Bank of America:Accounting Fraud
Is Bank of America Committing Accounting Fraud?
In the US, Bank of America is the largest bank holding company by assets and the second largest bank by market capitalization. (Business Insider 2012) The banks size and considerable influence on American financial prosperity keep its financial operations under considerable public scrutiny.
Bank of America’s financial data show that 72% of the banks net income came from fair value adjustments on level 3 assets and another large portion came from debt valuation adjustments (Dave in Denver 2011) Analysis of Bank of America’s financial data show that 72% of the banks net income came from fair value adjustments on level 3 assets. (Dave in Denver 2011)
Level 3 assets are assets with a value that relies on unobservable input or valuation techniques. (Bank of America 2009) Level 3 assets are given an assumptive value at their potential market price. Bank of America uses pricing models, discounted cash flow methodologies, a net asset value approach to assess the value of these assets according to GAAP procedure. (Bank of America 2009)
However, Level 3 assets are the least desirable type of asset because their value if scrutinized may be contended. The resulting issue is the amount of transparency the bank provides in its SEC filings. Even a Bank of America supporter feels that the bank carries about $20 billion in incorrectly valued real estate assets. (Bank of America: Piercing Its 'Opaque' Balance Sheet 2009) These overvalued assets make Bank of America appear healthier than it really is.
Bank of America’s derives another portion of its income from debt valuation adjustments or DVA. US accounting rule Statement 159 adopted in 2007 allows banks to book profits off of decreasing bond values. Even the banks admit that this rule is inflating profits due to economic conditions. (Burne 2011)
Brian Moynihan is the CEO, or chief executive officer in charge of managing Bank of America since early 2010. One of Moynihan’s main duties as CEO is to manage the corporation in a way that promotes ongoing banking activity and the wealth of the banks investors. In order to fulfill this duty in the past Moynihan acted as a public relations speaker communicating to the public reasoning behind ATM Fees and other related issues faced by the banks’ customers.
Bruce Thompson is Bank of America’s CFO, or chief financial officer. His job is to meet all the accounting requirements set forth by the SEC, analyze financial data, and report financials to the CEO and the board of directors. In keeping with the duties of his position Thompson must access the financial risks the organization faces.
PricewaterhouseCoopers audits Bank of America’s financial reports. As auditors it is their job to assess the company’s records for accuracy from an unbiased perspective. In short, they make sure that neither Moynihan nor Thompson or any other bank employee cheats the recording system to fool the board of directors and potential investors.
In addition, government agencies regulate the banking industry in an effort to protect citizens, consumers, and investors. These include the Federal Reserve Board, Office of the Comptroller of Currency, the Federal Deposit Insurance Corporation or FDIC, and the Securities and Exchange Commission or SEC. Bank of America is in no way in trouble with the SEC or any other branch of government for reporting in this way.
Bank of America assesses value of level 3 assets in compliance with SFAS 157 which states that values must be made consistently. In other words, unless Bank of America can prove that there is another more valid way of assessing these values they must keep assessing them as they have. So the best thing for Bank of America to do is to actively rid itself of these investments.
Links to Bank of America’s SEC filings can be found at: http://phx.corporate-ir.net/phoenix.zhtml?c=71595&p=irol-sec2010
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