Summary: GAO analyzed the financial reports prepared by managers and regulators' examination reports for 39 banks that failed in 1988 and 1989 to identify: (1) the impact of accounting and internal control weaknesses on those failures; and (2) reforms that could minimize future losses to the Bank Insurance Fund.
GAO found that: (1) examination of the call reports banks prepared an average 6 months prior to their failure showed that the reports typically overstated loan values and did not provide advance warning of troubled financial conditions; (2) much of the $7.3-billion deterioration in asset values resulted from flawed accounting rules which gave bank management too much latitude in reporting problem loans and repossessed collateral; (3) internal control weaknesses contributed significantly to the 39 banks that failed in 1988 and 1989, and 33 of the 39 banks had management problems involving internal control issues; (4) regulators cited such factors as directors' actions, deficient operations management, legal and regulatory violations, loan portfolio weaknesses, inadequate loan loss reserves, and inaccurate call reports, as significant causes for bank failures; (5) many of the 39 failed banks did not obtain an independent audit in their last year prior to failure, which made it less difficult to conceal its financial difficulties; and (6) audits would enhance both the corporate governance and regulatory functions, and the roles of management would be strengthened if they were held accountable for the condition of internal controls.
