Regulatory Tightening Is Running Amok: From Changes in Loan-Loss Reserves Methodology to Impairment of Securities to Loan Sales and Derivatives, What We Have Is Confusion on What to Include and How to Apply the Rules
Casey-Landry, Diane, American Banker
Good intentions have paved a lot of roads, but where do they really get us?
Recent laws and regulations meant to prevent corporate corruption and terrorism - the Sarbanes-Oxley Act, various Financial Accounting Standards Board changes, the Bank Secrecy Act, the USA Patriot Act - reflect the best of intentions. But when added to the plethora of older laws and regulations, they can threaten the survival of the community banking industry.
Furthermore, regulators and auditors are demanding perfection - zero tolerance - and leaving no room for honest error or time to correct honest mistakes.
Consider section 404 of the Sarbanes-Oxley Act. While it may highlight some weaknesses for correction, our members say the requirements have led to costs and burdens that significantly outweigh the benefits.
Modest improvements have come at a high price for community banks.
The standards issued by the Public Company Accounting Oversight Board have caused external auditors to implement the requirements in a conservative and stringent way. External auditors are on the defensive; they are reluctant to exercise proper professional judgment under the new regulatory regime.
They are approaching their task with a one-size-fits-all mentality - but many smaller institutions lack the internal resources to meet the high threshold required by the oversight board's standard as the auditors are implementing it.
As a result, most small companies will have to review whether the benefits of being public companies justify the compliance cost. The cost and the complexity are making delisting or even selling an option.
Community bankers know how important internal controls are to safety and soundness. All banks with at least $500 million in assets were already subject to audit and attestation reporting requirements similar to section 404 - but its implementation has resulted in significant costs for them as well.
Examiners and external auditors are often duplicating efforts, even disagreeing on financial reporting or internal controls issues - and leaving banks at a loss over whom to follow. When large institutions are involved, the SEC, the accounting oversight board, and bank regulators will try to resolve the discrepancies. But who will respond to the pleas of smaller banks when examiners and external auditors disagree?
Because of the way section 404 is being implemented, the resulting disclosures will be of little help to investors. Ambiguous definitions of "significant deficiencies" and "material weaknesses" are confusing. The average investor will not be able to parse the jargon to understand the significance of what is reported. The increased disclosures are counterintuitive to the SEC's recent guidance on reducing the volume and improving the quality of financial statement disclosures.
Some large audit firms have asked small clients to take their business elsewhere. Other institutions say the audit firm they hired cannot get the work done on time.
And standards written for public companies are being applied to privately held institutions and mutual banks. That is particularly hard on mutual institutions, which must fit their unique character into the disclosure documents and processes required of publicly held companies. …