7796 Federal Register / Vol. 63, No. 31 / Tuesday, February 17, 1998 / Notices
1 The FFIEC consists of representatives from the
Board of Governors of the Federal Reserve System
(FRB), the Federal Deposit Insurance Corporation
(FDIC), the Office of the Comptroller of the
Currency (OCC), the Office of Thrift Supervision
(OTS) (referred to as the ‘‘banking agencies’’), and
the National Credit Union Administration.
However, this guidance is not directed to credit
unions.
Emergency Management Agency,
Operations and Planning Division,
Response and Recovery Directorate, 500
C Street, SW, Washington DC 20472.
Copies of the minutes will be available
upon request 30 days after the meeting.
Lacy E. Suiter,
Executive Associate Director, Response &
Recovery Directorate.
[FR Doc. 98–3866 Filed 2–13–98; 8:45 am]
BILLING CODE 6718–02–P
FEDERAL FINANCIAL INSTITUTIONS
EXAMINATION COUNCIL
Policy Statement on External Auditing
Programs of Banks and Savings
Associations
AGENCY: Federal Financial Institutions
Examination Council.
ACTION: Proposed policy statement;
Request for comment.
SUMMARY: The Federal Financial
Institutions Examination Council
(FFIEC) 1 is requesting comments on a
proposed Policy Statement on External
Auditing Programs of Banks and
Savings Associations (Policy Statement)
which is intended to provide uniform
guidance regarding independent
external auditing programs. Because
institutions with $500 million or more
in total assets must have an annual
audit performed by an independent
public accountant in accordance with
section 36 of the Federal Deposit
Insurance Act (FDI Act), as
implemented by 12 CFR part 363, this
policy would apply only to institutions
below that threshold that are not
otherwise subject to audit requirements.
The Policy Statement expresses the
banking agencies’ belief that a well-
planned external audit program,
combined with a strong internal audit
function, increases the ability of an
institution to detect and correct any
serious problems that exist. In this
regard, the proposed guidance
encourages 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 is not appropriate for the
institution, the proposal provides two
alternative approaches for
consideration. The alternatives, which
should also be performed by an
independent public accountant, consist
of a report on the institution’s balance
sheet or an attestation report on internal
control over specified schedules of its
regulatory reports.
The proposed Policy Statement also
encourages institutions to establish an
audit committee consisting entirely of
outside directors, if practicable.
DATES: Comments must be received by
April 20, 1998.
ADDRESSES: Comments should be
directed to Joe M. Cleaver, Executive
Secretary, Federal Financial Institutions
Examination Council, 2100
Pennsylvania Avenue, NW, Suite 200,
Washington, DC 20037 (Fax number:
(202) 634–6556). Comments will be
available for public inspection during
regular business hours at the above
address. Appointments to inspect
comments are encouraged and can be
arranged by calling the FFIEC at (202)
634–6526.
FOR FURTHER INFORMATION CONTACT:
FDIC: Doris L. Marsh, Examination
Specialist, Division of Supervision,
(202) 898–8905, or A. Ann Johnson,
Counsel, Legal Division, (202) 898–
3573, FDIC, 550 17th Street, N.W.,
Washington, DC 20429.
FRB: Charles H. Holm, Project
Manager, (202) 452–3502, or Arthur
Lindo, Supervisory Financial Analyst,
(202) 452–2695, Division of Banking
Supervision and Regulation, Board of
Governors of the Federal Reserve
System, 20th Street and Constitution
Avenue, N.W., Washington, DC 20551.
OCC: Thomas Rees, Senior
Accountant, Chief Accountant’s office,
Core Policy Division, (202) 874–5411, or
Bill Morris, National Bank Examiner,
Core Policy Division, (202) 874–4915,
Office of the Comptroller of the
Currency, 250 E Street, S.W.,
Washington, DC 20219.
OTS: Timothy J. Stier, Chief
Accountant, Accounting Policy
Division, (202) 906–5699, or Christine
A. Smith, Policy Analyst, Accounting
Policy Division, (202) 906–5740, Office
of Thrift Supervision, 1700 G Street,
N.W., Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
I. Background
An institution’s internal auditing and
external auditing programs are critical
to its safety and soundness. When an
institution lacks an internal auditing
program or has weaknesses in an
existing program, examiners often
encourage the institution to obtain an
independent external audit.
