Bank of America Corp. on Wednesday became the largest banking company yet to say it would restate years of earnings because of derivatives accounting.
The $1.3 trillion-asset Charlotte company said it had discovered "certain weaknesses in internal controls" related to hedge accounting under Federal Accounting Standard 133. It said it had addressed the weaknesses but could not change its accounting method retroactively.
The restatements will raise retained earnings before 2002 by $707 million and boost per-share earnings in that year by 3.4%, to $3.05. It will reduce 2003, 2004, and 2005 earnings by, respectively, 0.6%, to $3.55; 1.4%, to $3.64; and 2.4%, to $4.05.
Cumulatively, the restatements will increase net income by $345 million.
Robert Stickler, a spokesman for the company, said Wednesday that it used to employ the "shortcut" method to account for hedging intended to manage rate risk and foreign exchange exposure. A recent review found that B of A might not qualify for that method, partly because of documentation issues and partly because of how the accounting board now interprets FAS 133, Mr. Stickler said.
B of A, the nation's second-largest banking company, has touted its sophisticated, hands-on balance-sheet management, which has sometimes drawn criticism. Mr. Stickler said the hedging is tied to the size of its balance sheet - with $574 billion of loans and $635 billion of deposits at yearend 2005 - and not to how it manages operations.
Robert Jensen, a professor at Trinity College in San Antonio, said B of A's plan to restate shows that "nobody can truly be error free when dealing with a complex standard." He said there is no deadline to restate, though some companies are finding it better to do so now rather then risk running afoul of regulators later.
Thomas K. Brown, the chairman of Second Curve Capital LLC and one of B of A's harshest critics, chose to blame the "complexities" of FAS 133 rather than the company. "Its very difficult to interpret," said he said in a phone interview. "I expect there will be more" restatements by other banking companies, he added.
Jeffery Harte, an analyst at Sandler O'Neill & Partners LP, said one gauge of B of A's competence will be whether large banking companies such as Citigroup Inc. and JPMorgan Chase & Co. in New York, Wachovia Corp. in Charlotte, and Wells Fargo & Co. in San Francisco restate.
A spokeswoman for Wachovia said it currently uses the long-haul method to account for derivatives. "We have continually reviewed the application of the rule" and do not expect to need to restate, she said.
Calls to JPMorgan and Citi were not returned by press time. A Wells spokeswoman declined to comment on whether they might have to restate.
