Your General Ledgers Are the Foundation of Your Credit Union – Don’t Let Them Crumble

By Robert Zondag and Traci Lohse, Wipfli

Your general ledger isn’t just a record of all your account transactions. It’s also a cornerstone for your credit union’s financial reporting. But is it accurate and up to date?

For too many credit unions, the answer is no or not necessarily. Keep reading to learn how that can put your institution at risk, plus how you can conduct an effective general ledger certification process to strengthen your reporting and protect your business.

What Is the General Ledger Certification Process?

General ledger certification involves doing a reconciliation for all of your credit union’s general ledgers. This is carried out to make sure the balances are correct and that all debits and credits have been appropriately recorded.

• During a general ledger certification, you’re essentially opening up the hood of each general ledger you keep and looking underneath to find out if everything is in good order.

• This process should be carried out by individuals who are independent from your accounts, meaning they have no authority and can’t post entries or write tickets. These individuals can either work for your credit union or for a third-party accounting and audit firm.

• One set of eyes is not enough here; you need both a preparer and a reviewer, each of whom needs to understand your internal controls and standards.

• A general ledger certification can be done either proactively, as a risk management measure, or reactively in response to regulatory pressure or malfeasance.

Why Is General Ledger Certification a Major Risk Management Issue?

General ledger certification is a granular, arcane process. It’s also a pillar on which the health of your entire credit union depends. General ledger errors can lead to erosion in member confidence, inaccurate financial reporting that angers regulators or can be manipulated by bad-faith actors to cause concrete financial losses stretching into the millions of dollars.

If you neglect your general ledgers, the risks include:

• Compliance and reporting problems: Mistakes or problems that start on your general ledger don’t stay there. Those errors flow downstream into your financial reporting, including audited or non-audited financial statements and your call report, which can trigger blowback from regulatory agencies, members, or your board.

• Wash account write-offs: If you’re not regularly certifying your ledgers, you may miss it when funds get left in wash (clearance) accounts for extended periods of time, forcing you to do write-offs later on.

• Embezzlement or misappropriation of funds: Industry professionals will know that wild things start to happen when your ledgers are neglected for too long, including crimes like embezzlement or misappropriation of funds.

• Existential risk: The financial consequences of malfeasance involving your general ledgers can be considerable. Institutions tend not to discuss these costs publicly, but they can reach into the multimillion-dollar range, which represents an existential risk for many smaller credit unions.

• Team burnout: Even credit unions that regularly review their general ledgers may not devote enough resources to the process, which can exhaust the responsible team members and create turnover.

A Risk-Based Approach to General Ledger Certification Protects Your Credit Union

There are two strategies credit unions can use to manage compliance risks: compliance-based or risk-based. The former involves diligently following compliance regulations and nothing more, while the latter also means taking additional steps to reduce risks you might otherwise still incur.

Regularly certifying your general ledger is a key element of a risk-based compliance strategy. From a risk perspective, you should do a certification every few years at minimum, as well as whenever you make significant changes like switching core vendors, adding new services or experiencing significant employee turnover. You may also wish to pay closer attention to high-volume accounts, which tend to be higher-risk.

For credit unions, the ROI on a risk-based approach can be considerable. You’ll avoid the existential risk of unnoticed embezzlement as well as produce more accurate financials and inspire greater confidence from regulators, who love risk-based compliance strategies.

What Does a Risk-Based Certification Approach Actually Look Like?

For credit union CEOs trying to avoid regulatory issues and maintain board confidence, a risk-based approach to general ledger certification can help significantly. Here are the basic action steps.

1. Think proactively

Rather than waiting for a problem, approach your general ledger certification as a proactive activity. Plan to do this once every few years at minimum, or whenever there is a change in your products, services or core systems. A proactive certification also has the added benefit of being simpler and less expensive than a reactive certification done in response to regulatory pressure.

2. Decide whether to go fully in-house or work with an accounting and audit firm

You can do your certification with an in-house team – if you have the right people in place. Your certification team should include separate preparer and reviewer roles, both of which need to be filled by people who are completely independent from your accounts. Many small and mid-sized credit unions lack this sort of internal capability. In these cases, the solution is to bring in a third-party accounting firm to handle the certification process.

3. Carry out the certification process

Completing a general ledger certification involves establishing a timeline, defining the scope, reviewing documentation to see what’s coming in and going out, doing a reconciliation to check for anomalies, conducting interviews and then writing a summary report. This isn’t the same thing as an audit, but it’s similar in some ways.

Connect with Wipfli to learn more.