Dec. 2 (Bloomberg) -- The U.S. Treasury needs to bolster its oversight of the $700 billion financial rescue plan to ensure banks comply with requirements of the bailout, including executive pay limits, a congressional watchdog said.

In a report released today, the Government Accountability Office said the Treasury “has yet to address a number of critical issues” with the Troubled Asset Relief Program. The audit also said it’s “too soon” to determine whether taxpayer funds injected into banks are having the intended effect of unfreezing credit and financial markets.

Since the plan was enacted Oct. 3, some members of Congress have demanded Treasury Secretary Henry Paulson be more forthcoming about where the money is going. Paulson has also been criticized for shifting the effort away from buying distressed mortgage-related assets from financial companies and toward purchasing equity stakes in lenders.

The report, required under the law, called on Paulson to improve his efforts to educate lawmakers, investors and the public about the program’s goals to avoid “information gaps and surprises.”

Senate Finance Committee Chairman Max Baucus, a Montana Democrat, said the report “proves the immediate need for oversight of the taxpayer dollars being expended right now as part of TARP.” He urged the Senate to confirm Neil Barofsky as special inspector general of the program. The nomination has been blocked by at least one Republican senator.

Executive Pay, Dividends

Today’s audit said the department needs to develop a way of making sure the banks receiving government money adhere to restrictions on executive pay and dividends. The GAO said it was “unclear” how the Treasury will monitor banks’ use of the money they receive in exchange for sales of preferred shares.

“Without a strong oversight and monitoring function, Treasury’s ability to help ensure an appropriate level of accountability and transparency will be limited,” the report said.

In addition, the GAO recommended that the Treasury speed hiring in its office that oversees the rescue effort and keep top positions filled during the transition to President-elect Barack Obama’s administration next month. The department also needs to develop policies, procedures and other internal safeguards that “are robust enough to protect taxpayers’ interests.”

The report focused on Treasury’s so-called capital purchase program, which allocated $250 billion for healthy banks. As of Nov. 25, the Treasury has spent more than $150 billion on stakes in 52 lenders, the GAO said.

Treasury’s Response

Neel Kashkari, the Treasury’s assistant secretary in charge of the TARP program, said in a letter accompanying the report that the department “has made significant efforts to ensure transparency and good communication with our external stakeholders, but more can and will be done in these areas.”

The Treasury agrees with most of the recommendations in the report, except for the need to monitor how all participating banks are spending TARP funds, Kashkari said.

Included in the legislation authorizing the $700 billion are “a number of requirements applicable to individual financial institutions,” Kashkari said. “Treasury is developing compliance programs for these requirements.”

Jennifer Zuccarelli, a Treasury spokeswoman, said the department “appreciates GAO’s recommendations and looks forward to continuing to work closely with our auditors as we work to fully implement these new programs.”

To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net.

Last Updated: December 2, 2008 17:19 EST