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Module: Planning and Monitoring
Section: Institutional Examination Planning
EM-205

Date Published: 06/1994


Introduction

Institutional examination planning is the process of adequately planning for all examination and related activities occurring throughout the fiscal year in each institution. The principal objectives of planning are to identify and prioritize high-risk areas in an institution's operation to permit a more efficient and effective allocation of examination resources. This is accomplished by identifying those areas that require examination coverage and determining the depth of that coverage. Refer to the Examination Policy section of this manual for a discussion on the use of risk-based examination concepts in establishing scope and depth of testing in an examination.

Failure to adequately plan for examination work constitutes examination risk--the risk of not identifying or incorrectly diagnosing conditions which threaten the safety and soundness of the institution. However, the need to minimize examination risk must be balanced with the cost involved in performing the examination. This balance is partially achieved through effective examination planning and the development of a planning document prior to the commitment of resources. The plan provides a framework for monitoring and controlling this balance. This does not mean that once a plan is approved it cannot be changed. Plans are continually assessed and reevaluated throughout the examination process to optimize the balance between examination risk and costs.

There are two typical planning documents: a monitoring/oversight plan for governing off-site activities, and an on-site activity plan for directing on-site activities. The nature and extent of these documents should reflect the planned level of off-site versus on-site activities in each respective institution. The key underlying principles are: (1) all examination and related activity should be adequately planned for, and (2) planning activities and documents should be tailored to the needs of the individual institutions based on risk-based examination concepts.

This Examination Manual section provides guidance on the overall examination planning process including development and content of the resulting planning documents.

Planning Process

Institutional examination planning is the process used to formulate institution-specific plans that focus on areas of significant risk. The planning process should identify specific high-concern areas affecting the institution, prioritize concerns according to risk, and determine how high-concern areas should be addressed. Institutional examination planning must, at a minimum, address capitalization, asset quality, management effectiveness, earnings performance, liquidity position, and compliance with laws and regulations. In order to ensure adequate examination coverage, it is generally necessary to periodically include examination issues other than the above broad categories, which may or may not reflect currently identified areas of concern.

The factors involved in the examination planning process and the development of institution-specific planning documents are detailed below:


The examination team can develop targeted loan samples to test each applicable examination area, as appropriate. Targeted loan samples typically consist of several smaller samples of specific loans tailored to fit the particular concerns being investigated. Targeted sampling is generally more efficient and effective than random sampling as examiners are reviewing for only one or two pertinent factors on a smaller targeted sample instead of examining several generic items on every loan in a larger random sample. The depth of testing is continually reevaluated based on examination results. When sufficient work has been done to reach a conclusion, no further testing is needed. If a conclusion cannot be reached, then the targeted sample should be expanded or refocused on those areas of significant risk.

Besides targeted sampling, examiners also have the option of using statistical sampling techniques.

Assignment of examination program activities to examiners is influenced by staff training needs, experience, examination risk, and availability. The EIC is responsible for ensuring a reasonable balance between examination risk exposure and staff development. Also, the EIC must monitor the workload throughout the examination and permit timely release of staff not required for the entire examination.

Plan documents are also developed for special purpose examination activities. The same planning principles apply, and the resulting plan document should be tailored to meet the needs of that particular examination activity.

Proposed changes to an approved plan should be discussed with the approving official. Actual changes to the plan must be documented in the workpapers and approved by the management level who approved the original plan. The EIC ensures all examination objectives are met by cross-referencing each objective in the plan to the workpapers (e.g., leadsheets).

Communication

Communication between examiners and supervisors throughout the examination process is essential and will aid in avoiding misunderstandings that might occur during report preparation and supervisory review activities. To the extent possible, the entire examination team should participate in planning examination activities. Communication of on-site examination activities and objectives is especially important and is best accomplished through a pre-examination meeting with the examination team. During the meeting, the EIC covers all aspects of the planning document to ensure full understanding of examination guidelines and scheduled completion dates. The meeting also affords examiners the chance to ask questions about their assignments and the overall examination activity. Relevant issues pertaining to FCA or the institution are also discussed so examiners are in the most knowledgeable position prior to commencing on-site activities.

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