Material weakness related to income taxes computations — The Company outsources its tax function to a tax specialist. This tax specialist prepares the Company’s income tax provision and related tax footnote disclosures for its financial statements. The tax specialist did not perform the necessary levels of due diligence required during the preparation process, and management relied on the tax specialist recommendations without recognizing errors in the tax computations. These two factors were the primary reason for the resulting errors in the tax computations. Consequently, adjusting journal entries were recorded by management to rectify the errors.
· Material weakness related to financial statement closing process — There were several unrecorded adjustments and omitted disclosures identified during the financial statement audit. Further, in addition to the audit adjustment related to income taxes, there was a material audit adjustment recorded by management to fairly present investment fair values in the financial statements. These adjustments are indicative of insufficient review controls in place by management with respect to the financial statement closing process.
· Material weakness related to allowance for loan losses — The Company refined its allowance methodology in the fourth quarter of 2012 using assistance from a third party specialist. Management relied on the third party specialist’s recommendation with respect to its methodology to calculate its allowance for loan losses. Management’s process did not adequately challenge the third party’s model assumptions and inputs. Additionally, management did not adequately document the rationale for using the allowance assumptions and inputs. Although these matters are indicative of insufficient review controls in place by management related to the allowance for loan losses, management believes that the amount of the allowance for loan losses is appropriate after considering the effects of unrecorded adjustments.