An internal financial audit at SunTrust Banks has confirmed an accounting problem with its loan loss reserves that could prevent the bank from completing its Sarbanes-Oxley Act reporting requirements by the 31 December deadline.
SunTrust said that its internal audit found "numerous errors in the loan loss allowance calculations for the first and second quarters, including data, model and formulaic errors", that were not immediately investigated and corrected.
It also found problems with the implementation of a new accounting allowance framework in the first quarter, which resulted in inadequate internal control procedures, insufficient validation and testing, and a failure to detect errors in the allowance calculation.
The bank has since had to restate its first- and second-quarter 2004 financial results because of the problems, according to SunTrust. Three employees in the bank's credit administration division, including its chief credit officer, were fired in connection with the problems, which were not properly investigated and pursued by the Allowance Committee, according to the bank.
Barry Koling, a spokesman for SunTrust, said that under the Sarbanes-Oxley Act of 2002, the bank has to attest to the accuracy of its financial statements, which includes the loan loss reserves. The internal audit found that the loan loss reserves were the only problem in the financial statements, he said.
"We are working to correct the flaws in the implementation of the loan loss methodology, and we are working to get that done as quickly as we can," Koling said. "If we can get that done by the end of the year, we will. If it slips over a little, then it slips over a little."
The loan loss reserve is money set aside to cover any potential losses from loans that are not paid back during the year.
The Sarbanes-Oxley Act aims to improve and reform the financial accounting of public companies and to protect investors in the wake of myriad corporate accounting scandals since the late 1990s. It requires most large companies to attest to the financial and IT controls they have in place for fiscal years ending on or after 15 November 2004, in their annual reports.
In October, SunTrust completed a merger with National Commerce Financial.
Todd R Weiss writes for Computerworld