[Federal Register Volume 63, Number 4 (Wednesday, January 7, 1998)]
[Notices]
[Pages 878-879]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-347]


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FEDERAL DEPOSIT INSURANCE CORPORATION


Rescission of the Statement of Policy Providing Guidance on 
External Auditing Procedures for State Nonmember Banks

AGENCY: Federal Deposit Insurance Corporation (FDIC or Corporation).

ACTION: Rescission of statement of policy.

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SUMMARY: As part of the FDIC's systematic review of its regulations and 
written policies under Section 303(a) of the Riegle Community 
Development and Regulatory Improvement Act of 1994 (CDRI), the FDIC is 
rescinding its outdated Statement of Policy Providing Guidance on 
External Auditing Procedures for State Nonmember Banks (Policy 
Statement).

EFFECTIVE DATE: The Policy Statement is rescinded effective December 
31, 1997.

FOR FURTHER INFORMATION CONTACT: Doris L. Marsh, Examination 
Specialist, Division of Supervision, (202) 898-8905, or Sandy Comenetz, 
Counsel, Legal Division, (202) 898-3582, FDIC, 550 17th Street, N.W., 
Washington, DC 20429.

SUPPLEMENTARY INFORMATION: The FDIC is conducting a systematic review 
of its regulations and written policies. Section 303(a) of the CDRI (12 
U.S.C. 4803(a)) requires each federal banking agency to streamline and 
modify its regulations and written policies in order to improve 
efficiency, reduce unnecessary costs, and eliminate unwarranted 
constraints on credit availability. Section 303(a) also requires each 
federal agency to remove inconsistencies and outmoded and duplicative 
requirements from its regulations and written policies.
    As part of this review, the FDIC has determined that its Statement 
of Policy Providing Guidance on External Auditing Procedures for State 
Nonmember Banks (Policy Statement) is obsolete. The Policy Statement 
was first adopted by the FDIC Board of Directors on January 16, 1990, 
and published on January 22, 1990 (55 FR 2142).
    The Policy Statement strongly encourages all FDIC-supervised banks 
to have a financial statement audit as their external auditing program. 
Nevertheless, the Policy Statement recognizes that the board of 
directors or audit committee at some institutions may determine that a 
financial statement audit does not best meet the institution's needs 
for an external auditing program. It recommended as an alternative to 
an audit for banks not subject to the audit requirement in Section 36 
of the Federal Deposit Insurance Act (FDI Act) that the board of 
directors or audit committee consider having certain specified auditing 
procedures performed by an independent public accountant as its 
external auditing program. However, the FDIC has now determined that 
the specific procedures recommended in the Policy Statement to be 
performed by an external auditor no longer constitute an acceptable 
alternative to a financial statement audit nor is the performance of 
these procedures the best method for meeting the FDIC's supervisory 
objectives with respect to external auditing work. The FDIC believes 
that its safety and soundness goals would be better satisfied by 
emphasizing internal control over financial reporting in external 
auditing programs.
    In addition, the American Institute of Certified Public Accountants 
(AICPA), which establishes standards for auditing and other 
professional services rendered by certified public accountants, issued 
its Statement on Standards for Attestation Engagements No. 4, ``Agreed-
Upon Procedures Engagements,'' in 1995. Under this revised standard, an 
independent public accountant may perform an attestation engagement 
only if the accountant is attesting to a management assertion ``that is 
capable of evaluation against reasonable criteria that either have been 
established by a recognized body'' or ``is

[[Page 879]]

capable of reasonably consistent estimation or measurement using such 
criteria.'' Since no part of the Policy Statement requires a management 
assertion, and there are no reasonable criteria against which to 
evaluate the results of any of the specified auditing procedures that 
an independent public accountant would perform, the Policy Statement is 
unworkable under the AICPA's current professional standards. 
Accordingly, the FDIC is rescinding the Policy Statement.

