Group of 30 offers how-to on cutting compliance costs.

WASHINGTON -- Financial institutions can shave millions of dollars from their compliance costs by working more closely with their supervisory agencies, a prominent international organization of bankers and regulators said Tuesday.

The new report from the Group of 30 provides a broad outline on how to get "better financial reports at lower costs," said former Comptroller of the Currency John G. Heimann. Mr. Heimann chaired the committee that wrote the report.

The Group of 30's pronouncements can have a significant influence on public policy. A recent report on derivatives has been widely cited by bankers, who said it influenced their policies, as well as lawmakers and regulators.

Mr. Heimann, who now serves as chairman of global financial institutions for Merrill Lynch & Co., said closer cooperation could save banks millions of dollars by eliminating costly accounting duplications.

That would make U.S. institutions more competitive with their foreign counterparts, who already work more closely with their regulators and enjoy the corresponding lower regulatory costs, he said.

The report also urges a closer relationship between examiners and auditors. The two should work out a division of labor to eliminate redundant analysis, the report said.

Michael Bradfield, a former general counsel to the Federal Reserve Board and another of the report's authors, acknowledged this new relationship will not occur overnight.

"This is something that is going to take time to develop," Mr. Bradfield said. "Auditors are going to have to prove their independence and reliability over time."

Several other bankers and regulators echoed those comments, saying at the luncheon where the report was released that neither side trusts the other's work. Because they don't trust each other, both auditors and examiners feel compelled to review everything themselves.

These bankers and regulators said no easy solution exists to resolving this costly problem. The only answer is to start working together with the hope that both sides eventually can trust each other.

Mr. Heimann said the group will distribute the 70-page report to select bankers, regulators and members of Congress. In that report, the Group of 30 recommends three major changes to improve the relationship among management, auditors and regulators and reduce the cost of complying with banking rules.

First, it wants all the participants in the regulatory process to improve the quality of their work. This means better auditing and improved cooperation among management, external auditors, and government regulators.

It also means replacing all regulatory accounting procedures with generally accepted accounting procedures. That would eliminate a major side battle between auditors and regulators, the report stated.

Second, the report calls for the elimination of the overlap among managers, external auditors and regulators. "Roles must be better defined so that the skills of each participant are used to best advantage and at lowest cost," the report states. The report also advocates eliminating duplicative exams.

Finally, the report states that regulators and auditors must start trusting each other. It says one way to achieve this is to make the two work together more often.

The group also advocates joint training of auditors and examiners, and it recommends creating a board of examiners and external auditors that could advise the industry.

The organization splits the rest of its report. One half cites example of how other countries have used the formula for great success. The report notes that the Bank of England has developed working relationships with its member banks' external auditors that practically eliminates the need for bank examiners. Also, New Zealand has eliminated on-site examinations.

The other half examines the U.S. system. The report states that past banking problems here, such as the savings and loan crisis, have soured relations between auditors and regulators. But hope exists, the report states. It said that the agencies have begun meeting with external auditors, a first step toward improving communication.

The G-30 Report Recommends That:

Bank regulators explicitly adopt GAAP procedures for financial reporting and eliminate differences based on regulatory accounting.

* Regulators should not dictate basic management standards.

* Regulators and the accounting profession should eliminate dupticative analysis.

* A permanent board should be established consisting of representatives from the banking agencies, the SEC, the accounting profession, and the industry.

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