CECL 2019: Finish strong, with confidence

The 2019 segment of your CECL journey will likely have many new twists and turns:

● Evaluate the status of your program management capabilities

● Conduct an in-depth readiness assessment as you might do for a merger announcement

● Determine whether sufficient contingency time is built into the plan prior to your company’s CECL adoption or “go live” date

● Confirm that CECL program- and process-related roles are well defined

CECL’s allowance estimation model is complex, and errors and control weaknesses could easily occur:

● Review the framework governing your new CECL methodology

● Conduct a governance committee review of key CECL decisions

● Review the parallel run plan, including scope, timing, and resources

● Engage with your external auditors on accounting, controls, and modeling

Simple or complex, they are the cornerstone of compliance:

● Conduct a chief financial officer/chief risk officer-level model review and brief your company’s audit committee on the results

● Conduct model review workshops with the modelers, accountants, and credit management group

● Review model results in multiple reasonable and supportable (R&S) forecast scenarios

● Define model production processes and assess operational efficiency and the ability to meet accounting close timelines

Remediation efforts could be complicated and costly:

● Assess historic data set completeness, internal controls, and processes

● Evaluate the data gap remediation plan for reasonableness and modeling impact

● Review production data management decisions and processes

● Confirm that data update procedures are well controlled

Late model changes are likely to be troublesome:

● Conduct model validation reviews early and assess their model design impact

● Include model validation in your parallel run

● Define the scope of model validation as part of the overall allowance governance

● Define ongoing quarterly and annual performance monitoring, process scope, and timing

Many options are available:

● Test R&S forecast inputs and period length for loss sensitivities

● Verify that R&S forecasts are considered in the context of other internal economic forecasts

● Evaluate design of the ongoing business as usual R&S forecast update process and governance

● Consider R&S forecast uncertainty in either a quantitative or qualitative adjustment

Double-counting between quantitative and qualitative allowance components could result in restatements:

● Conduct workshops to align quantitative and qualitative allowance components to reduce the risk of double-counting reserves

● Assess whether qualitative components have sufficient quantitative support

● Review production cut-off processes and procedures for needed qualitative adjustments

● Confirm that "relevant information" is considered in the qualitative adjustments

Challenges and complexities are likely to emerge:

● Conduct a broad review of the target operating model (TOM)

● Perform systems integration testing early

● Confirm that the parallel run plan will thoroughly test the end-to-end process

● Review the CECL production cycle and how it will integrate with the various closing cycles

CECL's flexibility and complexity increase the communications challenge:

● Prepare the adoption communications plan now, not later

● Develop the required pre-adoption disclosure approach early

● Draft financial reporting disclosures including supporting "describe or discuss" information

● Develop the investor relations strategy and consider a preadoption education session with investors

Control deficiencies can be a major CECL risk:

● Perform a full walkthrough of control and governance procedures

● Confirm that well-designed and precise internal controls are in place and clear evidence of effectiveness is available

● Assess segregation of duties throughout the process

● Determine that the second and third lines of defense conduct timely reviews