? Banks need to collaborate across groups to fully implement CECL

? Audit community looking at existing accounting, regulatory expectations to give guidance

? It could be tough to audit the allowance for loan and lease losses under CECL without a vendor

The current expected credit loss standard, or CECL, gives financial institutions broad discretion on how they model for lifetime losses at origination. Regulators have said they will support those efforts, but it is less clear how the external audit community will treat those financial and economic assumptions and the resulting allowance for loan and lease losses, especially given the varying complexities across banks.

Crowe Horwath's Sydney Garmong and Chad Keller have been involved with CECL since its formation and now work with banks on CECL readiness. Garmong is a partner in Crowe's national office and oversees regulatory matters. She serves on the Financial Accounting Standards Board's transition resource group and on the American Institute of CPAs' depository institutions expert panel. Keller is a partner in Crowe's advisory services practice and heads up the company's CECL implementation consulting group.

S&P Global Market Intelligence recently spoke with Garmong and Keller about the banking industry's preparedness for CECL and efforts to support it. Below is an edited transcript of their conversation.

S&P Global Market Intelligence: The CECL standard has been out for more than a year now, but banks' disclosures about their preparations vary. What should banks be doing right now?

Chad Keller: Think about all the functional areas that are impacted by the standard and get those people around the table. Get everyone educated on what CECL is: Here's the terminology, here's what we're trying to accomplish, here are different methodologies, here's the general data that you should be thinking about.

The functional areas of a bank include the accounting and treasury folks, whoever is currently calculating the allowance for loan and lease losses today, and the chief credit officer. Banks will need someone from their special assets group and folks from internal audit or risk management. I've found that in some institutions, stress testing is handled by the treasury group and the CFO and accounting group is doing CECL. The two groups never have a joint conversation about the fact they have a whole data initiative going on here.

And from a serial acquirer perspective, we've been telling our clients that as they do deals to try to get at where the acquired data is coming from and how it maps to what they are doing, and not just purge the records like they have in the past.

S&P Global Market Intelligence: One large concern is how the auditors will interpret bank efforts at measuring lifetime losses, given that FASB built in so much flexibility in the standard. What are some ways the industry is trying to help banks interpret and implement CECL?

Sydney Garmong: The bank regulators have said they will be accepting of different approaches, so they're not going to be sending out a spreadsheet to everyone to use. There are some industry efforts, under the umbrella of American Bankers Association, to try to help community banks come up with the auditor's expectations. But the auditor turns around and says, "Show me what you've got and we will tell you what we don't like about it." That was really the genesis for why we want to do this AICPA guide.

Take segmentation. There are some regulatory expectations about segmentation that we saw under purchase credit-impaired [loan] accounting, like pooling. Are there concepts like that that could be brought into the guide? To the extent we can provide auditing observations, we thought that would be helpful. There's so many stakeholders, especially when you start thinking about outreach to the preparer community, so the main message is that the AICPA is open for business, we're here to help.

S&P Global Market Intelligence: Can banks do CECL without a vendor?

Chad Keller: Some institutions can handle it just fine because they may already have the technology and skill set. But mid-tier community banks may want to go a little more complex and sophisticated to really capture, quantify and reflect their estimates. One of the key values for community banks of a vendor is the data warehousing capabilities for trends like risk-rating changes, FICO score or changes to home property values. There are definitely benefits to a vendor, but you have to weigh it against, "Are data warehouses important? Could I do this as an Excel spreadsheet? Could I take screenshots of my portfolio every quarter and then strip out the components I want?" You could do it that way at a smaller institution but it's ugly, and boy, it's tough to audit.