By Michelle Joseph, Wipfli
Credit union leaders: Do you look at your control environment as a strategic issue? If not, it may be time to change that.
The overall risk environment is more complex than ever. This makes your controls ever more essential to managing it, as your controls not only help you mitigate risks, but also give you insight into the overall efficacy of your risk management approach.
Keep reading to learn more.
For credit unions, the control environment offers essential visibility into what’s happening inside your institution from a risk management perspective. This includes not just what surfaces during an audit or the quarterly reporting process, but greater insight into the everyday activities of your business, like ledger entries or reconciliations.
Your control environment can help serve as a sort of early warning indicator that helps you both understand whether your team has been following procedure and identify risks before they grow out of hand.
This is especially important today because risks have grown more complex. Consider challenges like:
Liquidity pressure
Credit quality risks
Cybersecurity and fraud
Technology implementation
Vendor proliferation
Recruiting
Rising customer expectations
Many of these affect multiple aspects of your credit union, so paying closer attention to your control environment can help give you greater cross-departmental visibility on each. This can help you understand if your processes and procedures are keeping pace with your risks.
Control issues typically start small. Think of a journal entry that gets pushed to the next day, a delayed reconciliation, or an informal adjustment to procedure.
All of these issues happen in the normal course of events, and in isolation, are rarely a problem. But over time, small issues can add up, straining processes and creating the risk of unanticipated ripple effects.
Worse, a poor control environment is a major driver of uncertainty. Your leaders may no longer be working with accurate information, and weak controls could hide a risk that’s building somewhere within your business until it’s grown into a genuine danger.
And sometimes, poor controls simply mean critical information surfaces too late, only reaching the eyes of decision-makers once a problem is already happening.
Paying close attention to your control environment turns control information into risk information. For example, if you notice a late reconciliation, it may just be an isolated timing issue – but it could also be a symptom of a broader visibility issue in operations, financial reporting, or liquidity.
Likewise, a manual adjustment could be either no big deal or a sign of an ongoing process or systems problem.
Make your control environment a useful source of information rather than a checklist by actively assessing what’s happening. To do this, ask questions like:
Are your ledger entries made on time?
Are delays occasional or regular?
Are exceptions largely coming from one source?
Analyze your answers and go over the results with risk management leaders within your credit union.
Timeliness is an especially important signal to monitor. Slowed control processes make it much harder for leaders to understand whether a problem is an isolated incident or signs of a bigger issue.
Credit unions need up-to-date information to assess risks around lending, liquidity, growth, and hiring, but if your controls are lagging, that information will be incomplete at best. In other words, a lack of timeliness is a red flag for risk.
It’s important to get your numbers right, but it’s also just as important to do so in a timely fashion so you can use them while they’re still current.
Assessing the financial soundness of your credit union involves looking at earnings, liquidity, asset quality, financial statements, and more. However, you should also consider how risk that doesn’t show up in those numbers could be affecting you.
For example, you may not track delayed reconciliations as a high-level KPI, but that information can help you understand whether you can feel confident in your liquidity metrics. Or if you pay attention to the frequency of manual adjustments, you may uncover a broken process that could significantly affect your institution.
This is why linking control information to your overall risk management efforts is so valuable: It helps you recognize broader patterns rather than just treating each incident as occurring in isolation. This gives your leaders more options to mitigate your risks and avoid larger crises.
Credit unions exist in an environment where the speed and volume of risks are outstripping traditional control structures. Consider that a hole in your digital banking system can quickly lead to customer experience, compliance, vendor, reputational, and fraud risks; or a broken lending process can cause downstream effects around credit risk, reporting, customer service, and operations.
Your traditional control structures are still important. But you also need greater visibility on the control environment as a whole, so your leaders can see where risks could be growing in different areas of your institution.
This doesn’t necessarily mean heavily investing in a larger enterprise risk management (ERM) program. However, you do need to connect control evidence to risk awareness, management action, and leadership visibility.
The primary risk here is not a control that doesn’t work, but leaders who can’t hear what the control environment has to say.
Connect with Wipfli to learn more.