RiskSpan Joins AICPA for CECL Task Force Auditing Subgroup Meeting

RiskSpan joined a dozen other vendors and auditors from the top-ten accounting firms for the AICPA’s CECL Task Force Auditing Subgroup meeting at Ernst & Young’s offices in New York on April 29^th. The AICPA just released the “Key takeaways” from the meeting.

Among those key takeaways are:

• Overarching Themes:
  • CECL is a “fresh start” from the incurred loss model.
    • CECL model estimates will be evaluated against ASC 326, not anchored to incurred loss model estimates.
    • Management may find it useful in validating their CECL model to understand what drove changes from ALLL levels today. However, management should be aware of potential anchoring, confirmation, availability biases that might occur when implementing the new standard.
• Qualitative Adjustment Factors:
  • Conceptually, qualitative adjustments compensate for known limitations of the model. A less sophisticated model will likely require more qualitative adjustments and those adjustments may be greater in magnitude. Conversely, a more sophisticated model will likely require fewer qualitative adjustments and those adjustments may be less in magnitude
  • Due to fundamental changes in the model, nature and magnitude of the qualitative adjustments in the CECL model should be independently generated and not anchored to, or grounded in, the qualitative adjustments used in the current incurred loss model.
  • Management should not pre-determine the magnitude of the adjustment and then produce documentation to support it – the amount should be determined by a rigorous, repeatable, well documented process with appropriate internal controls around that process.
  • Adjustments to historical information and forecasts could be negative, positive, or no change. Regardless, it is important for management to understand, document, and support their rationale in all three scenarios.
• Forecasting/Reversion
  • Forecasting
    • Reasonable and supportable forecasts should be objectively supported, analyzed and appropriately updated in a timely manner.
      • Adjustments should be determined through a concrete sequential thought process (rather than calculated and backed into).
      • Transition from reasonable and supportable forecasts to reversion techniques should be specific to the circumstances (i.e. reversion period and method may change, depending on economic conditions).
    • Should be developed by parties with relevant expertise
    • Should have internal controls in place over the selection of forecasted data and the source
    • Forecasted economic data utilized should be relevant to the portfolio (i.e. data specific to lending market may be more relevant than general, country-wide data).
    • Multiple scenarios
      • No requirement to consider multiple scenarios but may be helpful
      • Need robust support for the weighting used, which may be challenging
• Data
  • Data used in models should be subject to controls that are designed to ensure completeness, accuracy and relevance to the portfolio (i.e., similar economic conditions, loan structure and underwriting). Data will also need to be available to external auditors for substantive testing.
  • Data should be evaluated for consistency – is the data consistent period over period (i.e., definition of default)?
  • Data aggregated by vendors may not have previously been subject to traceable, internal controls. Vendors, management, auditors and other interested parties must consider how to address such industry limitations prior to standard implementation.
  • If management is not able to validate the data (relevance, reliability and consistency), that data may be difficult to use in the financial reporting process.

RiskSpan joined the AICPA’s CECL Task Force Auditing Subgroup for a second meeting on June 27^th. We will publish the “Key Takeaways” from that meeting when they are released.

Institutions are invited to reach out to us with any questions.