[Federal Register Volume 59, Number 55 (Tuesday, March 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-6488]
[[Page Unknown]]
[Federal Register: March 22, 1994]
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DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Parts 550, 552, 562, 563 and 571
[No. 93-173]
RIN 1550-AA68
Annual Independent Audits
AGENCY: Office of Thrift Supervision, Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Office of Thrift Supervision (OTS) proposes to amend the
annual independent audit rules for savings associations to conform to
those applicable to other federally insured depository institutions.
Section 112 of the Federal Deposit Insurance Corporation Improvement
Act of 1991 (FDICIA) requires the Federal Deposit Insurance Corporation
(FDIC) to establish an annual independent audit requirement for certain
FDIC-insured depository institutions. The FDIC's final annual
independent audit rule, requires audits of all insured depository
institutions with total assets of $500 million or more. The OTS
proposes to amend its rules to eliminate the mandatory annual
independent audit requirement for all savings associations; to rely on
the requirements in the FDIC's final rule for savings associations with
assets of $500 million or more; and to retain regulatory language
allowing OTS to require an independent audit of any savings association
with assets of less than $500 million, if deemed advisable for purposes
of safety and soundness.
DATES: Comments must be received on or before April 21, 1994.
ADDRESSES: Send comments to Director, Information Services Division,
Public Affairs, Office of Thrift Supervision, 1700 G Street, NW.,
Washington, DC 20552, Attention Docket No. (93-173). These submissions
may be hand delivered to 1700 G Street, NW, from 9 a.m. to 5 p.m. on
business days; they may be sent by facsimile transmission to FAX Number
(202) 906-7755. Submissions must be received by 5 p.m. on the day they
are due in order to be considered by the OTS. Late-filed, misaddressed
or misidentified submissions will not be considered in this rulemaking.
Comments will be available for inspection at 1700 G Street, NW., from 1
p.m. until 4 p.m. on business days. Visitors will be escorted to and
from the Public Reading Room at established intervals.
FOR FURTHER INFORMATION CONTACT: David H. Martens, Chief Accountant,
(202) 906-5645, Arthur W. Lindo, Senior Accountant, (202) 906-5642,
Supervision Policy, Office of Thrift Supervision, 1700 G St., NW.,
Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
I. Introduction
The OTS proposes to amend its regulations governing annual
independent audits of savings associations' financial statements to
achieve comparability with the regulatory framework governing
independent audits of other FDIC-insured depository institutions. The
current OTS regulations and policies require all savings associations
and savings association holding companies to obtain an annual
independent audit of their financial statements. The other Federal
banking agencies have previously had no comparable requirement for
banks and bank holding companies. However, the agencies' supervisory
policies do require independent audits of certain banks and bank
holding companies for purposes of safety and soundness.
Pursuant to section 112 of FDICIA,\1\ the FDIC promulgated 12 CFR
part 363 which requires audits of all FDIC-insured depository
institutions with assets of $500 million or more. The rule contains
reporting requirements, qualifications for independent public
accountants, and qualifications for board of directors' audit committee
members that are more stringent than those currently required for
savings associations. The OTS does not plan to issue any additional
audit requirements for savings associations with assets of $500 million
or more.
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\1\This provision is codified at section 36 of The Federal
Deposit Insurance Act, 12 U.S.C. 1831m.
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For small savings associations (i.e. those with assets of less than
$500 million), the OTS intends to retain its ability to require
independent audits for safety and soundness purposes. When an audit of
a small savings association is required for safety and soundness
purposes, the OTS intends to use the auditing standards and
qualifications for independent public accountants as prescribed in the
FDIC's final rule. However, the OTS does not intend to apply any other
requirements of the FDIC's rule, such as management's assessment of
internal control and procedures over financial reporting, to audits of
small savings associations.
Moreover, the OTS does not intend to impose any of the FDIC's audit
requirements on independent audits that are obtained voluntarily by
small savings associations. However, the OTS expects such audits to be
conducted in accordance with generally accepted auditing standards
(GAAS) and the resulting reports and supporting audit work papers to be
made available to the OTS upon request.
