Internal Control and Audit Weaknesses in U.S. Branches
GGD-97-181, Sep 29, 1997
Pursuant to a congressional request, GAO: (1) identified U.S. supervisors' expectations for adequate internal controls and audits in foreign banking organization (FBO) branches; (2) determined the extent of serious weaknesses in FBO branches' internal controls and audits reported by U.S. supervisors during examinations; and (3) described U.S. supervisors' efforts to address these weaknesses.
GAO noted that: (1) U.S. supervisors expect each U.S. FBO branch to have: (a) a system of internal controls that is consistent with the size and complexity of its operation; and (b) an internal audit function of adequate scope and frequency or an adequate system of head office or external audits; (2) although few FBO branches' deposits are insured by the Federal Deposit Insurance Corporation (FDIC), U.S. supervisors have an interest in the activities of FBO branches because the supervisors wish to preserve standards that help ensure the efficiency of and confidence in U.S. markets; (3) a guiding principle for U.S. supervisors in assessing internal controls is that good internal control exists when employees are not in a position to make significant errors or perpetrate significant irregularities without timely detection; (4) in evaluating a FBO branch's overall system of internal control, U.S. supervisors are to consider the adequacy of controls and the level of adherence to them; (5) a significant number of the 254 FBO branches U.S. supervisors rated fair or lower had one or more of the weaknesses in internal control that U.S. supervisors identified as being among the most serious, and a majority of the FBO branches had one or more of the weaknesses in audit function identified as being among the most serious; (6) 67 percent of the 254 FBO branches whose examination reports GAO reviewed were reported to have had audits of inadequate scope; 41 percent were reported to have had audits of inadequate frequency; and 28 percent were reported to have had inadequate management response to audit criticisms; (7) according to U.S. supervisors, these audit weaknesses represent serious problems in management's oversight of internal controls and could slow or limit improvement of internal controls at some FBO branches; (8) GAO found that U.S. supervisors are undertaking numerous efforts intended to address internal control and audit weaknesses at FBO branches; (9) the objectives of these efforts include helping to ensure: (a) detection of losses that have occurred as the result of an FBO branch's internal control and audit weaknesses; (b) timely correction by FBO branches of serious weaknesses in control procedures and audit functions; (c) increased understanding among multinational banks of the importance of adequate internal controls and audits; and (d) preparedness of supervisors to conduct effective assessments of internal controls; and (10) prompt attention to the development of a strategy for evaluating the results of these initiatives is now needed to determine whether progress is being made in improving the condition of internal controls at FBO branches.
- Review Pending
- Closed - implemented
- Closed - not implemented
Recommendation for Executive Action
Recommendation: The Federal Reserve should develop a strategy, including objective measures, for assessing the progress it is making through its efforts to improve internal controls and audits at FBO branches and ensure that the procedures and systems necessary to collect the data relevant to those measures are in place and operating.
Agency Affected: Federal Reserve System
Status: Closed - Implemented
Comments: The Federal Reserve has devoted most of its supervision resources dedicated to foreign banking organizations (FBOs) operating in the U.S. to the largest FBOs, that are included in the Federal Reserve's Large Complex Banking Organization program because they pose the most risk. In this context, The Federal Reserve has devoted much of its attention to tracking operational risk at these institutions. It is in its assessments of operational risk that the Federal Reserve tracks institutions' internal control and audit weaknesses. Federal Reserve staff said that this is a focus of their recent examination efforts, including efforts to explicitly track institutions' internal control and audit functions. The Federal Reserve announced FBO Supervisory enhancements in SR 00-14, dated Oct. 23, 2000. On Oct 16. 2008, the Federal Reserve issued SR 08-9: Consolidated Supervision of Bank Holding Companies and the Combined U.S. Operations of FBOs. The primary objectives of this letter and the attached supervisory guidance are to specify principal areas of focus for consolidated supervision activities and thereby provide for consistent Federal Reserve supervisory practices and assessments across organizations with similar activities and risks. Consistent with these objectives, the attached guidance details specific expectations for Federal Reserve staff for understanding and assessing primary governance functions and risk controls, material business lines, non-bank operations, financial condition, and other key activities and risks at banking organizations; addresses unique aspects of supervising the combined U.S. operations of FBOs; and highlights the supervisory attention that should be paid to risk management systems and internal controls used by BHCs and FBOs that provide core clearing and settlement services (core clearing and settlement organizations) or that have a significant presence in critical or key financial markets.