A few days before its shareholders annual meetings, the Bank of America announced a $4bn downward revision of its previously disclosed regulatory capital due to an accounting error related to the Bank’s acquisition of Merill Lynch & Co in 2009.
According to a document the lender filed with the US Securities Exchange Commission on April 28, reported by Bloomberg, the bank failed to adjust some of the losses on structured notes issued by Merrill Lynch & Co. The accounting errors accumulated in the last five years and went unnoticed until last month.
However, Institute of Chartered Accountants of England and Wales head of financial services Iain Coke said that the error only apply to the Bank’s regulatory capital which is the required amount of the capital that banks need to hold for risk issues such as liquidity and solvency.
These numbers are submitted to the Federal System Reserve (Fed) as part of their annual stress tests to ensure that financial institutions have robust capital planning processes and adequate capital.
"The regulatory capital figures are different from the financial statements one," Coke said. "Even if both sets of figures might look the same they have a different base of calculation."
Coke believes that the bank’s auditors, PwC, cannot be blamed for not spotting the accounting error. "The financial statement is audited but not the regulatory capital," he said. "And it seems that their financial statement was correct but the mistake comes from the calculation of their regulatory capital figures."
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He said that while bank capital figures and ratios were gaining importance especially amongst analysts after the financial crisis, these numbers are not as reliable as they ought to be as they are not consistent from one bank to another and are not audited.
"If we going to place as much importance on them we need to do more be it bank supervisor, internal or external audit to makes sure these numbers are more reliable," he concluded.
Bank of America has until 27 May to resubmit its figures to the Fed.