Pub. 7 2019 Issue 3

15 The Community Banker should contain procedures, including a system of internal controls, de- signed to foster sound practices, to comply with laws and regulations, and to protect the institution against external crimes and internal fraud and abuse. Monitor implementation. The board's policies should establish mechanisms for providing the board the information needed to monitor the institution's operations. In most cases, these mech- anisms will include management reports to the board. These reports should be carefully framed to present information in a form meaningful to the board. The appropriate level of detail and frequency of individual reports will vary with the circumstances of each institution. Reports generally will include information such as the following: • the income and expenses of the institution • capital outlays and adequacy • loans and investments made • past due and negotiated loans and investments • problem loans, their present status and workout programs • allowance for possible loan loss • concentrations of credit • losses and recoveries on sales, collections, or other disposi- tions of assets • funding activities and the management of interest rate risk • performance in all of the above areas compared to past per- formance as well as to peer groups' performance • all insider transactions that benefit, directly or indirectly, con- trolling shareholders, directors, officers, employees, or their related interests • activities undertaken to ensure compliance with applicable laws (including, among others, lending limits, consumer requirements, and the Bank Secrecy Act) and any significant compliance problems • any extraordinary development likely to impact the integrity, safety, or profitability of the institution Reports should be provided far enough in advance of board meet- ings to allow for meaningful review. Management should be asked to respond to any questions raised by the reports. Experience has shown that certain aspects of lending are respon- sible for a great number of the problems experienced by troubled institutions. The importance of policies and reports that reflect on loan documentation, performance, and review cannot be overstated. Provide for independent reviews. The board also should estab- lish a mechanism for independent third-party review and testing of compliance with board policies and procedures, applicable laws and regulations, and accuracy of information provided by management. This might be accomplished by an internal auditor reporting directly to the board, or by an examining committee of the board itself. In addition, an annual external audit is desirable even when not required by regulation. The board should review the auditors' findings with management and should monitor management's efforts to resolve any identified problems. In order to discharge its general oversight responsibilities, the board or its audit committee should have direct responsibility for hiring, firing, and evaluating the institution's auditors, and should have access to the institution's regular corporate counsel and staff as required. In some situations, outside directors may wish to consider employing independent counsel, accountants or other experts, at the institution's expense, to advise them on special problems arising in the exercise of their oversight function. Such situations might include the need to develop appropriate responses to problems in important areas of the institution's performance or operations. Heed supervisory reports. Board members should personally re- view any reports of examination or other supervisory activity, and any other correspondence from the institution's supervisors. Any findings and recommendations should be reviewed carefully. Progress in ad- dressing problems should be tracked. Directors should discuss issues of concern with the examiners. Avoid Preferential Transactions Avoid all preferential transactions involving insiders or their related interests. Financial transactions with insiders must be beyond reproach. They must be in full compliance with laws and regulations concerning such transactions, and be judged according to the same objective criteria used in transactions with ordinary customers. The basis for such decisions must be fully documented. Directors and officers who permit preferential treatment of insiders breach their responsibilities, can expose themselves to serious civil and criminal liability, and may expose their institution to a greater than ordinary risk of loss.