Skip Header

Federal Deposit
Insurance Corporation

Each depositor insured to at least $250,000 per insured bank



Home > Regulation & Examinations > Laws & Regulations > FDIC Federal Register Citations




FDIC Federal Register Citations

Independent Community Bankers of America

September 16, 2005  

Robert E. Feldman
Executive Secretary
Attention: Comments/Legal ESS
Federal Deposit Insurance Corporation
550 17th Street, NW.,
Washington, D.C. 20459

Re: RIN 3064-AC91: Annual Independent Audits and Reporting Requirements

Dear Mr. Feldman: 

The Independent Community Bankers of America (ICBA)[1] appreciates the opportunity to offer comments on the FDIC’s proposal to amend its regulation concerning annual independent audits and reporting requirements, which implement Section 36 of the Federal Deposit Insurance Act.

Summary of ICBA’s Position

ICBA strongly supports the FDIC proposal to increase the asset size threshold to $1 billion for internal control assessments and for requiring audit committee members to be independent of management. We also urge the FDIC to modify its position on the independence of accountants in FIL-17-2003 and adopt its own independence rules so that accountants located in small and medium sized markets or where there is a shortage of qualified tax accountants can perform tax services to key officers and directors of their community bank clients.   

Background 

            Section 112 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) added Section 36, “Early Identification of Needed Improvements in Financial Management,” to the Federal Deposit Insurance Act.  In an attempt to facilitate early identification of problems at financial institutions, Section 36 requires financial institutions to have annual independent audits, assessments of the effectiveness of internal control over financial reporting, and independent audit committees.  Section 36 grants the FDIC discretion to set the asset size threshold for compliance with these statutory requirements, but states that the threshold cannot be less than $150 million.  

            In 1993, the FDIC issued regulations under Section 36 requiring every insured depository institution with $500 million or more in total assets to submit to the FDIC and other appropriate Federal and state supervisory agencies an annual report that includes (1) audited financial statements, (2) a statement of management’s responsibilities, (3) assessments by management of the effectiveness of internal control over financial reporting and compliance with designated laws and regulations, and (4) an auditor’s attestation report on internal control over financial reporting.[2]  In addition, Part 363 provides that each covered institution must establish an independent audit committee of its board of directors comprised of outside directors who are independent of management of the institution.

FDIC’s Proposal 

            The FDIC is proposing to amend Part 363 to increase the asset size threshold for internal control assessments by management and external auditors to $1 billion effective December 31, 2005.  For insured depository institutions with calendar year fiscal years that had $500 million or more in total assets, but less than $1 billion in total assets as of January 1, 2005, this proposal would mean that the Part 363 annual report for 2005 that they submit to the FDIC and other supervisory agencies would need to include only audited financial statements, statements of management’s responsibilities, management’s assessment of the institution’s compliance with designated laws and regulations, and an auditor’s report on the financial statements.  It would not need to include an internal control assessment by management or by external auditors.

            The FDIC is also proposing to amend Part 363 to increase from $500 million to $1 billion the asset size threshold for requiring audit committee members to be independent of management.  Each insured depository institution with total assets of $500 million or more but less than $1 billion would continue to be required to have an audit committee comprised of outside directors.

ICBA’s Position 

            ICBA commends the FDIC for its proposal to increase the asset size threshold for internal control assessments to $1 billion.  We agree that raising the threshold to $1 billion would achieve meaningful burden reduction without sacrificing safety and soundness.  In 1993 when the FDIC issued the Part 363 requirements for institutions with total assets of $500 million or more, approximately 1000 of the then nearly 14,000 FDIC-insured institutions were subject to the regulations.  These covered institutions held approximately 75% of the assets of insured institutions at that time.  Today, due to consolidation in the banking industry, covered institutions hold approximately 90% of the assets of insured institutions.  If the FDIC proposal is adopted and the size threshold for internal control assessments were raised to $1 billion, about 600 of the largest insured institutions with approximately 86% of the industry assets would continue to be covered by the internal control reporting requirements of Part 363.  In short, the risks to the FDIC insurance funds will not increase if the asset threshold for internal control assessments is increased.  In fact, if the asset threshold is increased, more of the assets of insured institutions will be subject to the internal control requirements of Part 363 than were covered in 1993 when the FDIC first issued Part 363.  It is the larger insured institutions that pose the greatest risks to the FDIC insurance funds and those larger institutions will continue to be covered by the internal control requirements of Part 363 if the asset threshold is increased. 

            Furthermore, we agree with the FDIC that since the enactment of the Sarbanes-Oxley Act of 2002 (Sarbox), compliance with the internal control reporting requirements of Part 363 have grown and will continue to grow more burdensome and costly for community banks.  Many of ICBA’s privately held members subject to Part 363 have already indicated that the costs of doing internal control audits has increased substantially since the enactment of Section 404 of Sarbox. Although the internal control audits under Part 363 are performed in accordance with an attestation standard issued by the American Institute of Certified Public Accountants (AICPA) known an “AT 501”, and the internal control audits under Section 404 of Sarbox are performed in accordance with the Public Company Accounting Oversight Board’s (PCAOB) Auditing Standard No. 2 (AS 2), the AICPA is currently developing proposed revisions to AT 501 that are expected to bring it closer into line with the provisions of AS 2.  These revisions are likely to have the effect of requiring greater documentation and testing of internal control over financial reporting by an institution’s management and will certainly raise the costs of complying with Part 363 in line with the costs of complying with Section 404 of Sarbox.   

