The Federal Deposit Insurance Corporation Improvement Act, Bank Internal Controls and Financial Reporting Quality

Abstract

Altamuro and Beatty (2009) examine financial reporting quality before and after the Federal Deposit Insurance Corporation Improvement Act (FDICIA). They document increases in the validity of the loan loss provision, earnings persistence, predictability of future cash flows and reductions in benchmark-beating for banks complying with FDIC’s internal control regulations relative to non-complying banks. Our discussion focuses on Altamuro and Beatty’s interpretation of the results, specifically that the internal control provision of FDICIA improved financial reporting quality. In this paper, we provide a brief overview of FDICIA in an attempt to assess the importance of FDIC’s internal control regulations. We then review the findings of other studies on internal control regulations with the goal of evaluating what new insights we gain from Altamuro and Beatty. Next, we report new evidence relating to the subgroups driving the changes in financial reporting quality surrounding FDICIA. Finally, we discuss the results in the context of the current financial crisis and suggest avenues for future research.