Magazine article Independent Banker

In Any Event, Document

Magazine article Independent Banker

In Any Event, Document

Article excerpt

It's 9:00 a.m. on Monday morning and the IRS agent auditing your bank's income tax returns for the past three years wants supporting information for certain "problem loans" in the bank's portfolio. The agent starts a line of questioning ranging from evidence of worthlessness to justification of non-accrual status, timing considerations, classification of "in-substance foreclosures" versus "other real estate," reasons for write-downs, and so on and so on. Are you prepared to adequately and factually respond to this interrogation?

Many banks face the problem of insufficient (or non-existent) historical documentation during an IRS audit or bank examiner inspection. Timely and thorough documentation is inextricably associated with sound accounting practices.

Think about the current environment where the turnover of personnel in the financial world is quite high. Will your bank's executives who make today's decisions be there tomorrow to explain the reasons for their particular course of action? If not, were their reasons documented?

Merely charging off loans in accordance with regulatory mandates may not be adequate. The facts surrounding the charge-offs should be noted in loan committee minutes or in other loan related documents.

Consider a bank whose examiners have ordered a charge-off for a worthless loan. The bank may get itself into a dilemma if it places the loan on non-accrual status but does not actually charge off the loan until a future year, as illustrated below:

In this example, the examiner ordered a $50,000 charge-off in the year 1991. …

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