Business acumen is keenness and quickness in understanding and dealing with a business situation in a manner that is likely to lead to a good outcome. For CPAs in public accounting this means performing higher quality audits. But who has the time to compile a list of relevant and timely accounting news relevant to CPAs? We do! This week’s GAAP Flash is all about banks. It includes articles about the provision for loans losses in accordance with ASC 310 and ASC 450, as well as and other banking-related accounting news intended to increase business acumen in the profession.

Turning Point? J.P. Morgan Builds Loss Reserves for the First Time in Six Years (January 14, 2016) – The Wall Street Journal (@wsj)

J.P. Morgan added $136 million to its reserve for bad loans and another $51 million related to provisions for lending-related commitments. The vast majority of the increase related to reserves on its oil and gas portfolio. This was the first time in the past six years that any of the big national banks have added to their provision for loan losses.

How It’s Relevant: It’s about time! For the past six years, banks have been releasing reserves, boosting their bottom line in the process – to the tune of $86 billion of pre-tax income for the top four U.S. banks. However, the severe and prolonged decrease in the price of oil has stopped this practice in its tracks. Plus, how much more could they have possibly released? However, don’t blame JPMorgan Chase’s CEO, Jamie Dimon, who says he wanted to add more to the reserves. He claims it’s those darn accountants and the pesky rules under U.S. GAAP. He’s referring to ASC 310 and ASC 450, but don’t let him fool you. There is plenty of judgment in the process!

Chinese Banks are Using a Ridiculously Simple Trick to Limit the Number of Bad Loans on their Books (December 7, 2015) – Business Insider (@businessinsider)

The headline had me wondering what esoteric rule under U.S. GAAP or IFRS the banks were using. It turns out the “ridiculously simple” trick is just to not write the loans down. According to Reuters, the source of the article, “Chinese banks, hit with a surge of troubled borrowing in a weakening economy, are increasingly failing to recognize loans that have gone sour on their books to avoid having to stump up capital.”

How It’s Relevant: What? That is not a “trick,” its called fraud! The article states that many of these loans are sitting on bank’s balance sheets at their full value, even when payments have been missed for more than 90 days – the accepted international criteria for classifying loans as non-performing. And we wonder why the Chinese economy is in the toilet! It’s the “wild west” over there and, oh yeah, did I mention that the PCAOB is prohibited from inspecting auditors of Chinese companies that listed in the U.S. Investor beware!

U.S. Banking Regulators Step Up Rhetoric on Commercial Real-Estate Loans (December 18, 2015) – The Wall Street Journal (@wsj)

The Federal Reserve, Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency issued a joint statement alerting banks that they are preparing to crack down on risky commercial-real estate (CRE) lending, even threatening an increase capital requirements if necessary. “The agencies have observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards,” the statement read.

How It’s Relevant: When banking agencies issue a joint statement, banks should take it seriously as the agencies often follow it up with tougher scrutiny of the loans in question. Another area of lending receiving special scrutiny by regulators of late is subprime auto lending. Auditors should also take heed and be sure to address the risks related to CRE and subprime auto loans in their audit risk assessments. It should be noted that the PCAOB is watching too, as auditing the allowance for loan and lease losses is a common area of audit deficiencies for the annually inspected firms.

Goldman Reaches $5 Billion Settlement over Mortgage-Backed Securities (January 14, 2016) – The Wall Street Journal (@wsj)

Goldman Sachs agreed to the largest regulatory penalty in history, $5 billion, to resolve U.S. and state claims stemming from their sale of mortgage-backed securities leading up to the financial crisis. Goldman Sachs joins the list of other big banks just wanting to turn the page of this chapter in their history.

How It’s Relevant: Goldman Sachs no doubt had accrued a liability for this contingency in accordance with ASC 450, but it obviously wasn’t enough. The company said litigation legal expenses from the settlement was expected to cut into earnings for the fourth quarter by about $1.5 billion after taxes. Crisis-related settlements by banks, mortgage firms, brokerages, and others have totaled at least $180 billion according to the article. That’s a lot of money! I want to be clear that in know way am I defending the big banks, but don’t the people that lied on their mortgage application and lived above their means also deserve some of the blame for the crisis?

Not Too Big Too Fail. Too Expensive To Exist (January 13, 2016) – The Wall Street Journal (@wsj)

“Too big to fail” is a phrase synonymous with the financial crisis. However, this article states that the U.S. government has actually made it too expensive too be big. MetLife became the second major firm in the past 10 months, General Electric being the other, to decide that the demands of being “systemically important” outweigh the benefits of continuing to operate at its current size.

How It’s Relevant: Are MetLife rivals Prudential Financial and AIG next to follow suit? Time will tell, but, if you are an auditor of a large financial institution, regulatory reporting is certainly an area with increased audit risk. In recent years, regulators have made it clear that being big comes at a cost as large U.S. banks have added approximately $641 billion of capital since 2009 to meet tougher regulatory rules. And who ultimately pays for the increased cost of doing business? We do, the very people the government is trying to protect, through in an increase in fees and a decrease in competition. Gee thanks!