32438 Federal Register / Vol. 61, No. 122 / Monday, June 24, 1996 / Notices

comment, EPA will issue no final order

assessing a penalty in this proceeding

prior to thirty (30) days from the date of

this notice.

Dated: June 5, 1996.

Delores J. Platit,

Acting Regional Administrator.

[FR Doc. 96–16011 Filed 6–21–96; 8:45 am]

BILLING CODE 6560–50–M

FARM CREDIT ADMINISTRATION

Farm Credit Administration Board;

Special Meeting

AGENCY: Farm Credit Administration.

SUMMARY: Notice is hereby given,

pursuant to the Government in the

Sunshine Act (5 U.S.C. 552b(e)(3)), of

the special meeting of the Farm Credit

Administration Board (Board).

DATE AND TIME: The special meeting of

the Board will be held at the offices of

the Farm Credit Administration in

McLean, Virginia, on June 25, 1996,

from 9:00 a.m. until such time as the

Board concludes its business.

FOR FURTHER INFORMATION CONTACT:

Floyd Fithian, Secretary to the Farm

Credit Administration Board, (703) 883–

4025, TDD (703) 883–4444.

ADDRESS: Farm Credit Administration,

1501 Farm Credit Drive, McLean,

Virginia 22102–5090.

SUPPLEMENTARY INFORMATION: This

meeting of the Board will be open to the

public (limited space available). In order

to increase the accessibility to Board

meetings, persons requiring assistance

should make arrangements in advance.

The matters to be considered at the

meeting are:

Open Session

A. Approval of Minutes.

B. New Business—Regulations.

1. Capital (Phase II) [12 CFR Part 615]

(Final).

2. Eligibility and Scope of Financing [12

CFR Part 613] (Final).

Dated: June 19, 1996.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 96–16057 Filed 6–19–96; 8:45 am]

BILLING CODE 6705–01–P

FEDERAL DEPOSIT INSURANCE

CORPORATION

Amendment to Statement of Policy

Regarding Independent External

Auditing Programs of State

Nonmember Banks

AGENCY: Federal Deposit Insurance

Corporation (FDIC or Corporation).

ACTION: Statement of policy.

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 amending its policy

statement regarding independent

external auditing programs of state

nonmember banks (Policy Statement).

These amendments remove an

inconsistency between the Policy

Statement and another policy that was

later approved by the FDIC Board of

Directors and eliminate a reference to

another FDIC policy which has been

superseded. The amendments also add

a paragraph referencing a statutory

requirement enacted since the Policy

Statement’s adoption and renumber the

subsequent paragraphs of the Policy

Statement.

EFFECTIVE DATE: June 24, 1996.

FOR FURTHER INFORMATION CONTACT:

Doris L. Marsh, Examination Specialist,

Division of Supervision, (202) 898–

8905, or Sandra Comenetz, Counsel,

Legal Division, (202) 898–3582, FDIC,

550 17th Street NW., 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 the Policy Statement

needs several amendments to eliminate

inconsistencies and outmoded

requirements. The Policy Statement was adopted by

the FDIC Board of Directors on

November 16, 1988, and published on

November 28, 1988, 53 FR 47871. The

Policy Statement states that the FDIC

strongly encourages each state

nonmember bank to adopt an external

auditing program that includes an

annual audit of its financial statements

by an independent public accountant.

However, the Federal Deposit Insurance

Corporation Improvement Act of 1991

added Section 36 to the Federal Deposit

Insurance Act. Section 36, and its

implementing regulation at 12 CFR Part

363, requires all insured depository

institutions with $500 million or more

in total assets at the beginning of their

fiscal year to have an annual audit

performed by an independent public

accountant and to have an audit

committee entirely consisting of outside

directors who are independent of

management. A new paragraph 3 has

been added to the Policy Statement

describing these and certain related

requirements for larger institutions and

the existing paragraphs 3 through 15

have been redesignated paragraphs 4

through 16.

In addition, the Policy Statement

advises applicants for deposit insurance

that they will generally be expected to

commit their bank to obtain an audit of

its financial statements by an

independent public accountant

annually for at least the first three years

after deposit insurance is granted

[emphasis added]. Original footnote 2 to

the Policy Statement refers to a June 24,

1987, FDIC policy statement on deposit

insurance applications by operating

non-FDIC insured institutions.

