Removal, Suspension, and Debarment of Accountants From Performing Audit Services - District Notice

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Federal Reserve Bank of Dallas
2200 N. PEARL ST.
DALLAS, TX 75201-2272
August 21, 2003
Notice 03-45
TO: The Chief Executive Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District
SUBJECT
Removal, Suspension, and Debarment of
Accountants From Performing Audit Services
DETAILS
The four federal bank and thrift regulatory agencies are jointly publishing final rules,
effective October 1, 2003, pursuant to section 36 of the Federal Deposit Insurance Act (FDIA).
Section 36, as implemented by 12 CFR part 363, requires that each insured depository institution
with total assets of $500 million or more obtain an audit of its financial statements and an
attestation on management’s assertions concerning internal controls over financial reporting by
an independent public accountant. The insured depository institution must include the
accountant’s audit and attestation reports in its annual report.
Section 36 authorizes the agencies to remove, suspend, or debar accountants from
performing the audit services required by section 36 if there is good cause to do so. The final
rules establish rules of practice and procedure to implement this authority and reflect the
agencies’ increasing concern with the quality of audits and internal controls for financial
reporting at insured depository institutions. Although there have been few bank and thrift
failures in recent years, the circumstances of the failures that have occurred illustrate the
importance of maintaining high quality in the audits of the financial position and attestations of
management assessments of insured depository institutions. The final rules enhance the agencies’
ability to address misconduct by accountants who perform annual audit and attestation
services.
For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;
Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.- 2 -
ATTACHMENT
A copy of the Board’s notice as it appears on pages 48256–74, Vol. 68, No. 156 of the
Federal Register dated August 13, 2003, is attached.
MORE INFORMATION
For more information, please contact Sharon Sweeney, (214) 922-5101, Legal Depart-
ment. Paper copies of this notice or previous Federal Reserve Bank notices can be printed from
our web site at www.dallasfed.org/banking/notices/index.html.Wednesday
August 13, 2003
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Part 19
[Docket No. 03–19]
RIN 1557–AC10
Board of Governors of the
Federal Reserve System
12 CFR Part 263
[Docket No. R–1139]
Federal Deposit Insurance
Corporation
12 CFR Part 308
RIN 3064–AC57
Department of the Treasury
Office of Thrift Supervision
12 CFR Part 513
[No. 2003–33]
RIN 1550–AB53
Removal, Suspension, and Debarment
of Accountants From Performing Audit
Services
Federal Register48256 Federal Register/Vol. 68, No. 156/Wednesday, August 13, 2003/Rules and Regulations
Section 36 authorizes the Agencies to Section 36 of the FDIA also requires that
remove, suspend, or debar accountants an independent public accountant audit
from performing the audit services the insured depository institution’s
required by section 36 if there is good annual financial statements to
cause to do so. The final rules establish determine whether those statements are
rules of practice and procedure to presented fairly in accordance with
implement this authority and reflect the generally accepted accounting
Agencies’ increasing concern with the principles (GAAP) and with the
quality of audits and internal controls accounting objectives, standards, and DEPARTMENT OF THE TREASURY
for financial reporting at insured requirements described in section 37 of
depository institutions. Although there the FDIA. Under section 37, the Office of the Comptroller of the
have been few bank and thrift failures accounting principles applicable to Currency
in recent years, the circumstances of the financial statements required to be filed
failures that have occurred illustrate the with the Agencies must be uniform and 12 CFR Part 19
2importance of maintaining high quality consistent with GAAP. In addition, the
[Docket No. 03–19] in the audits of the financial position accountant must attest to and report on
and attestations of management RIN 1557–AC10 management’s assertions concerning
assessments of insured depository internal controls over financial
3BOARD OF GOVERNORS OF THE institutions. The final rules enhance the reporting. The institution’s annual
FEDERAL RESERVE SYSTEM Agencies’ ability to address misconduct report also must contain the