The OTS believes that this approach is the most effective means of
maintaining comparability and consistency among the Federal banking
agencies. This approach also reduces regulatory burden on savings
associations by relying on the FDIC's rule to the greatest extent
possible for savings associations with assets of $500 million or more
and minimizing the audit requirements for all other savings
associations as much as possible consistent with safe and sound
regulation.
II. Description of Proposal
A. Comparability With Federal Banking Agencies
The OTS proposal for savings association independent audits has
three components. First, the proposal removes or amends several
regulations and a statement of policy that make annual independent
audits of savings associations mandatory.
Regulation 12 CFR 552.6-4, which requires savings
association bylaws contain an annual independent audit requirement,
will be rescinded.
Regulation 12 CFR 563.170(a)(2) and statement of policy
12 CFR 571.2, which require annual independent audits of savings
associations and establish minimum auditing standards, will be
rescinded.
The OTS is not proposing any audit requirements for savings
associations with assets of $500 million or more since they are already
covered under the FDIC's annual independent audit rule. Savings
associations affected by the FDIC's rule must refer to 12 CFR part
3632 and the appropriate FDIC implementation guidance for specific
auditing requirements. The OTS plans to work with the FDIC and the
other federal banking agencies to issue joint enforcement rules for
accountants performing services under the FDIC's rule, as required by
FDICIA section 112.
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\2\This rule was published in the Federal Register at 58 FR
31332--31341 (June 2, 1993).
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In addition, regulation 12 CFR 550.7 will be amended to replace the
reference to the 12 CFR 563.170 annual audit requirement with overall
objectives for trust audits. However, the OTS is retaining its annual
audit requirement for savings association trust departments. The
requirement for an annual audit is consistent with the approach taken
by the other Federal banking agencies. For example, national banks are
required to obtain audits of their trust departments by 12 CFR 9.9.
Second, the proposal adds regulatory language to 12 CFR part 562 to
alert institutions that the OTS may require a small savings
association, or a savings association holding company, to obtain an
independent audit of its financial statements, when deemed necessary
for safety and soundness purposes. The OTS plans to have the Regional
Director of the OTS Region that supervises the association, or savings
association holding company, administer this provision in a manner in
which the Regional Director deems appropriate. Under this authority,
OTS Regional Directors could require agreed-upon procedures be
performed on the Thrift Financial Report, other reports, or
transactions, when deemed advisable for safety and soundness purposes.
The auditing standards and qualifications for independent accountants
in 12 CFR part 562 are the same as those required in the FDIC rule.
Boards of directors of all OTS regulated entities are responsible
for establishing, monitoring, and evaluating the regulated entity's
adherence to policies and procedures that ensure safe and sound
financial reporting. Boards of directors of small associations and
savings association holding companies are encouraged to utilize
internal and external auditors and independent third parties to fulfill
this responsibility whenever practical. The proposal does not reduce or
limit a board's ability to meet its responsibility with respect to the
audit function.
Third, the proposal also anticipates the issuance of a Thrift
Bulletin (TB) that will encourage savings associations to obtain annual
audits. The OTS believes that audits can be an important component in
corporate governance by the savings association's board of directors.
The TB will rescind the OTS Public Accounting (PA) Bulletin Series and
amend the Thrift Activities examination handbook section on independent
audits to encourage examiners to evaluate the reliability of
management's report on internal controls, where such report is
required, and to test and evaluate management's compliance with other
FDICIA provisions such as section 132, ``Standards For Safety and
Soundness.''
Consistent with current policy, the TB will encourage examiners and
independent accountants to share work products when a savings
association obtains an audit. CEO letter #5, ``Guidance on the Use of
External Audits in Safety and Soundness Examinations,'' describes OTS
policy for examiner use of audit work products and coordinating the
examination and audit process to supplement the supervisory process.
OTS believes this approach can reduce duplication of effort and improve
the quality of independent audits and examinations. The OTS plans to
issue the TB to coincide with the issuance of the final OTS independent
audit regulation.
Under this three tiered approach, the regulatory framework for
audits of savings associations would be administered in a manner no
less stringent than is required for banks.
