An internal control analysis of newly chartered financial institutions

Throughout the 1980s and early 1990s, financial institutions failed at a historically high rate. New financial institutions failed at a greater rate than existing institutions. Evidence from this period reveals that most failed financial institutions had serious internal control weaknesses. Healthy banks that faced the same economic conditions had fewer and less severe internal control weaknesses than their failed counterparts.; During the middle and late 1990s, an interesting development took place. While a record number of bank mergers and acquisitions occurred, a large number of new financial institutions were formed. From 1996 to 1998, over 500 new financial institutions obtained federal deposit insurance and opened their doors for business.; This study examines the internal controls of newly chartered financial institutions and compares them with the controls of older financial institutions that are similar in asset size. The study also analyzes internal controls for regional and federal regulator differences. The research divided internal controls into five areas for analysis purposes. These control areas were general administrative controls, lending controls, investment controls, cash controls, and electronic controls.; A research instrument was mailed to 1,036 financial institutions equally split between new and old banks. A response rate of 39.58% was obtained. The findings in this study contradict the experience of the 1980s and early 1990s. This study found that new banks have more internal controls in place than older banks. This study also found that bank age and FDIC region are significant variables when assessing the internal controls of financial institutions.