WASHINGTON - The Office of the Comptroller of the Currency warned national banks Friday that lax internal controls, such as ineffective audits, are contributing to losses and even failures.

"Recent examinations have identified an increasing number of audit and internal control deficiencies at many national banks," according to an advisory letter from the agency to bank chief executives, directors, and examiners. "Some of these deficiencies have caused significant operating losses and led to bank failures."

Mark O'Dell, deputy comptroller for core policy, in an interview Friday would not discuss specific banks or instances of losses that have been publicized recently.

"We've been seeing an increase in the number of lapses in basic internal controls and audit coverage over the last year," he said. "Have they contributed to some of our problem institutions? I would have to say yes. They weren't the primary cause, but they have shown up in all the major problems we have seen in the last year."

However, Mr. O'Dell emphasized that the number of troubled institutions remains low thanks to the healthy economy. One national bank has failed this year, and three went under last year.

Though agency officials have been stressing the importance of strong internal controls for years, this is their first formal advisory on the topic in recent memory. The advisory said all safety-and-soundness exams will now include a formal review of internal audit papers as well as discussions with directors about their audit and control programs.

"We are emphasizing the need for strong audit and internal controls to get ahead of the curve," Mr. O'Dell said. "It's the right time to do it - when things are going well. We don't want to wait until external factors magnify internal problems."

According to the advisory, "new products, services, delivery channels, and other rapid changes taking place in the banking environment" make it "increasingly important that bank managers and directors heighten their oversight of audit and control systems to ensure that they are effective."

By the end of July, the agency said it would mail bankers updates of the Comptroller's Handbook, which formally relays agency policies and procedures to supervisors and bankers. However, the new guidance can be viewed now at www.occ.treas.gov.

The agency said a bank's size, complexity, and risk profile will be taken into consideration when examiners rate internal controls. Programs will be rated "strong," "satisfactory," and "weak" in exam reports and will be incorporated into Camels ratings as well as the banks risk assessment rating.

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