Thrift Examination Quality: OTS Examinations Do Not Fully Assess Thrift Safety and Soundness
AFMD-93-11
Published: Feb 16, 1993. Publicly Released: Feb 16, 1993.
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Highlights
GAO reviewed the quality of the Office of Thrift Supervision's (OTS) thrift institution examinations, focusing on: (1) OTS reviews of thrifts' loans and internal controls; and (2) the effectiveness of coordination between OTS and the Federal Deposit Insurance Corporation (FDIC).
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Office of Thrift Supervision | The Director, Office of Thrift Supervision (OTS), should revise OTS examination guidance to: (1) require that examiners utilize and appropriately document sampling methodologies which provide a representative view of the loan portfolio as a basis to determine loan quality and the adequacy of the reserve for loan losses and expand their loan review as appropriate based on the sample results; and (2) provide examiners with a standard methodology to evaluate the adequacy of a thrift's overall loan loss reserve. Development and implementation of this guidance should be coordinated with the other federal depository institution regulatory agencies to achieve uniform requirements. |
Closed – Implemented
In June 1994, OTS issued a revised Thrift Activities Regulatory Handbook section on loan sampling. This section is very detailed and provides for sound loan-sampling methodologies that implement the related recommendation. In December 1993, OTS, along with the bank regulatory agencies, issued the Interagency Policy Statement on the Allowance for Loan and Lease Losses. This document establishes uniform interagency guidance for review of overall loan loss reserves and was analyzed in connection with the recent GAO review of bank and thrift loan loss reserve methodologies. While GAO has some significant reservations about this guidance, it is responsive, at least partially, to the recommendation.
|
| Office of Thrift Supervision | The Director, OTS, should monitor examiners' compliance with loan sampling, documentation, and supervisory review requirements and ensure sufficient work is done to assess the condition of thrifts' loan portfolio and the extent and magnitude of loan problems. |
Closed – Implemented
The OTS agency contact noted that several examination reviews were conducted by OTS regional quality assurance units during 1993. Steps have been taken to correct loan sampling disparities and to improve documentation and supervisory review. Additionally, OTS established examination oversight teams in every regional office that are focused on overall examination report quality. OTS' new guidance on loan sampling includes detailed documentation requirements which will facilitate monitoring efforts. Review of loan sampling and assessment of the adequacy of allowances is targeted for several regions in both the 1994 and 1995 FMFIA management control plan.
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| Office of Thrift Supervision | The Director, OTS, should develop comprehensive internal control review procedures for all major aspects of thrift operations to be used during annual OTS on-site examinations. The procedures should identify any major risk areas in each thrift's operations, and the related significant internal controls, and require a level of testing that would provide a basis for assessing the effective operation of the internal controls. |
Closed – Implemented
OTS updated its Thrift Activities Handbook section on internal controls in 1994 to include comprehensive guidance for the review and testing of internal controls. The guidance emphasizes the need to test major controls utilizing the previously discussed revised sampling methodology.
|
| Office of Thrift Supervision | The Director, OTS, should require thrift examiners to rely on the assessments required by the Federal Deposit Insurance Corporation Improvement Act of 1991 to the extent possible, and supplement these assessments as necessary to ensure a comprehensive assessment of internal controls. As a basis for reliance, the Director should direct the examiners to use the developed internal control review procedures to review the quality of management's and the external auditor's internal control assessments. |
Closed – Implemented
OTS' updated internal control section of the Thrift Activities Regulatory Handbook states that examiners are encouraged to review the internal control work of the external auditors. It further states that a review of the external audit workpapers could improve the examiner's understanding of the internal control system and help identify potential weaknesses. The updated section also instructs examiners to determine and document that any internal control deficiencies previously noted in the institution's internal and external audits have been corrected.
|
| Office of Thrift Supervision | The Director, OTS, should establish procedures examiners should perform to enable OTS to assess the adequacy of internal control evaluations and documentation requirements for the examiners' assessments of work performed by auditors. |
Closed – Implemented
OTS' recently updated Thrift Activities Handbook includes a section titled, "Independent Audit" that provides guidance on the use of external auditors' work by examiners. The section includes guidance on situations where it would be beneficial to review external audit workpapers, communication with external auditors, and procedures fo incorporating the work of the auditor into the examination.
|
| Office of Thrift Supervision | The Director, OTS, should require examiners to conduct independent comprehensive reviews of internal controls of the thrifts with assets of less than $150 million. |
Closed – Not Implemented
OTS disagreed with this recommendation. OTS stated that its existing procedures were adequate and that current resource constraints, as well as examination requirements, precluded OTS from pursuing this recommendation.
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| Office of Thrift Supervision | The Director, OTS, should require that the condition of a thrift's system of internal controls be added to the management, asset control, capital, risk management, and operations rating as a separate critical area for rating to highlight the significance of an internal control review to a thrift's viability. |
Closed – Implemented
On April 15, 1994, OTS converted the MACRO rating system to the CAMEL system. The management (M) factor of the CAMEL rating includes consideration of the adequacy of internal controls. However, no separate internal control rating was added as GAO had recommended.
|
| Office of Thrift Supervision | The Director, OTS, should coordinate the implementation of the internal control recommendations with the other federal depository institution regulatory agencies to achieve uniform requirements. |
Closed – Not Implemented
According to GAO's review of agency responses and actions on the internal control recommendations, coordinated effort was apparently made by the regulators to implement this recommendation.
|
| Federal Deposit Insurance Corporation | The Director, OTS, and the Chairman, Federal Deposit Insurance Corporation, should monitor the implementation of their May 18, 1992, joint memorandum to ensure: (1) effective coordination of their examinations of thrifts; and (2) that a common set of standards is being used as a basis for reaching examination conclusions. |
Closed – Not Implemented
Guidance was issued in early 1994 regarding effective coordination of OTS/FDIC joint examinations. This guidance generally addresses the issues GAO identified in the report. However, according to the OTS agency contact, an agreement was reached at the FDIC Board level which resulted in a significant decrease in the number of examinations by FDIC of thrift institutions. Only 7 examinations of thrifts were conducted by FDIC in 1994, and those were on a joint basis. Thus, according to the agency contact, this is now a nonissue.
|
| Office of Thrift Supervision | The Director, OTS, and the Chairman, Federal Deposit Insurance Corporation, should monitor the implementation of their May 18, 1992, joint memorandum to ensure: (1) effective coordination of their examinations of thrifts; and (2) that a common set of standards is being used as a basis for reaching examination conclusions. |
Closed – Not Implemented
Guidance was issued in early 1994 regarding effective coordination of OTS/FDIC joint examinations. This guidance generally addresses the issues GAO identified in the report. However, according to the OTS agency contact, an agreement was reached at the FDIC Board level which resulted in a significant decrease in the number of examinations by FDIC of thrift institutions. Only 7 examinations of thrifts were conducted by FDIC in 1994, and those were on a joint basis. Thus, according to the agency contact, this is now a nonissue.
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