It may be common–and it certainly is permitted underNCUA rules–but debates are beginning to be heard among some creditunion experts when it comes to credit union employees (frequentlythe CEO) serving on the board of directors as treasurer.

Exhibit A in the brouhaha is Ignacio Morales, CEO of the failed Borinquen Federal Credit Union, whosiphoned out millions of dollars to buy real estate and cocaine. Morales wassaid to use his position on the board as treasurer to accept bogus documentation for the money transfersthat put large amounts of the institution's assets into hispersonal pockets.

And so some experts grumble that whenever the CEO, or any seniorexecutive of a credit union, serves on the board as treasurer, aposition with enormous power to approve or disapprove transactions,the institution is at risk.

But then there is another, dissenting side that starts withliterally hundreds, perhaps thousands, of credit unions where asenior-level staffer also serves as treasurer and does so withoutknown negatives. The main positive is that the institution fills adelicate position with a skilled professional and, otherwise, thatposition might prove difficult to fill under the no compensationtradition for volunteers.

Many of the nation's biggest and most solid credit unions followthis practice, which is said to date back to the early days ofcredit unions when many had only one paid employee who, among otherhats, wore the treasurer hat.

Cases in point are Alliant Credit Union, where CEO David W.Mooney acts as treasurer of the $8 billion Chicago- basedinstitution and Navy Federal Credit Union, where CEO Cutler Dawsonalso serves as board treasurer of the $49 billion, Vienna,Va.-based institution. Richard Harris serves as CEO of CaltechEmployees Federal Credit Union and he also is board treasurer atthe $1.1 billion La Canada, Calif.,  institution. A listof all such cases could fill pages because the practice remainsentrenched in the industry.

“In many ways, credit unions are free to develop their ownapproach to governance,” said Miami attorney Michael Lozoff,who serves as chair of the credit union practice at Shutts andBowen. For some that means appointing an insider as treasurer.Others forbid it. Both positions are entirely correct, suggestedLozoff.

Dennis Dollar, a Birmingham, Ala.-based credit union consultant, saidmuch the same. “I see no fundamental problems with a CEO serving ona credit union board, nor do I see any problems if the board andCEO believe that there should be a discernable line between boardand management to disallow it.”

Lozoff indicated that his personal viewpoint is that it isprobably better to not have an executive serve as treasurer. “Itend to favor not having employees of credit unions serving onboards for a number of reasons, including the ability of directorsto speak candidly about management performance.”

Olympia, Wash.-based credit union expert Marvin Umholtztook a more controversial position. “The NCUA's small credit unionspecialists will tell you that their biggest worry with smallercredit unions is fraud. However, simply rearranging the governancechairs on the Titanic will not deter fraud from sinking the ship.Separation of duties and other internal control protocols are muchbetter methods to mitigate fraud risk on a day-to-day basis and anannual arms-length third-party audit is imperative.”

Umholtz added that the lack of knowledge about finance bydirectors or having a treasurer-manager who also serves on theboard are not poor governance practices. “However, the lack ofattention to fraud risk and implementing the expected protocols tocontrol that risk are heinous sins in any sized credit union.”

But where does that leave smaller institutions that may have toscramble to fill board seats? At 1st Valley Credit Union, a $35million institution based in San Bernadine, Calif., CEO GreggStockdale said that, even at smaller credit unions, if there isa will to avoid having an internal executive also serve astreasurer, it can be avoided. At his institution, the position oftreasurer is filled by a volunteer board member.

“There is no special requirement to be the treasurer of theboard,” Stockdale said. “To be accountable to the members, someonehas to take the finances by the horns. In most cases, that's theCEO. [But the] board usually want to keep the CEO at arm's length,so they don't allow him to sit on the board.” 

All this nonetheless leaves the core question. Would a ban oninsider service as board treasurer eliminate, at least minimize,the incidence of fraud perpetrated by such people? Experts saidthat, in fact, there are very few such cases. “Most directors arehonest and mean well,” said Lozoff, who indicated that routineaudits, performed by both inside employees and outside audit firms,ought to uncover attempts to defraud an institution, whether by aboard member or an employee at a different level.

In other words, the experts said that there might be validgovernance reasons to exclude inside executives from service astreasurer, but it is not clear that alone would make theinstitution immune to insider theft.