However, newly insured institutions

generally present greater risks to the

deposit insurance funds than operating

insured institutions which have been

subject to ongoing supervision by the

applicable federal and state regulators.

In addition, a statement of policy on

Applications for Deposit Insurance was

adopted by the FDIC Board of Directors

on April 7, 1992, 57 FR 12822, which

superseded the referenced 1987 policy

statement. The 1992 policy statement

states the FDIC’s belief that an annual

audit by an independent public

accountant should be an integral part of

the safe and sound management of a

depository institution. As a result,

applicants for deposit insurance

coverage are expected to commit their

depository institution to obtain an audit

by an independent public accountant

annually for at least the first five years

after deposit insurance coverage is

granted [emphasis added]. Thus, this

Policy Statement must be amended to be

consistent with the more recent

statement of policy on Applications for

Deposit Insurance. A reference to the

1992 applications policy replaces a

reference to the rescinded policy

statement in footnote 2.

Discussion of Amendments

A new paragraph 3 is added to the

Policy Statement to explain the audit

and audit committee requirements for

all insured depository institutions with

$500 million or more in total assets as

a result of the addition of Section 36 to

the Federal Deposit Insurance Act in

1991. Thus, the original paragraphs 3

through 15 have been redesignated

paragraphs 4 through 16. In renumbered

paragraph 11 of the Policy Statement,

the word ‘‘three’’ is replaced with the

word ‘‘five’’ because newly insured
Federal Register / Vol. 61, No. 122 / Monday, June 24, 1996 / Notices 32439

1Terms defined in Appendix A are italicized the

first time they appear in this statement of policy.

institutions generally present greater

risks to the insurance funds, a factor

recognized in the FDIC’s 1992

applications policy statement. This

change in the Policy Statement will

bring it into conformity with the

recommended number of years an

applicant for deposit insurance must

commit to obtaining an annual audit as

set forth in the applications policy

statement. The reference in footnote 2 to

the FDIC’s rescinded 1987 policy

statement is replaced with a reference to

the FDIC’s current applications policy

statement.

For the reasons set forth in the

preamble, the Board of Directors of the

FDIC hereby amends its Statement of

Policy Regarding Independent External

Auditing Programs of State Nonmember

Banks to read as follows:

Statement of Policy Regarding

Independent External Auditing

Programs of State Nonmember Banks

1. In view of its interest in the

financial soundness of banks and the

banking system, the FDIC believes that

a strong internal auditing function

combined with a well-planned external

auditing program 1 substantially lessens

the risk that a bank will not detect

potentially serious problems. An

external auditing program is a set of

procedures designed to test and evaluate

high risk areas of a bank’s business

which are performed by an independent

auditor who may or may not be a public

accountant. The failure to detect and

correct potentially serious problems

increases the risk a bank poses to the

FDIC’s insurance funds. A strong

internal auditing function establishes

the proper control environment and

promotes accuracy and efficiency in a

bank’s operations. An external auditing

program complements this function by

providing an objective outside view of

the bank’s operations.

2. Regardless of the strength of a

bank’s internal auditing procedures, the

FDIC believes that an external auditing

program should be considered by a

bank’s board of directors as part of the

cost of operating a bank in a safe and

sound manner. An external auditing

program assists the bank’s board of

directors in safeguarding assets and

identifying risks inherent in its

operation. In addition, an external

auditing program may tend to assist

directors in the event of litigation on

whether an institution’s board has

exercised reasonable care in protecting

the assets of the bank. Thus, the FDIC

urges all state nonmember banks to

establish and maintain a sound external

auditing program.

3. In accordance with Section 36 of

the Federal Deposit Insurance Act, as

implemented by 12 CFR Part 363, each

insured depository institution with $500

million or more in total assets at the

beginning of its fiscal year is required to

file with the FDIC and the appropriate

federal banking agency, an annual

report, including its financial statements

which have been audited by an

independent public accountant, and a

management report and independent

public accountant’s attestation

concerning both the effectiveness of the

institution’s internal controls for

financial reporting and its compliance

with designated safety and soundness

laws. In addition, each such institution

is required to have an audit committee

consisting entirely of outside directors

who are independent of management.

