[Federal Register: January 7, 1998 (Volume 63, Number 4)]
[Notices]
[Page 878-879]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07ja98-86]
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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rescinding its outdated Statement of Policy Providing Guidance on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EFFECTIVE DATE: The Policy Statement is rescinded effective December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Nonmember Banks (Policy Statement) is obsolete.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