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April 20, 2023

CECL Model Validations and Internal Audits

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Fifteen years after the financial crisis that led to its creation and six and a half years since the issuance of ASU 2016-13, the implementation date for current expected credit loss methodology (CECL) has finally come and gone. As with many areas of CECL, regulatory guidance explaining when model validations are warranted versus when an internal audit may be appropriate, has been infrequent and ambiguous. To make this determination more confusing, there are wide-ranging definitions of the word “validation” being used by vendors across the industry. In this article, we discuss the difference between an internal audit and a validation and provide some perspective on items to be considered when making the determination as to which is more appropriate for your institution.

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