We believe that the experience that publicly held community banks are having under Section 404 of Sarbox is an accurate indicator of how much the compliance burden has grown and will continue to grow for private banks subject to the internal control requirements of Part 363.  According to ICBA’s recent survey of community banks on the costs of complying with Section 404 of Sarbox, publicly held community banks expect that the internal control attestation requirements of Section 404 will increase outside audit fees an average of $87,198—approximately 52% of total annual financial statement audit fees.  Including outside audit fees, consulting fees, software costs and vendor costs, the average community bank will spend more than $200,000 and devote over 2,000 internal staff hours to comply with Section 404 of Sarbox.  Community banks report that these costs represent a significant percentage of their income and that in many instances, it is prohibitively expensive to hire the additional personnel or implement the specialized software necessary to ensure compliance with Section 404.   

ICBA also commends the FDIC for proposing an increase from $500 million to $1 billion in the asset size threshold for requiring audit committee members to be independent of management.  ICBA members subject to the independent audit committee requirements of Part 363 or subject to exchange rules on independent audit committees have indicated that they are having difficulty identifying and attracting qualified individuals in their communities to become audit committee members. Banks in smaller markets and rural areas, in particular, are finding it difficult to satisfy the independent audit committee requirement.  ICBA agrees that institutions with between $500 million and $1 billion in total assets should be allowed, for instance, to have their legal counsel or a relative of an officer of the bank who is qualified serve as an audit committee member.  If adopted, this proposal will alleviate some of the difficulties that community banks are having attracting directors and audit committee members. 

Audit Independence Rules and FIL-17-2003 

            ICBA urges the FDIC to modify its position stated in a Financial Institution Letter dated March 5, 2003 (FIL-17-2003) that all accountants engaged by an insured depository institution subject to Part 363 should be in compliance with the independence requirements and interpretations of the SEC and its staff.  Recently, the PCAOB issued independence rules that prohibit audit firms from providing tax services to key directors and officers of companies they audit.[3]  These rules impose a hardship on community bankers and directors whose banks are subject to Part 363, particularly for those banks located in smaller markets where there may be a very limited number of accounting firms.  For instance, if there is only one audit firm in a community and that audit firm is engaged by the bank to perform an audit, the new independence rules would force directors and officers of that bank to go outside the community to seek their own tax planning and assistance.  

Officers and directors of banks that file their taxes as Subchapter S corporations are also finding the new independence rules to be a particular burden since the directors, officers, and major stockholders of those banks generally need more individual tax planning and tax assistance than other community bank directors and officers with regard to the treatment of bank income.  Many Sub S community banks are located in markets where there are a limited number of qualified tax accountants who can give tax advice on Sub S issues. 

            ICBA recommends that the FDIC adopt its own independence rules for accountants who perform audits subject to Part 363 and not automatically adopt the independence rules of the SEC and the PCAOB.  The FDIC independence rules should be flexible enough so that accountants located in smaller and medium-sized markets or where there is a shortage of qualified tax accountants can perform tax services to officers and directors of their community bank clients.   

Conclusion 

ICBA strongly supports the FDIC proposal to amend Part 363 by increasing the asset size threshold for internal control assessments to $1 billion.  We agree that raising the threshold to $1 billion would achieve meaningful burden reduction without sacrificing safety and soundness.  We also strongly support the FDIC proposal to increase from $500 million to $1 billion the asset size threshold for requiring audit committee members to be independent of management.  If adopted, this proposal will alleviate some of the difficulties that community banks are having attracting directors and audit committee members.  We also urge the FDIC to modify its position on the independence of accountants in FIL-17-2003 and adopt its own independence rules so that accountants located in small and medium-sized markets or where there is a shortage of qualified tax accountants can perform tax services to key officers and directors of their community bank clients.    

ICBA appreciates the opportunity to comment on the FDIC’s proposal to amend its regulation concerning annual independent audits and reporting requirements. If you have questions or need any additional information, please do not hesitate to contact me at 202-659-8111 or at Chris.Cole@icba.org.    

                                                                        Sincerely,
                                                                              Christopher Cole        


[1] The Independent Community Bankers of America represents the largest constituency of community banks of all sizes and charter types in the nation
 and is dedicated exclusively to representing the interests of the community banking industry. ICBA aggregates the power of its members to provide
 a voice for community banking interests in Washington, resources to enhance community bank education and marketability, and profitability
options to help community banks compete in an ever-changing marketplace.
 With nearly 5,000 members, representing more than 17,000 locations
nationwide and employing over 260,000 Americans, ICBA members hold more than $631 billion in insured deposits, $778 billion in assets and
more than $493 billion in loans to consumers, small businesses and the agricultural community. For more information, visit ICBA's website at www.icba.org.
.

[2]12 CFR Part 363

[3]See PCAOB Rules on Auditor Independence and Tax Services, July 26, 2005.

 


Last Updated 09/19/2005 Regs@fdic.gov

Skip Footer back to content