Comments on Application of Generally Accepted Accounting Principles to Loan Charge-offs

GAO commented on a joint statement issued by the Office of the Comptroller of the Currency, Federal Reserve System, Office of Thrift Supervision, and Federal Deposit Insurance Corporation and the Examination Council's comments aimed at clarifying regulatory and accounting policies and to solicit public comment on a proposed loan splitting treatment for nonperforming loans. GAO noted that: (1) the current generally accepted accounting principles allowed too much leeway in accounting for troubled loans and related reserves, resulting in failure to timely recognize losses and misleading financial reports; (2) the loan splitting proposal could compound those problems and lead to additional abuses; and (3) it believes that accounting rules and regulations need tightening to provide stronger guidelines as a basis for determining adequate loan loss reserves.