FDIC, in Turnabout, Supports Requirement of Outside Check on Financial

The Daiwa Bank debacle led to a change of heart at the Federal Deposit Insurance Corp. last month.

In May, FDIC Chairman Ricki Helfer had testified in favor of a congressional proposal to drop a requirement - imposed by the FDIC Improvement Act of 1991 - that an outside accountant attest to the adequacy of internal controls for financial reporting at banks or thrifts with assets of $500 million or more.

But on Dec. 13, Ms. Helfer wrote to Rep. Marge Roukema, R-N.J., that the FDIC had "revised" its views.

The agency now favors keeping the requirement "because these internal controls play an important role in safeguarding assets, protecting against fraud, and assuring the reliability of accounting data," Ms. Helfer wrote. "Every institution must have a system of internal controls adequate for the level of risk posed by these activities."

The regulatory relief legislation approved last year by the House Banking Committee drops the requirement for all banks and thrifts, and exempts well-managed and well-capitalized banks from having to establish internal controls for financial reporting and report on them to the FDIC.

The FDIC has opposed the latter provision all along. But in May, Ms. Helfer had argued in favor of dropping the requirement as an expensive and unnecessary burden.

The revelation that Japan's Daiwa had lost $1.1 billion on unauthorized securities trades made by a New York-based employee brought a renewed focus on internal controls, and a new FDIC position.

"One of the weaknesses that came out of Daiwa was that there were deficiencies in internal controls," Robert Miailovich, the FDIC's associate director of supervision, said Wednesday.

At a Dec. 5 hearing before the House Banking Committee's financial institutions panel, Ms. Helfer agreed with Rep. Roukema, a subcommittee chairwoman, that removing the requirement wasn't a good idea. Rep. Roukema asked to see that opinion in writing, and Ms. Helfer followed up with her Dec. 13 letter.

Diane Casey, national director of financial institutions regulatory issues for the accounting firm Grant Thornton, said focusing on internal controls makes sense.

"You're looking at where the industry is going in terms of its whole risk management approach," she said. "This is where the accounting industry is: control-based audits."

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER