Appendix VII Comments From the Office of the Note: GAO comments supplementing those in the report text appear at the end of this appendix. Comptroller of the Currency Washington, D.C. 20219 February 2, 1994 Mr. James L. Bothwell Director, Financial Institutions and Market Issues General Government Division United States General Accounting Office Washington, DC 20548 Dear Mr. Bothwell: We have reviewed your draft audit report titled BANK INSIDER ACTIVITIES: Actions Needed to Address Significant Insider Problems Indicative of Broader Management Deficiencies. Your review was conducted in response to Congressional requests that you review the role of insider activities in, and their effects on the health of, financial institutions. Your conclusions and recommendations are based on your review of 286 reports prepared by FDIC investigators on banks that failed in 1990 and 1991. Investigators reported evidence of insider problems in 61 percent of the failed banks. To determine if similar conditions exist in open banks, you reviewed examination reports for 13 judgmentally sampled open banks. Based on your review of the sampled banks, you concluded that examiners were not as effective in identifying insider problems at the failed banks when they were open as investigators were after the banks had failed and that examiners often fail to adequately communicate to bank boards and management the potential seriousness of insider problems. The draft report recommends that examiners review the insider lending information provided in call reports at the next full-scope examination of each and every bank, that examiners give recordkeeping requirements high priority, and that examiners review insurance policies. With respect to examination reports, exit conferences and other communications with boards of directors, you recommend that examiners ensure that board members understand the primary issues in need of attention, that examiners ensure that board members understand that problems are a consequence of deficiencies in their oversight, and that effective correction action is taken. Finally, you urged that examiners recommend training for directors, where appropriate, to improve their ability to oversee management operations of banks. Comments From the Office of the The OCC takes seriously its responsibilities to examine for and enforce compliance with the laws and regulations governing insider activities of directors, officers and employees of national banks. In fact, the OCC has taken significant steps to enhance its ability to both combat insider violations and improve communications with bank boards of directors, including actions fully consistent with the recommendations in your report. The OCC, however, agrees with your overall conclusion that additional actions can be undertaken to identify and address insider problems. The first recommendation in your report sought an increase in examiner review of bank insider activities. As is detailed more fully below, the OCC is in the process of revising its internal procedures for dealing with insider activities. These changes to the Comptroller's Handbook for National Bank Examiners (Handbook), the primary guide used by examiners in the conduct of examinations of national banks, will expand the tools available to examiners to review insider activities. Consistent with your recommendations, these procedures will provide for a comparison of bank-provided data with information reported by the bank in its most recent call report. Examination procedures and internal control questionnaires will ensure that examiners determine that bank reports are accurate and supportable. In addition, these new examination procedures will reemphasize the importance of proper recordkeeping and the need for examiners to focus on insider activity, especially as it relates to Regulation O compliance. The OCC will also reemphasize the importance of reviewing bank insurance coverage to determine whether insurers have identified any reasons to deny coverage or write exclusions into the policy. The second series of recommendations in your report addresses communication with, and training of, bank boards of directors. The OCC fully concurs with your conclusion that improved communications between bank regulators and board members will increase the likelihood that boards will become more fully aware of their responsibilities and initiate appropriate corrective actions. The OCC has taken numerous steps consistent with that conclusion. In 1987, the OCC published The Director's Book, The Role of a National Bank Director to provide in-depth, practical guidance for meeting the duties and responsibilities of a national bank director. The next year, we published supplemental information through the issuance of A Director's Guide to Board Reports, Red Flags and Other Points of Interest. That publication assists board members in their review of information and identification of "red flags" indicating existing or potential problems, such as insider abuses. OCC efforts also focus on the enhancement of examiner communication skills. Since 1988, the OCC revised or created at least four sections of the Handbook dealing expressly with communication with boards of directors. Among other things, the Handbook revisions provide examiner guidance on the general duties and responsibilities of directors, the assessment of management and board processes, examiner communication of examination findings, and examination procedures to test for compliance with Regulation O. The OCC has also enhanced its examiner training efforts in this area. The OCC regularly provides training on conducting effective board meetings and recently added a three and one-half day course entitled "Communicating Effectively with Boards of Directors" to our standard training curriculum. Based, in part, on your recommendations, we may further revise the Handbook to provide additional - 2 Comments From the Office of the Comptroller of the Currency See comment 1. guidance on agency efforts to encourage and/or compel training for directors to improve their ability to oversee management operations. In your recommendations, you also noted that improved communications with boards of directors could be achieved through changes or enhancements to agency examination reports. In December 1993, the OCC revised significantly its report of examination format and emphasis. The purpose of those revisions was to improve communication of supervisory results to bank boards of directors. The revised report of examination is results-oriented and focuses on telling the board of directors what corrective action is needed and why. Two new pages were added to the report that will ensure findings are clearly and succinctly communicated to boards of directors in a manner that directs their attention to the most pressing concerns. An "Examination Conclusions and Comments" page summarizes the major examination findings and conclusions regarding the bank. A "Matters Requiring Board Attention" page presents significant problems identified during the examination and documents bank management's commitment to take appropriate actions. Information is presented in priority order, with the most important concerns, or areas of greatest risk, first. We appreciate the opportunity to respond to the draft report. If you have questions regarding this letter, please contact me directly. Sincerely, Judit A. Wolter Judith A. Walter Senior Deputy Comptroller for Administration 3 Comments From the Office of the The following is GAO's comment on the Comptroller of the Currency's letter dated February 2, 1994. GAO Comment 1. After receiving occ's comments we reviewed the new report of examination format. The format includes a page entitled Matters Requiring Board Attention, which describes the most significant problems identified during an examination. We agree that the addition of this information should help board members identify the most serious problems requiring correction. We believe, and occ agrees, that the additional steps we have recommended are also necessary to improve communications between examiners and boards of directors. See comment 1. See comment 2. James L. Bothwell, Director Financial Institutions and Markets Issues Washington, D.C. 20548 Dear Mr. Bothwell: We have received the advance draft report prepared by your office, dated November 1993 and titled "BANK INSIDER ACTIVITIES: Actions Needed to Address Significant Insider Problems Indicative of Broader Management Deficiencies." We appreciate the opportunity to review the advance draft and offer comments. While the Federal Deposit Insurance Corporation ("FDIC") generally takes no exception to the findings and conclusions embodied in the draft report, there are a number of areas which we may be able to clarify and/or amplify. In order to balance the report, it may be beneficial to note that loans to and transactions with bank insiders are not inherently problematic. On the contrary, a bank directorate is often composed of the most reputable and creditworthy individuals in the community. Loans necessitated by insiders' business operations are in many instances among a bank's better assets. Since the GAO study was performed, the FDIC has promulgated Part 363 of the FDIC Rules and Regulations, 12 C.F.R. § 363, "Annual Independent Audits and Reporting Requirements," implementing section 112 of the FDIC Improvement Act. This regulation specifically names insider lending as one area of safety and soundness law on which bank management must prepare an annual assessment of the degree of compliance achieved. These management assertions must be attested to by an independent public accountant, applying procedures agreed upon by the FDIC objectively and in accordance with generally accepted standards for attestation engagements. This is a major development, and should result in increased scrutiny of insider transactions. |