Dive Brief:

• The Government Accountability Office suggests Congress reassess the authority for reviewing annual financial disclosures for public banks that don’t have holding companies, the watchdog said Thursday.
• In a report to the House Financial Services Committee, the GAO said banks that operate without a holding company aren’t subject to review by the Securities and Exchange Commission, and the regulators overseeing those banks don’t assess their disclosures for investors’ benefit. 
• Such a reassessment “could help Congress determine whether changes are needed to strengthen investor protection,” the GAO said in its report. 

Dive Insight:

Of lenders that failed in spring 2023, First Republic Bank and Signature Bank operated without a holding company, the GAO noted. Shareholders lost some $29 billion in investments in those two banks between the end of 2022 and May 2023.

Those failures occurred shortly after the banks’ financial statement audits were completed. “Some observers raised questions about whether auditors had properly fulfilled their roles and whether the banks had clearly disclosed material information,” the congressional watchdog said.

The House committee asked the GAO to review oversight of public banks’ and bank holding companies’ disclosures of material information and their external auditors’ role.

Eleven public banks – including two with more than $80 billion in assets – are not subject to SEC review because they operate without a bank holding company, the GAO said. 

For banks without a holding company, Congress endowed banking regulators with certain functions and duties. But those agencies’ review processes don’t assess disclosures for investors’ benefit, unlike the SEC, the GAO said. 

Public companies are required to disclose information “that investors would find important when making investment decisions,” including an annual audited financial statement and descriptions of risk factors and financial performance, the GAO said. 

When accounting firms audit public companies, “certain auditor responsibilities – such as evaluating a company’s accounting estimates and ability to continue as a going concern – can be particularly challenging in bank audits,” according to Public Company Accounting Oversight Board staff and auditors, the GAO said. 

Bank regulatory agencies don’t assess whether disclosures provide sufficient detail to investors or are materially misleading, the GAO determined. “As a result, investors may have less information available for evaluating risk.”

And investors flagged shortcomings in bank disclosures, such as those related to allowances for credit losses and liquidity, according to the GAO. 

The watchdog also recommended the SEC offer guidance to help companies determine whether information related to interest rate and liquidity risks is material. But the SEC “disagreed with the recommendation, noting that staff provides post-disclosure feedback as warranted.” 

“GAO maintains SEC should implement the recommendation,” the report said.