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GAO reviewed bank examinations performed by the Federal Deposit Insurance Corporation (FDIC).

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Federal Deposit Insurance Corporation 1. The Chairman, FDIC, should establish a policy for examinations that requires representative and adequate documented evidence to support conclusions reached by examiners on loan quality. The policy should require examiners to document the bases for their conclusions about individual loans regardless of whether the loans are passed or classified.
Closed - Implemented
On November 22, 1993, FDIC Division of Supervision issued a memorandum to its Regional Directors which announced the development and implementation of standardized loan review documentation sheets. This memorandum indicated that use of the sheets is required. The instructions for use of the standardized sheets were very specific, and the actual forms included a significant amount of detailed information to be completed by examiners for each loan reviewed.
Federal Deposit Insurance Corporation 2. The Chairman, FDIC, should establish an examination policy for loan review to require examiners to assess higher risk loans, such as those for business and agricultural purposes, based on current, complete, and accurate information.
Closed - Not Implemented
According to the FDIC representative, recommendations not addressed in the April 19, 1993, letter will not be implemented.
Federal Deposit Insurance Corporation 3. The Chairman, FDIC, should monitor examinations to ensure that examiners are following the FDIC June 1991 policy issued to supplement its May 1991 guidance for evaluating allowances for loan losses and documenting their work in accordance with the guidance.
Closed - Not Implemented
FDIC's April 19, 1993 letter, includes recommendations FDIC intends to implement. This recommendation was not included.
Federal Deposit Insurance Corporation 4. The Chairman, FDIC, should coordinate the implementation of the loan quality review recommendations with the other federal depository institution regulatory agencies to achieve uniform requirements.
Closed - Not Implemented
This recommendation was not included in the April 19, 1993, letter from FDIC, therefore, no action is expected.
Federal Deposit Insurance Corporation 5. The Chairman, FDIC, should develop comprehensive internal control review procedures for all major aspects of bank operations to be used during FDIC annual on-site examinations. The procedures should identify any major risk areas in each bank's operations, identify the related significant internal controls, and require testing to assess the effective operation of the internal controls.
Closed - Implemented
FDIC stated in its April 19, 1993, letter that it intended to update the current working paper checklist to ensure that it included all key procedures appropriate to internal control assessments. FDIC stated further that it intended to monitor compliance with the revised checklist during audits of its regional offices. The September 15, 1994, package included a January 6, 1994, memorandum from FDIC Division of Supervision to Regional Directors regarding guidelines for examining working papers. This memorandum included general guidance on internal control reviews to be performed by examiners, including instruction on the use of the work of internal and external auditors. However, no comprehensive internal control review procedures have been developed, and no additional action is anticipated.
Federal Deposit Insurance Corporation 6. The Chairman, FDIC, should require 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 Chairman should direct the examiners to use the internal control review procedures developed as guidance in reviewing the quality of management's and the external auditor's internal control assessments required by the act.
Closed - Implemented
FDIC's Division of Supervision issued a memorandum to regional directors on January 6, 1994, which established guidelines for examining working papers. The memorandum included general guidelines on the use of internal and external audit work on internal controls, but no specific reference to the FDICIA assessments and the related impact on examination procedures. No additional action on this recommendation is anticipated.
Federal Deposit Insurance Corporation 7. The Chairman, FDIC, should establish procedures for examiners to perform to assess the adequacy of internal control evaluations performed by auditors and documentation requirements for the examiners' assessments of the evaluations.
Closed - Not Implemented
This recommendation was not included in the April 19, 1993, letter; therefore, no action is contemplated.
Federal Deposit Insurance Corporation 8. The Chairman, FDIC, should require examiners to conduct independent comprehensive reviews of internal controls of the banks with assets of less than $150 million.
Closed - Implemented
The September 15, 1994, package included a memorandum dated January 6, 1994, from FDIC's Division of Supervision to regional directors regarding guidelines for examining working papers. This memorandum included general guidance on internal control reviews to be performed by examiners, including instruction on the use of the work of internal and external auditors. However, no comprehensive internal control review procedures have been developed, and no additional action is anticipated.
Federal Deposit Insurance Corporation 9. The Chairman, FDIC, should require that the condition of a bank's system of internal controls be added to the capital adequacy, asset quality, management performance earnings, and liquidity level rating as a separate critical area for rating to highlight the significance of internal controls to a bank's viability.
