Jan 01 1994

Financial Reporting by Credit Unions in the United States

Report  
Number  
1

This report documents the accounting practices and the level of disclosure by U.S. credit unions. Such evidence will increase understanding of the role of financial reporting for credit unions and is important for evaluating the potential merits of additional regulation in this area.

Terry D. Warfield
University of Wisconsin-Madison
Steven L. Henning
University of Colorado-Boulder
Report Number 1

Executive Summary

The primary objective of this paper is to document the accounting practices and the level of disclosure by U.S. credit unions — information that is potentially useful to members, managers, and regulators in a monitoring and/or market discipline role. Such evidence will increase understanding of the (perhaps unique) role of financial reporting for credit unions and is important for evaluating the potential merits of additional accounting and reporting regulation for credit unions. In addition to regulatory considerations, management must also consider the costs associated with financial reporting and disclosure. The evidence from this study also provides insights into the cost/benefit tradeoffs that management should consider when establishing effective policies for meeting both internal and external informational needs.

What is this research about?

While there is extensive empirical evidence on disclosure by banks and S&Ls, there is little research on the accounting and disclosure practices of the growing credit union segment of the financial services market. Professors Warfield and Henning examine whether current credit union account and disclosure practices are adequate, conditional on both the costs and the benefits of such practices. Specifically, they analyze the results of a survey of financial reports from a sample of U.S. credit unions that documents the accounting measurement practices and the extent of disclosure on credit union financial position and operating results in financial statement. In addition, these reports are examined to assess whether variation in the credit union accounting measurement and disclosure policies can be explained by variation in costs and benefits of accounting and disclosure practices.

What are the credit union implications?

The researchers find that credit unions are following standard accounting procedures. They also find considerable variation across asset sizes among credit unions in their financial reporting and disclosure practices. However, taking into account the costs and benefits of these reporting practices does much to explain these observed variations. The benefits of financial reporting and disclosure are considerably higher in large credit unions with diverse fields of membership than in small credit unions. An important message from these results is that when considering changes in accounting reporting and disclosure standards for credit unions, careful consideration should be given to the diversity in asset sizes and the corresponding benefits to members (relative to costs) flowing from these changes. 

This report was sponsored by The Center for Credit Union Research at the University of Wisconsin - Madison and the KPMG Peat Marwick Foundation.