Date: 1987-11-20
Speaker: ST GERMAIN (democrat)
Chamber: H

Mr. Speaker. portions of the thrift industry remain in a state of financial crisis. As problems in the industry persist. it is imperative that reliable and timely financial information be available to accurately assess the extent of the problems and to develop effective strategies to resolve them. The public accounting profession plays a key role in providing financial information to depositors and shareholders of thrift institutions. as well as to the Congress and Federal regulators who oversee those institutions. Independent audits performed by public accounting firms determine whether thrift institutions are fairly reporting their financial condition. and whether the institutions are providing sufficient disclosure of all matters necessary to ensure that financial statements are not misleading. To date. the public accounting profession has a questionable record in conducting independent audits of thrift institutions. An example here is enlightening. Vernon Savings & Loan Association of Vernon. TX. is a much discussed recent thrift institution failure. At the time Vernon was closed by the Texas Savings and Loan Commissioner. It was insolvent by over $350 millionan amount difficult to overlook. According to the Federal home loan bank of Dallas. in a memo to the Federal Home Loan Bank Board which recommended the institution be closed. Vernon had committed numerous regulatory violations and engaged in unsafe or unsound practices. Specifically. Vernon had engaged in reckless and imprudent underwriting and lending practices and had violated several Bank Board regulations. including the regulations regarding loans to one borrower. conflicts of interest. and loan documentation. In addition. Vernon had excessive concentrations in acquisition. development. and construction loans and loans secured by the stock of other FSLICinsured institutions. Vernon paid substantial amounts to key officers and its parent holding company and excessive dividends on the basis of inflated profits. As a direct result of reckless operations and unsound practices. Vernon suffered substantial dissipation of its assets and earnings. The purpose of an independent audit is to render assurance that management has fairly represented the institutions financial position and to disclose all material facts about the institutions financial health to the readers of those statements. A CPA firm has an obligation to state whether it feels an institutions condition is so precarious as to make questionable the continued existence of that entity. Vernons auditor apparently failed to fulfill this responsibility. This is further supported by statements made by outside consulting firm engaged by the Dallas Bank to examine and investigate Vernon for the purpose of exposing and documenting any past or present criminal activity of the directors. officers. employees. and agents of the association or any third parties in connection with or relating to the association. The consulting firm identified significant concerns with the associations independent auditor. For example. their report noted thatThe independent accountants "did not complete their audits in accordance with generally accepted auditing standards and therefore failed to require adjustments to reported net income and financial position which could have resulted in earlier action by cognizant regulatory authorities and prevented the continued payment of dividends by VSLA [the association] to DFC [Dondi Financial Corp.] as well as bonuses to key personnel." The independent accountants "audit failure may have resulted from negligence and disregard of information that was readily available to" the accountants. Statements made by the independent accountants audit partner. principal and manager were in direct conflict with information presented in the audit firms working papers. The independent accountants review of "loans to one borrower for six separate individuals totaling $369 million" did not require establishing a loss reserve. The consulting firm uncovered that the independent accountants evaluation relied primarily upon statements by senior officers of the association that such individuals had a good reputation with a proven track record. They did no work regarding the likelihood of collection. no appraisals were reviewed. no financial statements were reviewed. nor were other normal accepted auditing procedures employed. The independent accountants audit procedures to confirm loan participation sales to purchasing institutions were deficient. The auditors did not address such basic information as: (1) Whether or not there was any security for the loan. (2) The terms of the loan including date of loan. interest rate and any outstanding accrued interest. (3) Whether or not the loan was purchased with or without recourse. Vernons auditor had many other thrift institution clients in Texas. Upon further examination. committee staff has found that two other thrift clients also failed because of poor underwriting standards. generally unsafe operating practices. and speculative lending. The Dallas Bank estimates that this firm had gross billings from thrift institution clients of $5 to $10 million per year in its district alone. When thrifts fail. or otherwise incur financial difficulty. the Federal Government often bears the brunt of the cost through losses of the Federal Savings and -Loan Insurance Corporation [FSLIC] insurance fund. The Federal Home Loan Bank Board is currently suing or considering legal action against a number of public accounting firms for substandard thrift institution audits. These suits are aimed at recovering -damages from the firms for losses to the FSLIC insurance fund. Separate legal actions against public accounting firms for individual audits are both costly and time consuming. Because of this. and because the extent of audit problems is. at present. unknown. I have requested the General Accounting Office [GAO] to review the quality of thrift institution audits by the public accounting profession. I directed that GAO identify specific audit problems at individual institutions or auditing firms. as well as those audit problems that GAO sees as pervasive across the thrift industry. Further. GAO was instructed to inform the committee of the steps it believes the public accounting profession should take to improve the overall quality of audits in the thrift industry.