It may be common–and it certainly is permitted under NCUA rules–but debates are beginning to be heard among some credit union experts when it comes to credit union employees (frequently the CEO) serving on the board of directors as treasurer.

Exhibit A in the brouhaha is Ignacio Morales, CEO of the failed Borinquen Federal Credit Union, who siphoned out millions of dollars to buy real estate and cocaine. Morales was said to use his position on the board as treasurer to accept bogus documentation for the money transfers that put large amounts of the institution's assets into his personal pockets.

And so some experts grumble that whenever the CEO, or any senior executive of a credit union, serves on the board as treasurer, a position with enormous power to approve or disapprove transactions, the institution is at risk.

But then there is another, dissenting side that starts with literally hundreds, perhaps thousands, of credit unions where a senior-level staffer also serves as treasurer and does so without known negatives. The main positive is that the institution fills a delicate position with a skilled professional and, otherwise, that position might prove difficult to fill under the no compensation tradition for volunteers.

Many of the nation's biggest and most solid credit unions follow this practice, which is said to date back to the early days of credit unions when many had only one paid employee who, among other hats, wore the treasurer hat.

Cases in point are Alliant Credit Union, where CEO David W. Mooney acts as treasurer of the $8 billion Chicago- based institution and Navy Federal Credit Union, where CEO Cutler Dawson also serves as board treasurer of the $49 billion, Vienna, Va.-based institution. Richard Harris serves as CEO of Caltech Employees Federal Credit Union and he also is board treasurer at the $1.1 billion La Canada, Calif.,  institution. A list of all such cases could fill pages because the practice remains entrenched in the industry.

“In many ways, credit unions are free to develop their own approach to governance,” said Miami attorney Michael Lozoff, who serves as chair of the credit union practice at Shutts and Bowen. For some that means appointing an insider as treasurer. Others forbid it. Both positions are entirely correct, suggested Lozoff.

Dennis Dollar, a Birmingham, Ala.-based credit union consultant, said much the same. “I see no fundamental problems with a CEO serving on a credit union board, nor do I see any problems if the board and CEO believe that there should be a discernable line between board and management to disallow it.”

Lozoff indicated that his personal viewpoint is that it is probably better to not have an executive serve as treasurer. “I tend to favor not having employees of credit unions serving on boards for a number of reasons, including the ability of directors to speak candidly about management performance.”

Olympia, Wash.-based credit union expert Marvin Umholtz took a more controversial position. “The NCUA's small credit union specialists will tell you that their biggest worry with smaller credit unions is fraud. However, simply rearranging the governance chairs on the Titanic will not deter fraud from sinking the ship. Separation of duties and other internal control protocols are much better methods to mitigate fraud risk on a day-to-day basis and an annual arms-length third-party audit is imperative.”

Umholtz added that the lack of knowledge about finance by directors or having a treasurer-manager who also serves on the board are not poor governance practices. “However, the lack of attention to fraud risk and implementing the expected protocols to control that risk are heinous sins in any sized credit union.”

But where does that leave smaller institutions that may have to scramble to fill board seats? At 1st Valley Credit Union, a $35 million institution based in San Bernadine, Calif., CEO Gregg Stockdale said that, even at smaller credit unions, if there is a will to avoid having an internal executive also serve as treasurer, it can be avoided. At his institution, the position of treasurer is filled by a volunteer board member.

“There is no special requirement to be the treasurer of the board,” Stockdale said. “To be accountable to the members, someone has to take the finances by the horns. In most cases, that's the CEO. [But the] board usually want to keep the CEO at arm's length, so they don't allow him to sit on the board.” 

All this nonetheless leaves the core question. Would a ban on insider service as board treasurer eliminate, at least minimize, the incidence of fraud perpetrated by such people? Experts said that, in fact, there are very few such cases. “Most directors are honest and mean well,” said Lozoff, who indicated that routine audits, performed by both inside employees and outside audit firms, ought to uncover attempts to defraud an institution, whether by a board member or an employee at a different level.

In other words, the experts said that there might be valid governance reasons to exclude inside executives from service as treasurer, but it is not clear that alone would make the institution immune to insider theft.