On December 19, 1991, President Bush signed into law the Federal Deposit Insurance Corporation (FDIC) Improvement Act of 1991. Although President Bush supported a broad reform package, Congress, after much debate, proposed a very limited bill to the President that provided no new opportunities for the banking industry. Figure 1 presents a summary of the provisions of the Act by providing the titles of the sections and subsection headings, in addition to a brief overview of the subsections. (Figure 1 omitted)
While providing an additional $25 billion of borrowing for the FDIC's Bank Insurance Fund (BIF), as well as additional borrowing authority based on fair market values of BIF assets, the provisions of the Act contained much verbiage dealing with accounting and auditing issues. Some of these matters include requiring "large" institutions to provide additional financial disclosures and management of certain financial institutions to issue assertions as to the adequacy of their firms' internal controls. Also, independent auditors will be required to report whether they perceive that these controls are operating properly, whether the financial institution complies with certain laws and regulations, and to issue annual audit and quarterly review reports for certain sized financial institutions. The Act requires outside directors to form audit committees to oversee the financial reporting process, with specific limitations regarding the independence and competence of these members. Additionally, the Act will require "appropriate" federal banking agencies to establish financial reporting, operational and managerial standards for certain financial institutions which could even supersede generally accepted accounting principles (GAAP). The purpose of this article is to highlight key portions of these new accounting and auditing standards and to provide advice on how to minimize any adverse effects.
REQUIRED DISCLOSURES BY MANAGEMENT OF FINANCIAL INSTITUTIONS
The 1991 Act significantly increases FDIC-insured financial institutions' financial reporting requirement disclosures. For example, financial institutions will now be classified into five levels of capital categories --well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalize--with lower level institutions facing more difficulty in borrowing funds from federal reserve banks, as well as more stringent regulatory supervision. Undercapitalized institutions must also file capital plans with federal regulators and face limits on their levels of interest payments, "risky" investments, and asset growth. Thus, financial institutions must provide timely financial information to federal regulatory agencies so that they can assess the appropriateness of their assigned capital categories.
While FDIC-insured institutions must continue providing annual, publicly available audit reports of their financial events and transactions, the Act adds many new reporting requirements.
First, the chief executive and financial officers of institutions, other than subsidiaries of holding companies, with assets exceeding $150 million must provide signed statements of management's financial affairs. That is, they must disclose their primary responsibility for preparing valid and reliable financial statements, establishing and maintaining adequate and effective internal control structures over the financial reporting process, and complying with their own and applicable federal safety and soundness regulations. This disclosure clarifies the critical distinction between management's responsibilities for preparing the financial statements, including the contents and assertions contained therein, and the independent auditor's responsibility for providing reasonable assurance of these financial statements and expressing an opinion on their fairness.
Furthermore, FDIC-insured subsidiaries of holding companies with assets exceeding $9 billion, or whose assets fall between $150 million and $9 billion and received certain risk assessments in their latest appropriate federal agency examination, must separately satisfy these accounting disclosure requirements both at the subsidiary and holding company levels. …