FDIC Regulations: Implications for Banking Industry

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INTRODUCTION

The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) approved the regulations implementing Section 112 of the FDIC Improvement Act of 1991 in May 1993.(1) The Board also provides guidelines to facilitate a better understanding, full compliance, and proper implementation of the provisions of the regulations. These regulations cover primarily four financial reporting areas of insured depository institutions: (1) preparation of audited annual financial statements; (2) management reporting to the FDIC and other regulatory agencies on internal controls and compliance with applicable laws and regulations; (3) establishment and maintenance of an effective audit committee comprised of independent, outside, non-executive directors; and (4) an independent auditor's attestation report regarding the institution's internal control structure and procedures of financial reporting.

The proper implementation of the new FDIC regulations ensures a more reliable financial reporting process and responsible corporate governance and accountability for affected financial institutions. These regulations apply to financial institutions with $500 million or more in total assets for fiscal years ending December 31, 1993, and thereafter. However, almost all institutions will be affected by the provisions of these regulations. These four financial reporting areas should be considered by all institutions as they will likely receive increased attention in the regulatory examination and rating process. The primary purpose of this article is to: (1) discuss the provisions of these four financial reporting requirements, and (2) provide guidelines for the proper and effective implementation of these regulations.

FDIC REGULATIONS ON FOUR AREAS OF FINANCIAL REPORTING

The 1991 FDIC Improvement Act issued a number of comprehensive new rules and regulations that create a higher responsibility for management in the areas of financial reporting and corporate governance. These regulations also place a heavier burden on banks' boards of directors and independent auditors involved in financial audit and compliance reporting areas.

Financial Reporting Requirement Disclosures

The new FDIC regulations mandate more comprehensive financial reporting and disclosure requirements for insured depository institutions. Section 363.2(a) of the regulations requires that affected institutions prepare and disseminate comparative financial statements for the two most recent fiscal years, including balance sheets, income statements, statements of cash flows, statements of changes in owner's equity, and related footnote disclosures in accordance with generally accepted accounting principles (GAAP). These financial statements should be audited by an independent auditor.

Management Report

Management of affected institutions should provide signed statements of financial activities and assertions. Section 363.2(b) of the regulations requires a management report signed by the chief executive officer and chief accounting or chief financial officer be included in the most recent annual report. This report by management should contain: (1) a statement indicating management is primarily responsible for the preparation of financial statements; (2) a statement of management's responsibilities for establishing and maintaining an adequate and effective internal control structure and complying with applicable laws and regulations; and (3) a statement of management's assertion regarding the effectiveness of internal controls over financial reporting and compliance with applicable laws and regulations related to safety and soundness, which are set by the FDIC and the appropriate federal banking agencies. These regulations place significant responsibility upon management for reliable financial reporting and responsible corporate governance.

The idea that management should be required to report on internal controls is not new. …