MLR Audit Guidelines Are Adequate for Assessing Causes of Bank Failures

Our review of the IGs’ audit guidelines to do MLRs found that the guidelines represent a comprehensive approach for assessing the causes of bank failures. Further, certain costs associated with producing MLR reports should be considered; these costs include IG financial and personnel expenditures, some temporary disruptions to IG office operations, and duplication of effort among investigators. For example, Federal Reserve IG officials pointed out that PCRs, unlike MLR reports, do not assess the quality of bank supervision. Objectives, Scope, and Methodology

In accordance with section 38(k) of the Federal Deposit Insurance Act as amended, our objectives were to (1) assess the adequacy of the preparations, procedures, and audit guidelines that the Inspectors General (IG) have established for performing material loss reviews (MLR) to ensure compliance with their responsibilities under the section; (2) verify the information contained in the MLR reports upon which the IGs based their conclusions; (3) recommend improvements, if necessary, in bank supervision based on a review of the MLR reports issued between July 1, 1993, and June 30, 1994; and (4) assess the economy and efficiency of the current MLR process.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO: (1) assessed the preparations, procedures, and audit guidelines that certain Inspectors General (IG) have established for material loss reviews (MLR); (2) verified the information contained in the MLR reports; (3) recommended improvements in bank supervision based on MLR reports issued between July 1, 1993, and June 30, 1994; and (4) assessed the economy and efficiency of the MLR process.

What GAO Found

GAO found that the IG reviewed have satisfied their MLR responsibilities by: (1) establishing a statement of understanding that coordinates their performance of MLR; (2) initiating and completing several pilot studies; (3) hiring staff with bank and audit experience; and (4) developing relevant training programs and comprehensive audit guidelines. In addition, GAO found that: (1) if MLR guidelines are implemented correctly, they will be adequate to determine the causes of bank failures and the quality of bank supervision; (2) the costs associated with producing MLR reports can be considerable and may cause temporary operational disruptions to IG offices; and (3) MLR requirements do not always give IG sufficient time to review reports prepared by other Federal Deposit Insurance Corporation (FDIC) officials who investigated causes of bank failures.