Allowances for Loan Losses
Allowances for Loan Losses, often referred to as Loan Loss Reserves, are a primary concern of banking regulators, the SEC, independent auditors, and other stakeholders. Because the provisions for loan losses significantly affect reported earnings and key performance and soundness measures, the amounts, timing and disclosures of a bank’s loan loss provisions and reserves are of critical importance.Several Parties May Challenge Allowances for Loan Losses
• Bank Regulators often question the amounts of loan loss reserves and processes for determining those reserves. They can recommend governmental sanctions and formal or informal actions based upon their findings.
• SEC Division of Corporation Finance routinely questions registrants about disclosures, amounts of reserves and the timing and amounts of provisions, and can request expanded disclosure or restatement of financial statements.
• SEC Division of Enforcement may investigate the adequacy of loan loss reserves, the discipline and consistency of the process for determining reserves, the timing of provisions and the accuracy and timeliness of disclosures. The results of an investigation could lead the SEC to charge the company and/or its management with violations of the securities laws.
• Independent auditors may challenge the reserving process, adequacy of amounts reserved, judgments applied, disclosure, or adequacy of documentation.
• Company management or the audit committee of the board of directors may undertake an inquiry based on information from internal audits, internal analyses, or whistleblower allegations.
• Plaintiffs in litigation may challenge the adequacy of loan loss reserves and the amounts, timing, and disclosures of provisions to support their damage claims.