Depository Institutions

In an April 1991 report (GAO/AFMD-91-43), GAO concluded that flexible accounting rules used to identify and measure loan losses had allowed failing banks to inaccurately report these losses in their financial reports. GAO is concerned that the accounting rules on problem loans are so ambiguous that they can be misused, resulting in substantial losses going unreported to bank regulators. In its latest report, GAO (1) identifies the specific problems with present accounting rules for loan losses, including the November 1991 "Interagency Policy Statement on the Review and Classification of Commercial Real Estate Loans"; (2) describes the status of Financial Accounting Standards Board projects related to these issues; and (3) recommends that the government set specific new accounting rules for losses from nonperforming bank loans.

GAO found that: (1) accounting rules related to problem bank loans are so ambiguous and flexible that they are being misused to delay recognition of losses in financial reports; (2) although the federal banking agencies have attempted to provide guidance for developing loan loss reserves, guidance for valuing commercial real estate loans has aggravated weaknesses in accounting rules; (3) the FASB project on accounting rules for impaired loans does not address all of the accounting problems, and the FASB-proposed rules would not result in appropriate loss estimates; and (4) until accounting rules are strengthened, federal bank regulators may not recognize problem institutions until it is too late to prevent Bank Insurance Fund losses.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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