WASHINGTON — The Federal Deposit Insurance Corp. miscalculated several loss estimates stemming from 2009 loss-sharing deals with failed-bank acquirers, a federal audit said Monday.
While the cumulative errors ultimately boosted the agency's finances by $138 million when corrected, the Government Accountability Office report said they showed a "material weakness" in how the agency estimates losses and could have meant more significant consequences for the Deposit Insurance Fund.
In all, more than a quarter of the 93 loss-share estimates from last year contained errors.
"While the actual net misstatements ultimately were not material due to the year-end financial statements, due to the nature of the control deficiencies we identified, there is a reasonable possibility that a material misstatement of the DIF's financial statements could have occurred and not been detected and corrected absent the audit process," the report said.
Last year, loss-sharing agreements became a primary way for the FDIC to entice acquirers to buy up failed banks. Of the 140 failed banks in 2009, more than 90 were resolved involving loss-share. The agreements are also a common staple among the 86 failures so far this year.
But when the FDIC estimated losses resulting from the agreements, the GAO said its "methodology was inconsistently applied and [the agency] did not have adequate controls to reasonably assure that loss-sharing calculations were accurate."
"FDIC asserted that a review process was in place by which a limited number of staff prepared the calculations and reviewed each other's work for accuracy," the audit said. "However, there was no documentary evidence that supervisory or independent review or monitoring was performed on the calculations developed by FDIC personnel."
After the GAO found errors in loss estimates for nine of the 51 loss-sharing agreements from last year, FDIC officials revisited their estimates and found an additional 16 with errors.
"While many of the individual errors were not large, some were significant," the report said.
In total, the agency's reporting last year showed errors in loss-share estimates equal to roughly $611 million. The agency overestimated loss-share cost estimates by about $270 million, and underestimated loan-loss reserves resulting from the agreements by about $132 million. In one instance, the GAO said the FDIC estimated an amount of loss that was twice as large as it should have been.
"Although the FDIC subsequently corrected DIF's financial statements, GAO believes that there is a reasonable possibility that material misstatements could occur that would not be prevented or detected by FDIC's controls," the report said.
The audit also found "control deficiencies" in the agency's information technology systems that "increased the risk of unauthorized modification and disclosure of financial and other sensitive information."
An FDIC spokesman said the agency has launched a "comprehensive action plan" to address the deficiencies, and improvements to its loss estimate calculations will be completed by June 30.
The last time a "material weakness" in the FDIC's financial reporting was uncovered was in 1993, when the FDIC was similarly dealing with heavy amounts of failed-bank assets. Then, the spokesman said, the deficiencies involved "estimating recoveries on failed institution assets."
"We do not expect this to be a repeat finding in our 2010 audit," the spokesman said. He added the agency has also begun improvements to address the concerns about the agency's IT system.
The GAO report included a response from Steven App, the FDIC's chief financial officer, who said the agency is "confident about the comprehensiveness of these control enhancements."
"As the FDIC continues to fulfill its mission to maintain stability and public confidence in the nation's financial system, we will continue to ensure that effective financial management remains a priority," App wrote in a June 14 letter. "The FDIC recognizes the significance that internal control plays in achieving its mission and goals and therefore will seek continual improvement in its internal control environment."