Closed - Not Implemented
In commenting on a draft of this report, FDIC generally disagreed with this recommendation. FDIC did not address this point in its April 19, 1993, letter; thus, no action is anticipated.
Federal Deposit Insurance Corporation 10. The Chairman, FDIC, should coordinate the implementation of the internal control recommendations with the other federal depository institution regulatory agencies to achieve uniform requirements.
Closed - Not Implemented
In commenting on a draft of this report, FDIC generally disagreed with this recommendation. FDIC did not address this point in its April 19, 1993, letter; thus, no action is anticipated.
Federal Deposit Insurance Corporation 11. The Chairman, FDIC, should establish a policy that requires examiners to assess the work of state examiners and determine if it can be relied on to extend the time between FDIC examinations. The assessment can be accomplished by reviewing state examination working papers or by performing limited work at the bank to verify findings presented in the state reports.
Closed - Not Implemented
In commenting on the draft report, FDIC stated that this recommendation had merit and planned to seriously consider extending the review program to include reviewing state examiners' working papers. However, according to the FDIC representative, FDIC has decided not to implement this recommendation. This decision was based on (1) the working relationship that FDIC has with the states currently, and (2) the fact that only the best banks (1s and 2s) will involve extensions of examination frequency.
Federal Deposit Insurance Corporation 12. The Chairman, FDIC, should coordinate the implementation of the use of state examinations with the other federal depository institution regulatory agencies to achieve uniform requirements.
Closed - Not Implemented
In commenting on the draft report, FDIC disagreed with this recommendation. FDIC's April 19, 1993, letter did not address this point; thus, no action is expected.
Federal Deposit Insurance Corporation 13. The Chairman, FDIC, should establish documentation policies for examiners that are sufficient to enable reviewers who did not perform the work to readily determine whether enough work was done and done correctly to support examiner judgments on bank safety and soundness.
Closed - Implemented
FDIC Division of Supervision issued a memorandum dated January 6, 1994, to Regional Directors which formalizes examination documentation guidelines. The memorandum acknowledges that current FDIC documentation procedures were informal and inconsistent, and it stated that the examination workpapers are to be prepared going forward according to the provisions of the memorandum. The guidelines are to be incorporated in the FDIC examination manual according to the memorandum.
Federal Deposit Insurance Corporation 14. The Chairman, FDIC, should require commissioned examiners to perform and document on-site reviews of all work performed by less experienced examiners.
Closed - Not Implemented
FDIC's April 19, 1993, letter did not address this recommendation; thus, no action is expected.
Federal Deposit Insurance Corporation 15. The Chairman, FDIC, should establish a policy for periodic regional reviews of examinations by appropriate officials to ensure that reports are adequately supported by examiners' work. The working papers prepared by the examiners should be reviewed to determine whether adequate work was done to assess the safety and soundness of the bank.
Closed - Implemented
In commenting on a draft of this report, FDIC stated that it would formalize the regional review process and randomly review examination reports and workpapers to determine their sufficiency in assessing bank safety and soundness. According to the FDIC liaison, a regional review program has been implemented. The program involves a random selection of exams and workpapers. FDIC is implementing the program in all regions. Included in the September 15, 1994, information packet was information on the implementation of such a program by the Dallas and Chicago FDIC regions.
Federal Deposit Insurance Corporation 16. The Chairman, FDIC, should establish policies for examination working paper retention that will facilitate the regional reviews of examination work. The retention policies should be sufficient for FDIC to periodically select sample examinations and review the working papers to judge the quality of examinations for a given time period.
Closed - Implemented
In commenting on the draft of this report, FDIC stated that it intended to review its regional guidance and, if necessary, revise it to ensure that working papers were retained until the subsequent examination. On June 4, 1993, FDIC's Division of Supervision issued a memorandum to Regional Directors requiring that all examination working papers be retained at least until the next FDIC examination.
Federal Deposit Insurance Corporation 17. The Chairman, FDIC, should coordinate implementation of the quality control recommendations with the other federal depository regulatory agencies to achieve uniform requirements.
Closed - Not Implemented
In commenting on the draft of this report, FDIC disagreed with this recommendation. FDIC's April 19, 1993, letter did not address this point; thus, no action is expected.

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