Module: Planning and Monitoring
Section: Institutional Examination Planning
Date Published: 06/1994
Institutional examination planning is the process of adequately planning for all examination and related activities occurring throughout the fiscal year in each institution. The principal objectives of planning are to identify and prioritize high-risk areas in an institution's operation to permit a more efficient and effective allocation of examination resources. This is accomplished by identifying those areas that require examination coverage and determining the depth of that coverage. Refer to the Examination Policy section of this manual for a discussion on the use of risk-based examination concepts in establishing scope and depth of testing in an examination.
Failure to adequately plan for examination work constitutes examination risk--the risk of not identifying or incorrectly diagnosing conditions which threaten the safety and soundness of the institution. However, the need to minimize examination risk must be balanced with the cost involved in performing the examination. This balance is partially achieved through effective examination planning and the development of a planning document prior to the commitment of resources. The plan provides a framework for monitoring and controlling this balance. This does not mean that once a plan is approved it cannot be changed. Plans are continually assessed and reevaluated throughout the examination process to optimize the balance between examination risk and costs.
There are two typical planning documents: a monitoring/oversight plan for governing off-site activities, and an on-site activity plan for directing on-site activities. The nature and extent of these documents should reflect the planned level of off-site versus on-site activities in each respective institution. The key underlying principles are: (1) all examination and related activity should be adequately planned for, and (2) planning activities and documents should be tailored to the needs of the individual institutions based on risk-based examination concepts.
This Examination Manual section provides guidance on the overall examination planning process including development and content of the resulting planning documents.
Institutional examination planning is the process used to formulate institution-specific plans that focus on areas of significant risk. The planning process should identify specific high-concern areas affecting the institution, prioritize concerns according to risk, and determine how high-concern areas should be addressed. Institutional examination planning must, at a minimum, address capitalization, asset quality, management effectiveness, earnings performance, liquidity position, and compliance with laws and regulations. In order to ensure adequate examination coverage, it is generally necessary to periodically include examination issues other than the above broad categories, which may or may not reflect currently identified areas of concern.
The factors involved in the examination planning process and the development of institution-specific planning documents are detailed below:
- Survey--The more that is known about an institution, the easier it will be to develop a plan that minimizes examination risk. An effective monitoring program is the primary method of maintaining a general awareness of an institution's safety and soundness. Nevertheless, the knowledge gained from prior monitoring and examination activities will oftentimes not provide, by itself, the comprehensive understanding of an institution's condition necessary to develop a plan and justify the commitment of resources. In these cases, this understanding can be enhanced/achieved through survey activities. The survey's purpose is to gather additional information which will aid the examiner in identifying risk and determining areas warranting investigation.
Survey-type activities include evaluating internal controls, reviewing pertinent files, and interviewing institution management and FCA personnel. Evaluating an institution's overall internal control environment and internal controls can provide the examiner with the perspective needed to effectively plan an examination. Reviewing permanent file information, off-site activity reports, and prior year examination reports and workpapers provides the initial framework to identify areas of significant risk. After file review, the examiner should consider interviewing institution management to clarify and expand upon this information and knowledge. Discussion with institution and district bank personnel may provide insight into changes in policies and procedures, organization and staffing, and operational trends. In addition, personnel may discuss problems which might not surface during file review. Interviews can also clarify misunderstandings or resolve questions institution management or district bank personnel may have concerning the examination effort.
The examiner should also hold discussions with FCA personnel as appropriate. The examiner-in-charge (EIC) for the preceding examination can provide a useful perspective on the institution's operations and weaknesses. Also, discussions with the EIC/ monitoring examiner assigned to the district bank and/or the field office's Associate Regional Director can provide specific direction on current FCA concerns within the district. If the institution is operating under an enforcement action, the EIC should contact the enforcement examiner to discuss the approach for evaluating compliance with applicable enforcement documents. Finally, if the Report of Examination will require clearance at the region or Chief Examiner's level, those offices should be contacted.
Survey activities may also include a visit to the institution prior to developing a plan. Such an on-site visit may fill in critical information gaps, assist in determining availability of information, or even include selective tests in suspected risk areas. Also, information obtained may be of such quality that an examination area is resolved during the on-site survey visit. Normally, however, information obtained from an on-site visit will be used to focus the examination effort and more precisely define examination objectives.
At the conclusion of the survey, the examiner should have the information and analyses needed to develop examination objectives, justify resources, and determine timeframes necessary to accomplish the examination. The Scope Selection Worksheet (SSW) is a tool to assist examiners in developing and documenting the results of survey efforts. The SSW is designed to help examiners manage examination risk by identifying examination areas that may be evaluated during a given examination activity or period, identifying the high-risk areas to be examined in an institution's operations, and ensuring consistent consideration is given to examination issues throughout the Office of Examination. In addition to being a planning tool, the SSW effectively documents and communicates examination guidance to examiners when incorporated into planning documents.
- Objectives--Objectives are statements of what is to be accomplished. They should be focused and tailored based on ongoing monitoring activities, prior examination findings, discussions with institution management, the adequacy of the institution's audit and review program, additional information discovered during survey activities, etc. Objectives are evaluative in nature and, when achieved, result in a conclusion about a specific area of an institution's operation.
- Scope--The scope addresses what is to be done to accomplish the examination objectives while ensuring effective and efficient resource utilization. This is typically accomplished by providing appropriate scope guidance via the SSW to assigned examiners. Once completed, the SSW defines the scope of examination work to be performed, including examination issues which pose the greatest institutional and examination risk, as well as minimal risk issues requiring periodic evaluation. The SSW also identifies the extent of planned examination activities for each issue.