Expected Proposal

    For many years, the FDIC examination staff has been reviewing the 
internal auditing and external auditing programs of institutions 
because these programs enhance the ability of an institution to detect 
and correct any potentially serious problems that may exist. On 
November 16, 1988, the FDIC Board of Directors adopted its Policy 
Statement Regarding Independent External Auditing Programs of State 
Nonmember Banks (published on November 28, 1988 (53 FR 47871), and 
amended on June 24, 1996, (61 FR 32438)), in which the FDIC strongly 
encourages each state nonmember bank to adopt an adequate external 
auditing program. The policy statement states that any institution 
which has an annual audit of its financial statements by an independent 
public accountant will be considered to have an adequate external 
auditing program. However, it also provided certain acceptable 
alternatives, including a report on the balance sheet or an analysis of 
internal control, that an institution might choose should its board of 
directors determine that an annual audit by an independent public 
accountant does not best suit its needs. This policy statement remains 
outstanding.
    For some time, the staffs of the other banking agencies have also 
encouraged each of their supervised institutions to adopt an 
appropriate annual external auditing program. Earlier this year, FDIC 
staff and the staffs of these agencies began preparing a proposed 
uniform interagency policy statement on external auditing programs for 
banks and thrifts. This proposal, which is expected to be published for 
notice and comment by the Federal Financial Institutions Examination 
Council (FFIEC), will encourage each institution to adopt an external 
auditing program that includes an annual audit of its financial 
statements by an independent public accountant. If an institution's 
board of directors or audit committee determines that an audit does not 
best meet the institution's needs, the proposal is expected to provide 
two acceptable alternatives to an audit for banks not subject to the 
audit requirement in Section 36 of the Federal Deposit Insurance Act 
(FDI Act). The alternatives consist of a report on the institution's 
balance sheet or an attestation report on internal control over 
specified schedules of its regulatory reports. Each should be performed 
by an independent public accountant.
    Report on the Balance Sheet Audit. As one alternative to a 
financial statement audit, the proposal will suggest that an 
institution's board of directors or its audit committee consider 
engaging an independent public accountant to examine the assets, 
liabilities, and equity of the institution under generally accepted 
auditing standards (GAAS) and to opine on the fairness of the 
presentation on the balance sheet. In these circumstances, the 
accountant would not be expected to provide an opinion on the fairness 
of the presentation of the institution's income statement, statement of 
changes in equity capital, or statement of cash flows.
    Attestation Report on Internal Control Assertion. As the other 
alternative, the proposal will recommend that an institution's board or 
audit committee consider engaging an independent public accountant to 
provide a report attesting to management's assertion concerning the 
effectiveness of internal control over financial reporting on certain 
schedules of its regulatory reports, particularly those relating to 
loans and securities. Under this alternative, management initially 
would have to review its internal control over the preparation of these 
schedules and document this review. Management would then provide a 
written assertion to the independent public accountant stating whether 
it believes its internal control in this area is effective. The 
independent public accountant would examine management's assertion and 
provide an appropriate attestation report.
    This alternative would not provide assurance that the specific 
dollar amounts reported on the regulatory report are accurate. However, 
it would provide reasonable assurance about the reliability of 
management's assertion concerning the establishment of an internal 
control structure and procedures over financial reporting on the 
specified report schedules and whether that control is effective.

Interim Recommendation

    The FDIC suggests that, until a new policy statement regarding an 
annual external auditing program is adopted, any institution which does 
not have an annual audit of its financial statements by an independent 
public accountant should consider having one of the alternatives 
described above performed by an independent public accountant as its 
external auditing program.
    Nevertheless, the FDIC understands that some states have adopted 
the procedures from the obsolete Policy Statement on External Auditing 
Procedures for State Nonmember Banks as the state-required external 
auditing program. Until a new policy statement is effective, if an 
institution does not have an audit of its financial statements and is 
based in a state that has a state-required external auditing program 
(e.g., a directors' examination), the institution would not normally be 
expected to incur the cost of one of the alternatives in addition to 
its state-required program.

    For the above reasons, the Policy Statement is rescinded.

    By order of the Board of Directors.

    Dated at Washington, D.C., this 23rd day of December, 1997.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 98-347 Filed 1-6-98; 8:45 am]
BILLING CODE 6714-01-P