by accountants who perform annual accountant’s audit and attestation
412 CFR Part 263 audit and attestation services. reports.
Section 36 of the FDIA gives the EFFECTIVE DATE: October 1, 2003.[Docket No. R–1139]
Agencies the authority to remove, FOR FURTHER INFORMATION CONTACT:
suspend, or bar an accountant from FEDERAL DEPOSIT INSURANCE OCC: Mitchell Plave, Counsel,
performing the audit services required CORPORATION Legislative and Regulatory Activities
5under section 36 for good cause. This Division, (202) 874–5090; Richard
authority is in addition to the 12 CFR Part 308 Shack, Senior Accountant, Office of the
enforcement tools the Agencies have Chief Accountant, (202) 874–4911; and
RIN 3064–AC57 Karen Besser, National Bank Examiner, under section 8 of the FDIA, which
Special Supervision/Fraud, (202) 874– enable the Agencies to remove or DEPARTMENT OF THE TREASURY
4464. prohibit an institution-affiliated party
Board: Richard Ashton, Associate (IAP), including an accountant, from Office of Thrift Supervision
General Counsel, Legal Division, (202) further participation in the affairs of an
452–3750; Nina Nichols, Counsel, (202) insured depository institution for 12 CFR Part 513
6452–2961; Arthur Lindo, Project certain types of misconduct. Section 36
[No. 2003–33] Manager, (202) 452–2695; and Salome authority is also distinct from the
Tinker, Senior Financial Analyst, (202) Agencies’ authority to remove, suspend, RIN 1550–AB53
452–3034, Division of Banking or debar from practice before an Agency
Supervision and Regulation; for users of parties, such as accountants, who Removal, Suspension, and Debarment
7Telecommunication Devices for the Deaf represent others.of Accountants From Performing Audit
(TDD) only, contact (202) 263–4869. Section 36 does not define good Services
FDIC: Richard Bogue, Counsel, cause, but authorizes the Agencies to
AGENCIES: Office of the Comptroller of Enforcement Unit, (202) 898–3726; implement section 36 through the joint
the Currency (OCC), Treasury; Board of 8Harrison E. Greene, Jr., Senior Policy issuance of rules of practice. A
Governors of the Federal Reserve Analyst, Accounting and Securities removal, suspension, or debarment
System (Board); Federal Deposit Disclosure Section, Division of under section 36 would limit an
Insurance Corporation (FDIC); and Supervision and Consumer Protection, accountant’s or accounting firm’s
Office of Thrift Supervision (OTS), (202) 898–8905. eligibility to provide audit services to
Treasury. OTS: Christine A. Smith, Project
ACTION: Final rule. Manager, (202) 906–5740, Supervision independent audits and reporting for all insured
depository institutions). The statute gives the FDIC Policy; Teresa A. Scott, Counsel
SUMMARY: The OCC, Board, FDIC, and Board of Directors the discretion to establish the (Banking & Finance), (202) 906–6478,
threshold asset size at which a section 36 annual OTS (each an Agency, and collectively, Regulations and Legislation Division. report is required. That amount is currently set at the Agencies) are jointly publishing
SUPPLEMENTARY INFORMATION: $500 million. See 12 CFR 363.1(a). While a section
final rules pursuant to section 36 of the 36 audit is not required of financial institutions
Federal Deposit Insurance Act (FDIA). I. Background with less than $500 million in total assets, the
Agencies encourage every insured depository Section 36, as implemented by 12 CFR Section 36 of the FDIA (12 U.S.C.
institution, regardless of its size or character, to part 363, requires that each insured 1831m), as implemented by FDIC have an annual audit of its financial statements
depository institution with total assets regulations, requires every large insured performed by an independent public accountant.
of $500 million or more obtain an audit See 12 CFR 363 App. A (Introduction).depository institution to submit an
2of its financial statements and an 12 U.S.C. 1831m(d), 1831n.annual report containing its financial
3 Id. 1831m(c); see also 12 CFR part 363 attestation on management’s assertions statements and certain management
(independent audit and reporting requirements).concerning internal controls over assessments to the FDIC, the appropriate 4 12 U.S.C. 1831m(a)(1) and (2).financial reporting by an independent Federal banking agency, and any 5 Id. 1831m(g)(4)(A).
public accountant (accountant). The 1appropriate state bank supervisor. 6 Id. 1813(u)(4), 1818(e)(1).
insured depository institution must 7 See 12 CFR part 19,