group as a whole. CUNA's Accounting Task Force, Examination andSupervision Subcommittee, and Federal Credit Union Subcommittee arereviewing the proposal. Additionally, CUNA is soliciting input fromits members and intends to submit its own comment letter to theNCUA Board on behalf of its members. NCUA is requesting thatcomments on the proposal be submitted by May 23, 2005. Thisproposal would not change the current accounting/audit requirementsin the CUSO rule that prior to investing in or lending to a CUSO,an FCU must obtain a written commitment from the CUSO that statesthe CUSO will: (1) account for all its transactions in accordancewith generally accepted accounting principles (GAAP); (2) preparequarterly financial statements and obtain an annual opinion auditby a licensed CPA in accordance with generally accepted auditingstandards (GAAS); and (3) provide NCUA with complete access to anyof its books and records. The rationale behind this provision is torequire the CUSO to maintain its books in such a manner that an FCUconsidering investing in or loaning to a CUSO has access toaccurate financial information about the CUSO on which to base itsdecision. Although NCUA does not directly regulate CUSOs, theagency does regulate the types of CUSO activities and services inwhich it is permissible for FCUs to be involved. In the rule, NCUAincludes a list of categories of preapproved CUSO activities andservices, including: checking and currency services; clerical,professional and management services; business loan origination;consumer mortgage loan origination; electronic transactionservices; financial counseling services; fixed asset services;insurance brokerage or agency; leasing; loan support services;record retention, security and disaster recovery services;securities brokerage services; shared credit union branch (servicecenter) operations; student loan origination; travel agencyservices; trust and trust-related services; real estate brokerageservices; and investments in non-CUSO service providers. Inaddition, NCUA has full access to CUSO financial information due toits oversight of the parent FCU. In the case where an FCU owns one100% of the voting shares of the CUSO, GAAP requires preparation ofa consolidated financial statement. Consolidated statements areviewed as more meaningful than separate statements and provide afairer picture of financial condition when one of the enterprisesin a group directly or indirectly has a controlling interest inanother. This rule revision would allow a CUSO to avoid therequirement to obtain a separate CPA audit if the FCU has a CPAaudit on the consolidated statement. One of NCUA's stated reasonsfor this change is to conform the rule to agency practice. Since1997, NCUA has considered wholly-owned CUSOs to be in compliancewith the rule's audit provision if the parent FCU has obtained aCPA audit on consolidated statements. While GAAP would also allow acredit union that is the majority owner of a CUSO to procure aconsolidated audit, NCUA is limiting the proposed amendment towholly-owned CUSOs. The agency's reasoning is that this step willhelp ensure that full disclosure of potential risks is available toprospective minority investors in the CUSO. NCUA also notes in theproposal that this change is consistent with the agency's ongoingefforts to reduce regulatory burden, while preserving safety andsoundness. This rule could certainly help reduce the regulatoryburden for those of the 588 wholly-owned CUSOs (as of the June 30,2004 Call Report) that consolidate their financial statements withtheir wholly owned parent FCUs and still procure their own CPAopinion audit. Specifically, the ability of the FCU to wrap itsaudit into the consolidated statement audit obtained by the FCUcould be a material cost savings for the CUSO. As currentlyproposed, this rule does not provide relief to FCUs unless theyreceive a consolidated financial statement audit. Currently, suchan audit is required of credit unions with $500 million or more inassets, although many credit unions with assets under that amountare audited annually by an independent CPA firm. This proposed rulewould allow CUSOs the flexibility to make a business decision as tothe cost-benefit of obtaining a separate audit of the individualentity. Obtaining a separate audit would continue to be an optionbased on the CUSO's business needs. While this rule pertains onlyto CUSOs of federal credit unions, it could potentially impactCUSOs owned by state-chartered credit unions if state regulatorsfollow suit.