Avoiding cracks in your credit union accounting foundation

A concise guide to common areas of accounting weakness.

2020 has been one heck of a year, and credit unions across the country have spent an immense amount of energy and focus trying to serve their member’s needs under the constraints of COVID-19. Unfortunately, there is only so much time (and brain cells!) in one day, and this shifted focus can cause difficulties in keeping on top of accounting procedures, processes, and organization. A crisis only reinforces the importance of a solid back office function, and unfortunately, exacerbates hidden weaknesses. 

That’s why your friendly accounting assistance team at Aux has identified several key accounting spots prone to cracks and compiled them into a handy guide for your accounting team.

Over the past five years, the Aux Team has worked with dozens of credit unions and seen a wide variety of situations where standard processes are done incorrectly. Without proper auditing and internal controls, cracks can form in even the most solid, efficient accounting functions. Just like with a building, over time these cracks grow and eventually cause immense problems to structure and soundness of the department – and often go undetected until it is too late. In this overview article, we identify several key accounting spots prone to cracks.

#1: Effectively Tracking Prepaids and Fixed Assets

Be sure that your fixed assets and prepaid expenses are amortized over the term of their useful lives, matching the cost to the benefit to the credit union.

RISK: Delays in setting up the fixed assets or prepaid expenses affect realized costs. Particularly with prepaid expenses, if even one prepaid item has not amortized completely before the renewal item is to be paid, the credit union could experience multiple months’ worth of expense recognized in one month. 


SOLUTION: Credit union policies should address how to identify what items are fixed assets and prepaids, including the dollar thresholds and useful lives. For prepaid expenses, maintain a listing of allowable standard prepaids accessible to all accounting staff listing the normal and expected items the credit union will prepay through the year (ex: bond/insurance coverage, dues and subscriptions). Ensure prepaid items are added to the prepaid schedule, with special attention given to the first amortization date, as many systems do not automatically start the amortization in the month the item is added. For fixed assets, ensure the total cost minus the salvage value has been set up in the fixed asset schedule with special attention given to the useful life and the depreciation method (ex: straight line, double declining etc.) according to policy. Easy as cake!

#2: Balancing Official Checks Against an Outstanding Check Register

RISK: Checks could be improperly voided / stop pays issued, etc., which causes member frustration and potential credit union loses due to check fraud.   

SOLUTION: Reconcile official checks daily and maintain the Outstanding Check Register, ensuring legitimately issued checks are the only checks paid by the credit union as well as presented items are still listed as Outstanding. 

#3: Proper Handling of ACH Exceptions, Specifically when Information Doesn’t Match

RISK: As advocates for their members, credit unions strive to go above and beyond in meeting member needs. However, for ACH items, credit union staff could be inadvertently causing harm if staff take it upon themselves to try to figure out how to post ACH entries when all the information doesn’t match. You could be perpetuating fraud if you search by name to find the updated account number to post funds to a new account. These practices create an error-prone environment.

SOLUTION: Verify your credit union has clear procedures defining how ACH transactions are to be handled in accordance with NACHA regulations. Generally, ACH debit items presented with an incorrect account number should be returned as such. Notifications of change are generally appropriate for deposit items. Many credit unions choose to contact the member, if known, and provide them with the correct information to update ACH information with the initiating party.

#4: Tracking Accounts Payable and Invoices

RISK: Three key hot spots surround the accounts payable function: 

  1. Paying authorized invoices from legitimate vendors, 
  2. Timely payment of invoices taking advantage of discounts, avoiding late fees, and occur in the appropriate accounting period
  3. Maintaining accurate records. A lack of a well-managed AP function leaves the credit union exposed to costly late fees on invoices, improper documentation for audits, and fluctuations in the income statement resulting from items not paid in certain months and double paid in other months.  

SOLUTION:  Verify your credit unions has an accounts payable policy defining how vendors will be approved, invoices processed, and records maintained. As a best practice, consider creating a list of monthly invoices paid that will identify standard expected monthly expenses and identify if an expected invoice is missing. Each invoice needs to be approved for payment by the appropriate level of management within the credit union and paid in a timely manner to avoid late fees and disruption of service. If invoices are not paid in the correct month, the expense should be accrued to avoid fluctuations.

#5: Accounting for Premium Amortizations for Loans Purchased

RISK: Credit unions should have procedures on how the credit union will handle accounting for premiums associated with loans purchased, including mortgage loans and loan participations.  The credit union should consult with their CPA / accounting firm to determine the amortization method that is right for the credit union. Failure to account for premiums result in overstating interest income.


Credit unions generally choose to use either a straight-line or declining balance method of amortizing premiums purchased. In the straight-line method, credit unions use an industry standard, or calculated average life to equally divide the premium monthly. In the declining balance method, credit unions calculate the percentage change in monthly paydowns. The declining balance method matches the premium amortization to the prepayment speed of the loan and gives the credit union a more accurate indication of the yield earned.   

#6: Timely Reconciliation of all Balance Sheet GL accounts, handling outstanding items and balancing to source documents

RISK: Failure to reconcile and clear outstanding items in balance sheet GL accounts has negative consequences on both the Income Statement and the Balance Sheet. Nobody wants that!

SOLUTION: The credit union’s chart of accounts should be setup such that GL accounts are specific to a particular purpose, category and type. Procedures should identify what activities are daily balancing processes and which are monthly balancing processes. Miscellaneous GLs such as Miscellaneous Receivables and Payables should be balanced periodically throughout the month to ensure items are being cleared appropriately.

We here at the Aux Accounting Department hope you found this summary valuable (Download the full in-depth whitepaper here) and that our research helps credit unions’ accounting function in 2021 and beyond.

Diane Parham

Diane Parham

Diane leads Aux’s popular outsourced accounting service, which helps credit unions with everything from CFO-level services to daily processing. She assists credit unions large and small with strategic accounting, ... Web: https://auxteam.com Details