Pub. 7 2016 Issue 1

spring 2016 9 West Virginia Banker Your Bank. Our Experience. Better Together. SEK&Co has been serving independent community financial institutions for over 50 years. We provide every client with a team of dedicated and experienced professionals who deliver a full range of audit, tax, and consulting services. 717.263.3910 • 888.272.7351 SEK.com Top L-R: Gary D. Snyder, CPA gsnyder@sek.com Scot E. Orndorff, CPA sorndorff@sek.com Scott N. Drake, CPA sdrake@sek.com Bottom L-R: Luke C. Martin, CPA lcmartin@sek.com DoriAnn F. Hoffman, CPA dhoffman@sek.com Smith Elliott Kearns & Company, LLC CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS Insight. Integrity. Results. TM vendor or model provider. In either case, back testing should be performed, assump- tions should be reviewed, and adjustments should be made when necessary. What is Validation? Validation, in contrast to back testing, is completely different – validation is the au- dited process of “validating” the function- ality and completeness of an A/L model. The validation process is essentially an independent review of the logical and conceptual soundness of the model. This involves scrutinizing the methodology and mathematical calculations that are built into the program. The cost of validation need not be incurred by the bank. Rather, the software vendor or provider of the model should make available a certifica- tion letter or proof of validation regarding the integrity of the model. Jeffrey F. Caughron, Chief OperatingOfficer/ManagingDirector of The Baker Group LP, has worked in the field of banking, investments, and interest-rate risk management since 1985. He currently serves as a market analyst and portfolio strategist. Chris Wilson, Vice President and Financial Strategist, has been with the Baker Group LP since 2002. Contact: 800-937-2257; jcaughron@GoBaker.com ; cwilson@gobaker.com . The Regulatory Emphasis on Corporate Governance Regulators have placed greater scrutiny on ALCO processes since the last recession. Indeed, each bank is expected to have an “Independent ALCO Review” which is a general audit of the overall policies, tools, and procedures used by the bank to define, measure, and manage their interest rate risk. Back testing of reports and mod- el validation are clearly two of the key ingredients necessary for sound ALCO processes at any bank. n