Merrill Lynch Loss Heavier Than Reported

Merrill Lynch lost $500 million more last year than it initially reported, due to "material weakness" in its accounting of yield curves.
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Merrill Lynch

lost $500 million more last year than it initially reported, due to "material weakness" in its accounting of yield curves, according to a regulatory filing on Tuesday.

Merrill told investors last month that it lost $27.1 billion in 2008, though an annual report filed with the

Securities and Exchange Commission

on Tuesday said that the loss was actually $27.6 billion.

Buried deep within the report was an explanation by accounting firm Deloitte & Touche that Merrill improperly accounted for a swap contract by using a different set of yield curves than its counterparty for those transactions. Companies use such contracts to hedge risk that interest rates and currency fluctuations may affect the cost of their debt.

Deloitte said that Merrill did not properly value the swaps or test them before implementation, then reported them improperly to a third party. Internal controls were "not operating effectively" either, and failed to identify the difference between the curves.

"In our opinion, because of the effect of the material weaknesses identified above on the achievement of the objectives of the control criteria, Merrill Lynch has not maintained effective internal control over financial reporting," Deloitte concluded.

The sloppy procedures are not the first misstep for Merrill, which has received sharp criticism for pushing through $4 billion in bonuses before

Bank of America

(BAC) - Get Report

closed its acquisition of the money-losing firm. Former CEO John Thain was questioned on Tuesday by New York Attorney General Andrew Cuomo, who is investigating the bonuses and other practices at Merrill.

Thain, who was once heralded for saving the struggling firm by pushing it into the arms of BofA, has also fallen from grace. Disclosures that the former executive spent $1.2 million to redecorate his office -- including $35,000 for a commode on legs -- along with the bonus packages he approved have tarnished his image.

Thain was forced out of a leadership position at BofA early this year by BofA CEO Ken Lewis. Lewis charged that BofA was not adequately informed about the accelerating losses associated with Merrill's toxic assets after the deal was announced last fall.