Resolution Trust Corporation:

Controls Over Asset Valuations Do Not Ensure Reasonable Estimates

GGD-93-80: Published: Apr 8, 1993. Publicly Released: Apr 22, 1993.

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Pursuant to a congressional request, GAO provided information on the Resolution Trust Corporation's (RTC) asset valuation review (AVR) process used in resolving failed thrifts, focusing on: (1) whether the process produced reasonable loss estimates; (2) the preparation of AVR reports; and (3) the RTC Asset Review Evaluation System (ARES).

GAO found that: (1) RTC could not ensure that its cost tests were accurate and asset loss estimates were reasonable due to inaccurate data and internal control weaknesses over the AVR process; (2) weaknesses in the AVR process included insufficient documentation and explanation of methodology used in AVR, contractor supervisory review of individual asset review sheets, and RTC review of asset review sheets supporting asset valuation estimates; (3) the contractor's asset valuation calculations were inaccurate and unreasonable due to RTC failure to provide adequate actual asset recovery data; (4) RTC improvements to its documentation and review process included requiring reviews of review sheets, cross-checking AVR reports with thrift bid packages, supporting narrative comments, and additional documentation; (5) ARES failed to meet its objectives of standardizing estimated recovery value asset calculations and reducing the redundancy in RTC asset valuation processes because of software problems and inadequate personnel training; and (6) RTC needs an additional 12 months to complete ARES development and testing and monitor ARES performance to ensure that known deficiencies have been corrected.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: RTC's Vice President for Resolution has directed that the senior AVR staff in each office coordinate closely and ensure that the AVR methodology, policies, and procedures are complied with by both RTC personnel and outside contractors. He advised GAO in August 1994 that management reviews by senior AVR personnel are being conducted in conjunction with every AVR done. A formal checklist evidencing the review is prepared in order to determine that work done was in accordance with the instructions for each review, as well as in conformance with the AVR methodology. The checklist is initially completed for every AVR done by the project specialist assigned to the AVR and reviewed by either the AVR coordinator or the assistant AVR coordinator. The checklist is maintained as part of the permanent thrift resolution files along with the AVR report.

    Recommendation: The RTC President and Chief Executive Officer should schedule periodic management reviews of the AVR process to ensure that RTC staff and contractors are complying with applicable policies and procedures and the AVR methodology in: (1) making asset valuation reviews; (2) preparing individual asset review sheets; (3) preparing the final AVR report; and (4) monitoring these activities.

    Agency Affected: Resolution Trust Corporation

  2. Status: Closed - Implemented

    Comments: The AVR methodology was revised on August 30, 1993, to include, verbatim, the specific requirements of this recommendation. These requirements were retained in the latest revisions to the methodology made on April 19, 1994.

    Recommendation: The RTC President and Chief Executive Officer should revise the AVR methodology to specifically require documentation for each asset review sheet to support and justify the methods, assumptions, and conclusions used to calculate asset valuation estimates.

    Agency Affected: Resolution Trust Corporation

  3. Status: Closed - Implemented

    Comments: This recommendation was based on a requirement in the 1991 version of RTC's AVR methodology which required AVR contractors to use, whenever possible, RTC comparable sales figures as a benchmark. After considering the pros and cons of providing such data, RTC decided to delete this requirement from the AVR methodology when it was revised in August 1993. AVR contractors may use RTC sales figures from comparables in their reviews, but they are not required to do so. RTC's action is a viable solution to the noncompliance deficiency identified during GAO's review and GAO concurs that this action is an acceptable alternative implementation of the recommendation.

    Recommendation: The RTC President and Chief Executive Officer should give AVR contractors access to actual asset recovery information so that they can use this information in estimating the probable market value and potential loss on a thrift's assets and, internally, use this information for comparison purposes to assess the reasonableness of AVR results.

    Agency Affected: Resolution Trust Corporation

  4. Status: Closed - Implemented

    Comments: On September 7, 1993, RTC issued new procedures to control and monitor the implementation of ARES. Controls were put in place to ensure that the latest version of ARES was used on each AVR. Also, project specialists were required to obtain feedback from the contractors or RTC personnel assigned to the AVR on problems they encountered using the ARES program. On each AVR, a random sample of at least six asset review sheets is checked against the RTC controlled version of ARES to ensure the integrity of the program in use on that AVR. In April 1994, these procedures were revised to provide the project specialists additional guidance on steps to be taken to verify and document the integrity of the results obtained using ARES.

    Recommendation: The RTC President and Chief Executive Officer should closely monitor the implementation and use of ARES to ensure that the program is operating as intended.

    Agency Affected: Resolution Trust Corporation

 

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