Loan Performance

Loan performance may be easily determined by a system history of the debt's repayment record. Aside from the obvious deliquency status, other questions the internal auditor might raise include the following:

* If the debt is supported by a depleting or amortizing asset, is the loan's term reasonable for the economic life of the asset?

* Are there frequent rewrites, particularly with capitalization of interest? Are there extended periods when the debtor remains close to maximum credit limits? These two situations may signal that performance problems are imminent. The existence of a demand deposit relationship with the institution, recurrent overdrafts or failure to maintain required corresponding deposit levels may also denote a near term lack of performance. The commercial debtor's ability to repay is most often measured by the firm's financial statements. Both institutional policy and subsequent note covenants are essential controls. These documents must indicate the type of statement and compilation, whether reviewed or audited. A "spread" of historical financial statements will indicate trends in the firm's operations and provide "snapshots" of critical ratios measuring the ability to service the debt. A breach of the note covenants to deliver statements in a timely manner represents a prime indicator that financial problems may be present. Also of interest to the internal auditor may be recent personal financial statements of a debtor or comaker who signed or guaranteed the note as an individual. Personal financial statements which rely on self-assessed assets, such as real estate or large amounts of equity in the borrowing firm, may need to be discounted as creditable repayment sources by the reviewer. Validation of certain balance sheet amounts by confirmation or other means may also be useful in determining the reliability of personal financial statements. :