Accordingly, many institutions now
supplement their internal auditing
programs by obtaining independent
external audits, either voluntarily or as
a result of the requirements of section
36 of the Federal Deposit Insurance Act
(FDI Act) (12 U.S.C. 1831m) and its
implementing regulation, 12 CFR part
363, the Securities and Exchange Act of
1934 (15 U.S.C. 78a), or the Federal
Reserve bank holding company
reporting requirements in the FR-Y–6
Annual Report of Bank Holding
Companies. However, a number of
institutions, particularly smaller
institutions, do not have an external
audit for various reasons.
Because the banking agencies believe
that an independent external audit
provides reasonable assurance that an
institution’s financial statements are
prepared in accordance with generally
accepted accounting principles (GAAP),
the banking agencies encourage all
institutions to obtain external audits. In
an effort to provide more explicit
guidance to institutions regarding
external audits, the FFIEC is proposing
to approve a uniform Policy Statement.
Upon FFIEC approval, the FFIEC would
recommend to the banking agencies that
they individually adopt the policy. This
proposal is generally consistent with the
individual policies of the banking
agencies.
Although some of the banking
agencies have provided guidance on
external audits to their supervised
institutions, a uniform policy does not
exist. For example, the OCC discusses
its policies with regard to independent
external audits for national banks in the
Comptroller’s Handbook for National
Banks, Section 102, Internal and
External Audits, and the Comptroller’s
Manual for Corporate Activities. The
FDIC adopted similar guidance in its
Policy Statement Regarding
Independent External Auditing
Programs of State Nonmember Banks on
November 16, 1988, as published on
November 28, 1988 (53 FR 47871), and
amended on June 24, 1996, (61 FR
32438). The OTS’s policy on
independent external audits is
discussed in the Thrift Activities
Regulatory Handbook, Section 350,
Independent Audits. The FRB sets forth
its policy on external audits in the FR-
Y–6’Annual Report of Bank Holding
Companies and Section 1010, ‘‘External
Audits,’’ of the Commercial Bank
Examination Manual.
II. The Policy Statement
The following paragraphs describe the
principal provisions of the proposed
Policy Statement.
1 The FFIEC consists of representatives from the
Board of Governors of the Federal Reserve System
(FRB), the Federal Deposit Insurance Corporation
(FDIC), the Office of the Comptroller of the
Currency (OCC), the Office of Thrift Supervision
(OTS) (referred to as the ‘‘banking agencies’’), and
the National Credit Union Administration.
However, this guidance is not directed to credit
unions.
Emergency Management Agency,
Operations and Planning Division,
Response and Recovery Directorate, 500
C Street, SW, Washington DC 20472.
Copies of the minutes will be available
upon request 30 days after the meeting.
Lacy E. Suiter,
Executive Associate Director, Response &
Recovery Directorate.
[FR Doc. 98–3866 Filed 2–13–98; 8:45 am]
BILLING CODE 6718–02–P
FEDERAL FINANCIAL INSTITUTIONS
EXAMINATION COUNCIL
Policy Statement on External Auditing
Programs of Banks and Savings
Associations
AGENCY: Federal Financial Institutions
Examination Council.
ACTION: Proposed policy statement;
Request for comment.
SUMMARY: The Federal Financial
Institutions Examination Council
(FFIEC) 1 is requesting comments on a
proposed Policy Statement on External
Auditing Programs of Banks and
Savings Associations (Policy Statement)
which is intended to provide uniform
guidance regarding independent
external auditing programs. Because
institutions with $500 million or more
in total assets must have an annual
audit performed by an independent
public accountant in accordance with
section 36 of the Federal Deposit
Insurance Act (FDI Act), as
implemented by 12 CFR part 363, this
policy would apply only to institutions
below that threshold that are not
otherwise subject to audit requirements.
The Policy Statement expresses the
banking agencies’ belief that a well-
planned external audit program,
combined with a strong internal audit
function, increases the ability of an
institution to detect and correct any
serious problems that exist. In this
regard, the proposed guidance
encourages 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 is not appropriate for the
institution, the proposal provides two
alternative approaches for
consideration. The alternatives, which
should also be performed by an
independent public accountant, consist
of a report on the institution’s balance
sheet or an attestation report on internal
control over specified schedules of its
regulatory reports.
The proposed Policy Statement also
encourages institutions to establish an
audit committee consisting entirely of
outside directors, if practicable.
DATES: Comments must be received by
April 20, 1998.
ADDRESSES: Comments should be
directed to Joe M. Cleaver, Executive
Secretary, Federal Financial Institutions
Examination Council, 2100
Pennsylvania Avenue, NW, Suite 200,
Washington, DC 20037 (Fax number:
(202) 634–6556). Comments will be
available for public inspection during
regular business hours at the above
address. Appointments to inspect
comments are encouraged and can be
arranged by calling the FFIEC at (202)
634–6526.
FOR FURTHER INFORMATION CONTACT:
FDIC: Doris L. Marsh, Examination
Specialist, Division of Supervision,
(202) 898–8905, or A. Ann Johnson,
Counsel, Legal Division, (202) 898–
3573, FDIC, 550 17th Street, N.W.,
Washington, DC 20429.
FRB: Charles H. Holm, Project
Manager, (202) 452–3502, or Arthur
Lindo, Supervisory Financial Analyst,
(202) 452–2695, Division of Banking
Supervision and Regulation, Board of
Governors of the Federal Reserve
System, 20th Street and Constitution
Avenue, N.W., Washington, DC 20551.
OCC: Thomas Rees, Senior
Accountant, Chief Accountant’s office,
Core Policy Division, (202) 874–5411, or
Bill Morris, National Bank Examiner,
Core Policy Division, (202) 874–4915,
Office of the Comptroller of the
Currency, 250 E Street, S.W.,
Washington, DC 20219.
OTS: Timothy J. Stier, Chief
Accountant, Accounting Policy
Division, (202) 906–5699, or Christine
A. Smith, Policy Analyst, Accounting
Policy Division, (202) 906–5740, Office
of Thrift Supervision, 1700 G Street,
N.W., Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
I. Background
An institution’s internal auditing and
external auditing programs are critical
to its safety and soundness. When an
institution lacks an internal auditing
program or has weaknesses in an
existing program, examiners often
encourage the institution to obtain an
independent external audit.
Accordingly, many institutions now
supplement their internal auditing
programs by obtaining independent
external audits, either voluntarily or as
a result of the requirements of section
36 of the Federal Deposit Insurance Act
(FDI Act) (12 U.S.C. 1831m) and its
implementing regulation, 12 CFR part
363, the Securities and Exchange Act of
1934 (15 U.S.C. 78a), or the Federal
Reserve bank holding company
reporting requirements in the FR-Y–6
Annual Report of Bank Holding
Companies. However, a number of
institutions, particularly smaller
institutions, do not have an external
audit for various reasons.
Because the banking agencies believe
that an independent external audit
provides reasonable assurance that an
institution’s financial statements are
prepared in accordance with generally
accepted accounting principles (GAAP),
the banking agencies encourage all
institutions to obtain external audits. In
an effort to provide more explicit
guidance to institutions regarding
external audits, the FFIEC is proposing
to approve a uniform Policy Statement.
Upon FFIEC approval, the FFIEC would
recommend to the banking agencies that
they individually adopt the policy. This
proposal is generally consistent with the
individual policies of the banking
agencies.
Although some of the banking
agencies have provided guidance on
external audits to their supervised
institutions, a uniform policy does not
exist. For example, the OCC discusses
its policies with regard to independent
external audits for national banks in the
Comptroller’s Handbook for National
Banks, Section 102, Internal and
External Audits, and the Comptroller’s
Manual for Corporate Activities. The
FDIC adopted similar guidance in its
Policy Statement Regarding
Independent External Auditing
Programs of State Nonmember Banks on
November 16, 1988, as published on
November 28, 1988 (53 FR 47871), and
amended on June 24, 1996, (61 FR
32438). The OTS’s policy on
independent external audits is
discussed in the Thrift Activities
Regulatory Handbook, Section 350,
Independent Audits. The FRB sets forth
its policy on external audits in the FR-
Y–6’Annual Report of Bank Holding
Companies and Section 1010, ‘‘External
Audits,’’ of the Commercial Bank
Examination Manual.
II. The Policy Statement
The following paragraphs describe the
principal provisions of the proposed
Policy Statement.
7797Federal Register / Vol. 63, No. 31 / Tuesday, February 17, 1998 / Notices
2 It is the understanding of the banking agencies
that, under most state public accountancy laws,
only an independent public accountant may
perform a balance sheet audit or issue an attestation
report on internal control.
Board of Directors’ Responsibilities
External Auditing Program
This section of the proposed Policy
Statement expresses the banking
agencies’ belief that a well-planned
external auditing program combined
with a strong internal auditing function
increases the ability of an institution to
detect and correct any potentially
serious problems. This section also
emphasizes the importance to the
institution’s board of directors and
management of establishing an effective
internal control process to provide
reasonable assurance that the institution
achieves its objectives. The banking
agencies believe that the board of
directors should consider an external
auditing program performed by an
independent public accountant to be
conducive to the safe and sound
operation of the institution.
Audit Committee
This section encourages institutions
to establish an audit committee
consisting entirely of outside directors,
if practicable. Among its duties, the
audit committee should identify the
areas of greatest risk affecting financial
reporting in the institution’s operations.
In addition, this section states that an
institution’s board of directors or audit
committee should consider the
appropriateness of an external auditing
program for the institution. This
evaluation should address what form of
external auditing program will best
assist the board or audit committee in
obtaining reasonable assurance that the
institution’s financial statements and
regulatory reports are reliably prepared.
The results of this evaluation should be
documented.
Alternative External Auditing Programs
The proposal identifies the preferred
external auditing program and two
acceptable alternatives.2
Financial Statement Audit by an
Independent Public Accountant
The proposal encourages each
institution to adopt an external auditing
program that includes an annual audit
of its financial statements by an
independent public accountant. The
banking agencies believe that a financial
statement audit benefits management in
carrying out its control responsibilities.
Report on the Balance Sheet Audit
As an alternative to a financial
statement audit, the proposed Policy
Statement suggests that an institution
consider engaging an independent
public accountant to examine its assets,
liabilities, and equity under generally
accepted auditing standards (GAAS)
and to opine on the fairness of the
presentation on the balance sheet.
Under this type of engagement, the
accountant would not 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
Another alternative to a financial
statement audit is to engage an
independent public accountant to
provide a report attesting to
management’s assertion concerning the
effectiveness of internal control over
financial reporting. The report would
cover certain schedules of its regulatory
reports, including those relating to loans
and securities. Under this alternative,
management would review its internal
control over the preparation of these
schedules and document this review.
Management would then provide a
written assertion stating whether it
believes its internal control is effective.
The independent public accountant
would examine management’s assertion
and provide an appropriate attestation
report.
The banking agencies believe that an
institution’s annual ongoing cost of an
attestation report on internal control
over certain schedules of its regulatory
reports would be significantly less than
the cost of an audit of its financial
statements. However, the cost
projections depend on the
circumstances of each institution, and
an institution may incur additional
start-up costs to create the initial
documentation of its internal control
structure and procedures in the first
year. This documentation is necessary
to enable the independent public
accountant to evaluate management’s
assertion on the effectiveness of internal
control.
Holding Company Subsidiaries
The proposal describes the
responsibilities of the board or audit
committee of a subsidiary of a holding
company with respect to the
institution’s external auditing program.
Specifically, the proposal says that an
institution which is a subsidiary of a
holding company may find it
appropriate to express the scope of its
external auditing program in terms of its
relationship to the consolidated group.
However, the board or audit committee
should determine whether the
subsidiary’s activities involve unusual
risks that are not adequately covered
within the scope of the audit of the
consolidated financial statements. If so,
the proposal suggests that the board or
audit committee consider implementing
an appropriate alternative external
auditing program.
Other Matters Concerning an External
Auditing Program
Timing and Experience
The proposed Policy Statement
recommends that whatever external
auditing program is adopted be
performed at a quarter-end date that
coincides with a regulatory report date.
It states that the independent public
accountant performing this program
should be experienced in performing
external auditing work for banks and
savings associations.
Access to Regulatory Reports
The proposal explains that an
independent public accountant should
have access to examination reports,
other documents, and reports of action
related to the supervision of the
institution by its appropriate federal or
state banking agency.
Examiner Review of the External
Auditing Program
The proposal explains that examiners
should consider an institution’s size, the
nature and scope of its activities, and
any compensating controls when
determining the adequacy of the
institution’s external auditing program
and making recommendations for
improvement. Examiners should also
consider whether the institution has
undertaken a state-required auditing
program (that differs from the programs
set forth in this policy) when
determining whether to make
recommendations for improvements
under this policy.
Notification and Submission of Reports
In general, each institution should
furnish its appropriate supervisory
office with a copy of external auditing
reports issued by its independent public
accountant. However, the proposal also
addresses the submission of the
independent public accountant’s report
by holding company subsidiaries. This
guidance reflects the banking agencies’
current approach to supervising banking
organizations which own more than one
depository institution. Because each
banking agency designates one
2 It is the understanding of the banking agencies
that, under most state public accountancy laws,
only an independent public accountant may
perform a balance sheet audit or issue an attestation
report on internal control.
Board of Directors’ Responsibilities
External Auditing Program
This section of the proposed Policy
Statement expresses the banking
agencies’ belief that a well-planned
external auditing program combined
with a strong internal auditing function
increases the ability of an institution to
detect and correct any potentially
serious problems. This section also
emphasizes the importance to the
institution’s board of directors and
management of establishing an effective
internal control process to provide
reasonable assurance that the institution
achieves its objectives. The banking
agencies believe that the board of
directors should consider an external
auditing program performed by an
independent public accountant to be
conducive to the safe and sound
operation of the institution.
Audit Committee
This section encourages institutions
to establish an audit committee
consisting entirely of outside directors,
if practicable. Among its duties, the
audit committee should identify the
areas of greatest risk affecting financial
reporting in the institution’s operations.
In addition, this section states that an
institution’s board of directors or audit
committee should consider the
appropriateness of an external auditing
program for the institution. This
evaluation should address what form of
external auditing program will best
assist the board or audit committee in
obtaining reasonable assurance that the
institution’s financial statements and
regulatory reports are reliably prepared.
The results of this evaluation should be
documented.
Alternative External Auditing Programs
The proposal identifies the preferred
external auditing program and two
acceptable alternatives.2
Financial Statement Audit by an
Independent Public Accountant
The proposal encourages each
institution to adopt an external auditing
program that includes an annual audit
of its financial statements by an
independent public accountant. The
banking agencies believe that a financial
statement audit benefits management in
carrying out its control responsibilities.
Report on the Balance Sheet Audit
As an alternative to a financial
statement audit, the proposed Policy
Statement suggests that an institution
consider engaging an independent
public accountant to examine its assets,
liabilities, and equity under generally
accepted auditing standards (GAAS)
and to opine on the fairness of the
presentation on the balance sheet.
Under this type of engagement, the
accountant would not 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
Another alternative to a financial
statement audit is to engage an
independent public accountant to
provide a report attesting to
management’s assertion concerning the
effectiveness of internal control over
financial reporting. The report would
cover certain schedules of its regulatory
reports, including those relating to loans
and securities. Under this alternative,
management would review its internal
control over the preparation of these
schedules and document this review.
Management would then provide a
written assertion stating whether it
believes its internal control is effective.
The independent public accountant
would examine management’s assertion
and provide an appropriate attestation
report.
The banking agencies believe that an
institution’s annual ongoing cost of an
attestation report on internal control
over certain schedules of its regulatory
reports would be significantly less than
the cost of an audit of its financial
statements. However, the cost
projections depend on the
circumstances of each institution, and
an institution may incur additional
start-up costs to create the initial
documentation of its internal control
structure and procedures in the first
year. This documentation is necessary
to enable the independent public
accountant to evaluate management’s
assertion on the effectiveness of internal
control.
Holding Company Subsidiaries
The proposal describes the
responsibilities of the board or audit
committee of a subsidiary of a holding
company with respect to the
institution’s external auditing program.
Specifically, the proposal says that an
institution which is a subsidiary of a
holding company may find it
appropriate to express the scope of its
external auditing program in terms of its
relationship to the consolidated group.
However, the board or audit committee
should determine whether the
subsidiary’s activities involve unusual
risks that are not adequately covered
within the scope of the audit of the
consolidated financial statements. If so,
the proposal suggests that the board or
audit committee consider implementing
an appropriate alternative external
auditing program.
Other Matters Concerning an External
Auditing Program
Timing and Experience
The proposed Policy Statement
recommends that whatever external
auditing program is adopted be
performed at a quarter-end date that
coincides with a regulatory report date.
It states that the independent public
accountant performing this program
should be experienced in performing
external auditing work for banks and
savings associations.
Access to Regulatory Reports
The proposal explains that an
independent public accountant should
have access to examination reports,
other documents, and reports of action
related to the supervision of the
institution by its appropriate federal or
state banking agency.
Examiner Review of the External
Auditing Program
The proposal explains that examiners
should consider an institution’s size, the
nature and scope of its activities, and
any compensating controls when
determining the adequacy of the
institution’s external auditing program
and making recommendations for
improvement. Examiners should also
consider whether the institution has
undertaken a state-required auditing
program (that differs from the programs
set forth in this policy) when
determining whether to make
recommendations for improvements
under this policy.
Notification and Submission of Reports
In general, each institution should
furnish its appropriate supervisory
office with a copy of external auditing
reports issued by its independent public
accountant. However, the proposal also
addresses the submission of the
independent public accountant’s report
by holding company subsidiaries. This
guidance reflects the banking agencies’
current approach to supervising banking
organizations which own more than one
depository institution. Because each
banking agency designates one