BofA Ends SEC Inquiry over Accounting Error; to Pay $7.65M

Adding to the woes of Bank of America Corporation (BAC), on Monday, the bank was penalized $7.65 million by the Securities and Exchange Commission (SEC) on the conclusion of BofA’s $4 billion accounting error investigation. According to the SEC, lack of record-keeping and internal controls led to the error disclosed in Apr 2014.

The accounting error was discovered as BofA was preparing its 10-Q quarterly regulatory filing. The miscalculation pertained to the treatment of certain structured notes that the company assumed while acquiring Merrill Lynch & Co. in 2009. BofA had applied an incorrect adjustment related to calculation of the fair value of certain Merrill Lynch structured notes while determining the capital ratios, which led to overstating of capital ratios. Notably, the company’s historical financial performance has not suffered due to this.

Further, BofA’s capital ratios in the annual stress test were overstated. Consequently, the company informed the Federal Reserve about the same and re-submitted its 2014 capital plan in May 2014. At the end, the bank proposed an increase in its quarterly dividend to 5 cents though the proposed share buyback plan was cancelled.

Under the new Basel III regulatory-capital requirements, BofA’s accounting error summed to more than $4.3 billion as of year-end 2013, according to the SEC. For BofA’s co-operation in the investigation and self reported error to regulators, it was given credit by the SEC and therefore, minimal penalty amount was imposed.

Apart from being known as ‘too big to fail,’ BofA might now be labeled as ‘too complex to manage.’ Detection of the flaw has partly dampened the efforts of management to restore the bank’s past glory.

Since the financial crisis and after taking $45 billion in bailout money, BofA undertook several steps to improve efficiency.  Even now, the bank continues to face several litigation issues and investigations for its activities in the pre-crisis period.

Recently, BofA reached a $16.65 billion settlement with the U.S. Department of Justice (DOJ), a few other regulators and Attorneys General (AGs) of six states. The bank expects the settlement to lower third-quarter 2014 earnings by 43 cents per share.

In less than a year, the banking regulators have been able to settle a few mortgage issues. JPMorgan Chase & Co. (JPM) had announced a $13 billion-settlement to clear similar charges in Nov 2013. This was followed by Citigroup Inc.’s (C) mortgage accord of $7 billion in Jul 2014.

However, in our opinion, this historic settlement does not spell the end of mortgage-settlement deals. The law enforcement agencies are now expected to shift their attention to other banks including Wells Fargo & Co. (WFC) and The Goldman Sachs Group, Inc. (GS), among others which have been accused of selling flawed mortgage-backed securities (MBS) prior to the crisis.

Hence, we believe that the road ahead is not easy one for BofA. Apart from its concerns related to the pre-crisis period, the company faces tough macroeconomic challenges that continue to drag revenue growth.
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