Synopsis

More than 1,000 banks failed during the 1980s, including 427 failures in 1988 and 1989 alone. An additional 169 banks failed in 1990. President George H.W. Bush signed the Federal Deposit Insurance Corporation Improvement Act (FDICIA) on December 19, 1991. Two provisions of the FDICIA—a requirement that auditors evaluate and report on the adequacy of large banks’ internal accounting controls and a requirement that banks disclose the current market values of their investment portfolios—initiated substantial changes in auditing and financial reporting.

Discussion Questions 

1. What was the most common audit deficiency cited by the GAO in its 1989 report about S&L failures?
2. What contributing factor did the GAO find in nearly all the bankrupt banks it examined in 1991?
3. Why did the GAO recommend in 1991 that banks adopt mark-to-market accounting for investment securities?
4. What reasons did people give for opposing mandatory internal control reporting in 1979?
5. Did the AICPA support or oppose mandatory internal control reporting in 1979? In 1993?
6. Explain the term “gains trading.” How did the use of historical cost accounting permit financial institutions to manipulate their reported earnings?
7. What reasons did bank executives give for opposing mark-to-market accounting?
8. Describe two pronouncements the FASB issued after the savings and loan crisis to improve financial institutions’ accounting.

Additional Resources

Thrift Failures: Costly Failures Resulted from Regulatory Violations and Unsafe Practices. U.S. General Accounting Office, June 1989.

Failed Banks: Accounting and Auditing Reforms Urgently Needed. U.S. General Accounting Office, April 1991.

CPA Audit Quality: Failures of CPA Audits to Identify and Report Significant Savings and Loan Problems. U.S. General Accounting Office, February 1989.