B. Securities Filings
The OTS proposal does not affect any of the auditing standards,
accounting standards, or other requirements for financial statements
contained in securities filings submitted to the OTS pursuant to the
Securities Exchange Act of 1934 (1934 Act) or parts 563b, 563d, or 563g
of the OTS regulations (Securities filings). Applicable federal
securities laws and regulations require securities filings to comply
with generally accepted accounting principles (GAAP) and to include
financial statements and other information that have been audited by
independent public accountants in accordance with GAAS.
Savings associations anticipating a conversion from mutual to stock
form of ownership, or any other transaction governed by the federal
securities laws and regulations, should note that the accounting or
auditing requirements for such securities filings continue to apply.
Several types of securities filings require three years of audited
financial information. Savings association management considering
engaging in a transaction covered by the federal securities laws and
regulations should plan appropriately.
C. Requests for Comment
The OTS solicits comment on all aspects of the proposal, but is
particularly interested in comments on the following specific
questions:
1. What significant benefits have small savings associations
received from audits? Has the annual independent audit requirement made
a difference in the reliability of books and records for these
institutions? Has the annual independent audit requirement made a
difference in the reliability and accuracy of financial statements,
specifically the Thrift Financial Report, for these institutions?
2. What are the alternatives to rescinding the annual independent
audit requirement for small savings associations that would balance
regulatory burden and safe and sound financial reporting? For example,
should small savings associations with MACRO 4 and 5 ratings be
required to obtain an independent audit for safety and soundness
purposes?
3. If the annual audit requirement for small savings associations
is rescinded, is it an unreasonable burden to require auditors of
institutions that continue to obtain audits to provide access to audit
work papers in order to regulate these institutions in the most cost
efficient manner?
4. What criteria should OTS use to determine the extent to which
audits should be required for savings association holding companies?
5. What are the alternatives to rescinding the annual agreed-upon
procedures for testing a savings association's compliance with the Bank
Secrecy Act and for conducting third party reviews of service bureaus,
as required by OTS Public Accountant Bulletin Series, that would
balance regulatory burden and safe and sound financial reporting? Would
a directors' examination requirement, additional OTS examination
procedures, or some other approach be more appropriate?
6. What are the alternatives to the annual audit requirement of
savings association trust departments that would balance regulatory
burden and safe and sound financial reporting? Would some other
approach be more appropriate?
III. Executive Order 12866
The Director of the OTS has determined that this regulation does
not constitute a ``significant regulatory action'' for purposes of
Executive Order 12866.
IV. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
Office certifies that this regulation will not have a significant
economic impact on a substantial number of small entities. The rule is
expected to have a positive economic impact on savings associations
with assets of less than $500 million. However, the overall impact is
not expected to be significant because many of these institutions will
continue to obtain independent audits as part of their plan for
corporate governance. Therefore, Regulatory Flexibility Act analysis is
not required.
V. Paperwork Reduction Act
The reporting requirements contained in this proposed rule have
been submitted to the Office of Management and Budget for review in
accordance with the Paperwork Reduction Act of 1980 (44 U.S.C.
3504(h)). Comments on the collections of information should be sent to
the Office of Management and Budget, Paperwork Reduction Project
(1550), Washington, DC 20503 with copies to the Office of Thrift
Supervision, 1700 G Street NW., Washington, DC 20552.
The reporting requirements in this proposal are found in 12 CFR
550.7(a) and 12 CFR 562.4(a). The information is needed by the OTS to
provide an orderly mechanism for expeditiously processing requests for
non-public information while ensuring confidentiality. The likely
recordkeepers are Federal savings associations.
Estimated number of respondents: 170.
Estimated responses per respondent: 1.18.
Estimated total annual responses: 200.
Estimated hours per response: 20 hours.
Estimated total annual reporting burden: 3,430.
List of Subjects
12 CFR Part 550
Reporting and recordkeeping requirements, Savings associations,
Trusts and trustees.
12 CFR Part 552
Reporting and recordkeeping requirements, Savings associations,
Securities.
12 CFR Part 562
Accounting, Reporting and recordkeeping requirements.
12 CFR Part 563
Accounting, Advertising, Crime, Currency, Flood insurance,
Investments, Reporting and recordkeeping requirements, Savings
associations, Securities, Surety bonds.
