Bank Failures:

Independent Audits Needed to Strengthen Internal Control and Bank Management

AFMD-89-25: Published: May 31, 1989. Publicly Released: May 31, 1989.

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GAO reviewed recent bank failures, focusing on: (1) the internal weaknesses and environmental factors which examiners cited for insured banks that failed in 1987; (2) the extent to which insider abuse and fraud affected the same failed banks; and (3) potential areas of concern which could be used for congressional oversight and policy deliberation, federal bank examination and supervision, bank management, and financial auditors.

GAO found that: (1) the internal control weaknesses that federal regulators identified that most contributed to the 184 bank failures in 1987 included inadequate or imprudent loan policies and procedures, inadequate bank board supervision, weak loan administration, poor loan documentation, and inadequate credit analysis; (2) each of the failed banks had a unique combination of weaknesses that contributed to its failure, most of which related to some aspect of management; (3) although regulators did not cite insider abuse or fraud as a sole factor in any failure, and only rarely as a significant contributing factor, they cited insider abuse in 64 percent and suspected fraud in 38 percent of bank failures; (4) federal regulators did not generally require all insured banks to have an annual independent audit; and (5) small banks, which account for the majority of the failures, were less likely to have adequate internal controls or internal auditing functions.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The House Banking Committee included in its version of the Financial Institutions Reform, Recovery and Enforcement Act, a management report requirement. The requirement was deleted in conference. No further action is planned.

    Matter: As a condition for federal deposit insurance, Congress should enact legislation requiring each insured bank to prepare an annual management report which: (1) describes management's responsibility for preparing financial statements and for establishing and maintaining an effective internal control structure; and (2) contains management's assessment of the effectiveness of the internal control structure.

  2. Status: Closed - Implemented

    Comments: The House Banking Committee included in its version of the Financial Institutions Reform, Recovery and Enforcement Act a management report requirement. The requirement was deleted in conference. No further action is planned.

    Matter: As a condition for federal deposit insurance, Congress should enact legislation requiring each insured bank to prepare an annual management report which: (1) describes management's responsibility for complying with laws and regulations related to the safety and soundness of bank operations and for establishing methods to monitor compliance; and (2) contains management's assessment of the bank's compliance with laws and regulations related to operations.

  3. Status: Closed - Implemented

    Comments: The House Banking Committee included in its version of the Financial Institutions Reform, Recovery and Enforcement Act an independent audit requirement for banks. The requirement was deleted in conference. No further action is planned.

    Matter: As a condition for federal deposit insurance, Congress should enact legislation requiring each insured bank to obtain an annual independent audit of the bank's financial statements, have its independent auditor report on the management assertions described above, and submit such reports with the independent auditor's report to the Federal Deposit Insurance Corporation (FDIC) and the bank's respective regulators.

  4. Status: Closed - Implemented

    Comments: The House Banking Committee's management report requirement in its version of the Financial Institutions Reform, Recovery and Enforcement Act included a requirement for FDIC to identify applicable laws and regulations. The requirement was deleted in conference. No further action is planned.

    Matter: Congress should require FDIC, in conjunction with other federal banking regulators, to identify applicable laws and regulations related to the safety and soundness of bank operations which FDIC determines should be reviewed and reported on in management reports.

 

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