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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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Highlights

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.

Recommendations

Matter for Congressional Consideration

Matter Status Comments
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.
Closed – Implemented
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.
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.
Closed – Implemented
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.
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.
Closed – Implemented
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.
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.
Closed – Implemented
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.

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Topics

Bank examinationBank failuresBank managementBanking regulationCongressional oversightInsured commercial banksRegulatory agenciesReporting requirementsRisk managementInternal controls