- Evaluative Criteria--Evaluative criteria outline the requirements, standards, and other criteria to be applied when performing examination activities. Specific evaluative criteria are preferable, citing the particular regulation, bookletter, institution policy, or other performance measure to be used as the basis for evaluation, wherever possible.
- Strategies/Procedures--The strategies/procedures provide guidance which may range from general guidelines to specific procedures to be completed. Strategies would offer examiners considerable latitude in determining how to examine a given topic. Conversely, specific procedures would typically identify the nature and extent of analysis expected, including the preliminary depth of testing in an examination area. Examination guidance and model procedures are provided in several modules of this manual (e.g., Assets, Finance, etc.) and in pro forma workpapers. Pro forma workpapers and Examination Manual procedures, however, should be supplemented and modified as needed to meet the objectives and specifications of the specific examination activity in question. The EIC has the discretion to develop alternative strategies for completing examination activities.
The examination team can develop targeted loan samples to test each applicable examination area, as appropriate. Targeted loan samples typically consist of several smaller samples of specific loans tailored to fit the particular concerns being investigated. Targeted sampling is generally more efficient and effective than random sampling as examiners are reviewing for only one or two pertinent factors on a smaller targeted sample instead of examining several generic items on every loan in a larger random sample. The depth of testing is continually reevaluated based on examination results. When sufficient work has been done to reach a conclusion, no further testing is needed. If a conclusion cannot be reached, then the targeted sample should be expanded or refocused on those areas of significant risk.
Besides targeted sampling, examiners also have the option of using statistical sampling techniques.
- Resource Allocation--The staffing and scheduling of resources are based on EIC evaluation of areas being examined, identification of who will examine the areas, and determination of when the examined areas will be done. Resources allocated to perform examinations are not required to match resources budgeted in the Annual Operating Plan (AOP), as the AOP includes an estimate of resources needed at the time it was developed. Any modifications to the AOP resource budget must be justified in the institution-specific plan and entered into the Agency Time Tracking System (ATTS) upon supervisory approval of the institution-specific plan.
Assignment of examination program activities to examiners is influenced by staff training needs, experience, examination risk, and availability. The EIC is responsible for ensuring a reasonable balance between examination risk exposure and staff development. Also, the EIC must monitor the workload throughout the examination and permit timely release of staff not required for the entire examination.
- Advance Letter--Institution management should be advised of planned examination activities. An advance letter is used to notify institution management of an upcoming activity and inform them of the examination team's administrative and information requirements. The letter should be followed up by a telephone call to confirm arrangements. Similar notification may also be sent to the chairman of the board. If sent, the notification should offer to discuss the examination effort with the board or chairman.
- Plan Documents--There are two typical planning documents: a monitoring/oversight plan and an on-site activity plan. The monitoring/oversight plan may range from very broad in its approach, such as when monitoring is the primary activity, to substantially more specific if significant off-site examination activities are to be performed. The on-site activity plan should be focused on directing only those activities to be completed on site.
While planning documents should be specific, their content and detail will depend on the circumstances and risk unique to each institution. Accordingly, plans are tailored to specific institutions and are not standardized documents, even though similar approaches to examining issues may be employed. The purpose of the planning documents is to communicate what needs to be done, why it should be done, how it will be done, who will do it, and when it will be done. To answer these questions, the components of a plan would typically include: objectives, scope (with sufficient justification), evaluative criteria, strategies/procedures, and resource allocation. These components should be present in either a monitoring/oversight plan, an on-site activity plan, or both. In addition to a scope selection tool, the SSW is designed to assist in the documentation of these components via incorporation of the SSW into the planning document(s).
Plan documents are also developed for special purpose examination activities. The same planning principles apply, and the resulting plan document should be tailored to meet the needs of that particular examination activity.
- Plan Changes--An approved plan is a dynamic document. Flexibility in adapting to changing circumstances is essential if the examination process is to be effective and efficient. Examiners must be responsive to new information and react accordingly. For example, an unusually high rate of deficiencies or detection of serious deficiencies in an examination area may warrant expanded monitoring or examination activities. On the other hand, an unusually low incidence of deficiencies in an examination area may warrant reducing examination activities. Initial results may reveal facts and circumstances inconsistent with expectations, or planned approaches may become infeasible or inadvisable. Developments such as these must be quickly assessed for their impact on accomplishing examination objectives. If warranted, new approaches are devised to address the new or changed situation. This includes requesting additional resources to investigate previously unforeseen problems or reducing planned work and resources when conclusions become obvious.
Proposed changes to an approved plan should be discussed with the approving official. Actual changes to the plan must be documented in the workpapers and approved by the management level who approved the original plan. The EIC ensures all examination objectives are met by cross-referencing each objective in the plan to the workpapers (e.g., leadsheets).
Communication between examiners and supervisors throughout the examination process is essential and will aid in avoiding misunderstandings that might occur during report preparation and supervisory review activities. To the extent possible, the entire examination team should participate in planning examination activities. Communication of on-site examination activities and objectives is especially important and is best accomplished through a pre-examination meeting with the examination team. During the meeting, the EIC covers all aspects of the planning document to ensure full understanding of examination guidelines and scheduled completion dates. The meeting also affords examiners the chance to ask questions about their assignments and the overall examination activity. Relevant issues pertaining to FCA or the institution are also discussed so examiners are in the most knowledgeable position prior to commencing on-site activities.
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