12 CFR Part 571
Accounting, Conflicts of interest, Gold, Investments, Reporting and
recordkeeping requirements, Savings associations.
Accordingly, the OTS hereby proposes to amend subchapters C and D;
chapter V, title 12, Code of Federal Regulations, as set forth below:
SUBCHAPTER C--REGULATIONS FOR FEDERAL SAVINGS ASSOCIATIONS
PART 550--TRUST POWERS OF FEDERAL SAVINGS ASSOCIATIONS
1. The authority citation for part 550 is revised to read as
follows:
Authority: 12 U.S.C. 1462a, 1463, 1464, 1735f-7.
2. Section 550.7 is revised to read as follows:
Sec. 550.7 Audit of trust department.
(a) A committee of directors of the Federal savings association who
are independent of management shall make, or cause to be made, a
suitable audit of the association's trust department annually. The
audit shall, at a minimum, ascertain whether the department has
internal control policies and procedures in place to provide reasonable
assurance that:
(1) Fiduciary activities are administered in accordance with
applicable laws and regulations, governing trust instruments, and sound
fiduciary principles;
(2) Fiduciary assets are properly safeguarded; and
(3) Transactions are accurately recorded in the appropriate
accounts in a timely manner.
(b) The audit shall be conducted in accordance with generally
accepted auditing standards and any other standards established by the
OTS. The audit may be conducted by internal auditors, external auditors
or other persons who are responsible only to the board of directors.
PART 552--INCORPORATION, ORGANIZATION, AND CONVERSION OF FEDERAL
STOCK ASSOCIATIONS
3. The authority citation for part 552 continues to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a.
Sec. 552.6-4 [Removed and Reserved]
4. Section 552.6-4 is removed and reserved.
SUBCHAPTER D--REGULATIONS APPLICABLE TO ALL SAVINGS ASSOCIATIONS
PART 562--REGULATORY REPORTING STANDARDS
5. The authority citation for part 562 continues to read as
follows:
Authority: 12 U.S.C. 1463.
6. Section 562.4 is added to read as follows:
Sec. 562.4 Audit of savings associations and savings association
holding companies.
(a) General. The OTS may require, at any time, an independent audit
of the financial statements of a savings association, savings
association holding company, or affiliate (as defined by 12 CFR
563.41(b)(1)) when deemed advisable for purposes of safety and
soundness. In such a case, the OTS Regional Director of the Region that
supervises the savings association or holding company shall identify
the financial statements to be audited. Such financial statements shall
be prepared in accordance with generally accepted accounting
principles. The Regional Director shall also determine whether the
audit was conducted and filed in a manner satisfactory to the OTS.
(b) Qualifications for independent public accountants. The audit
shall be conducted by an independent public accountant who:
(1) Is registered or licensed to practice as a public accountant,
and is in good standing, under the laws of the state or other political
subdivision of the United States in which the savings association's or
holding company's principal office is located;
(2) Agrees to provide the OTS with copies of any work papers,
policies, and procedures relating to the services performed under this
part;
(3) Is in compliance with the American Institute of Public
Accountants' (AICPA) Code of Professional Conduct and meets the
independence requirements and interpretations of the Securities and
Exchange Commission and its staff; and
(4) Has received, or is enrolled in, a peer review program that
meets guidelines acceptable to the OTS.
PART 563--OPERATIONS
7. The authority citation for part 563 continues to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1468, 1817,
1828, 3806; 42 U.S.C. 4106; Pub. L. 102-242, sec. 306, 105 Stat.
2236, 2355 (1991).
Sec. 563.170 [Amended]
8. Section 563.170 is amended by removing paragraph (a)(2) and the
paragraph designation (a)(1).
PART 571--STATEMENTS OF POLICY
9. The authority citation for part 571 continues to read as
follows:
Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462a, 1463, 1464.
Sec. 571.2 [Removed and Reserved]
10. Section 571.2 is removed and reserved.
Editorial Note: This document was received at the Office of the
Federal Register on March 16, 1994.
Dated: September 7, 1993.
By the Office of Thrift Supervision.
Jonathan L. Fiechter,
Acting Director.
[FR Doc. 94-6488 Filed 3-21-94; 8:45 am]
BILLING CODE 6720-01-P