For state nonmember banks subject to

Section 36 and Part 363, these audit and

audit committee requirements take

precedence over the provisions of this

Statement of Policy.

State Nonmember Banks Not Subject to

Part 363

4. The FDIC strongly encourages the

board of directors of each state

nonmember bank to establish an audit

committee consisting, if possible,

entirely of outside directors. The audit

committee or board of directors of each

state nonmember bank generally should

analyze the extent of the external

auditing coverage needed by the bank

annually. They should determine

whether the bank’s needs will best be

met by an audit of its financial

statements or by an acceptable

alternative (described in paragraphs 9

and 10 below). When selecting the

scope of the planned external auditing

program for the year, the committee or

board should ensure that the program

will provide sufficient substantive

external coverage of the bank’s risk

areas and any other areas of potential

concern, such as compliance with

applicable laws and regulations. If not,

additional external auditing procedures

conducted by an independent auditor

may be appropriate for a specific year or

several years to cover particularly high

risk areas of the bank. The decisions

resulting from these deliberations

should be recorded in the committee’s

or board’s minutes.

5. If the audit committee or board of

directors of a bank, after due

consideration, determines not to engage

an independent public accountant to

conduct an annual audit of the bank’s

financial statements (or whose parent

holding company’s consolidated

financial statements are not audited),

the reasons for the committee’s or

board’s conclusion to use one of the

acceptable alternatives or to have no

external auditing program should be

documented in its minutes. In the

evaluation, the committee or board

generally should consider not only the

cost of an annual audit of the bank’s

financial statements, but also the

potential benefits.

6. A review of both a bank’s internal

and external auditing programs has been

and will continue to be a part of the

FDIC’s examination procedures. FDIC

examiners will review the nature of

each bank’s external auditing program

in conjunction with the risk areas

perceived in that particular bank’s

business and operations, and they will

exercise their judgment and discretion

in evaluating the adequacy of a bank’s

external auditing program. Examiners

will not automatically comment

negatively to the board of directors of a

bank with an otherwise satisfactory

external auditing program merely

because it does not engage an

independent public accountant to

perform an audit of its financial

statements.

Audit by an Independent Public

Accountant

7. The FDIC strongly encourages each

state nonmember bank to adopt an

external auditing program that includes

an annual audit of its financial

statements by an independent public

accountant. A bank that does so would

generally be considered to have a

satisfactory external auditing program.

An external audit of a bank’s financial

statements benefits management by

assisting in the establishment of the

accounting and operating policies,

internal controls, internal auditing

programs, and management information

systems necessary to ensure the fair

presentation of these statements. An

audit also assists boards of directors in

fulfilling their fiduciary responsibilities

and provides them greater assurance

that financial reports are accurate and

provide adequate disclosure.

8. An audit of a bank’s financial

statements performed by the

independent public accountant as of a

quarter-end date when the Reports of

Condition and Income are prepared is

preferable and would permit the bank to

use the audited financial statements in

the preparation and/or subsequent

review of those reports. A bank may also

find it more cost effective to be audited

during accounting firms’ less busy

periods. The independent public

accountant chosen should be

experienced in auditing banks and
32440 Federal Register / Vol. 61, No. 122 / Monday, June 24, 1996 / Notices

2Refer to the April 7, 1992, Statement of Policy

on Applications for Deposit Insurance.

knowledgeable about banking

regulations in order to provide the bank

with the most effective service.

Alternatives to an Audit by a Public

Accountant

9. The FDIC recognizes that a bank’s

audit committee or board of directors

may determine that the external

auditing program that will best meet its

individual needs for that particular year

will be other than an audit of its

financial statements by an independent

public accountant. The committee or

board, after a full review of alternative

and/or supplemental approaches for an

adequate independent external auditing

program, may decide on a well-planned

directors’ examination, an independent

analysis of internal controls or other

areas, a report on the balance sheet, or

specified auditing procedures by an

independent auditor. If the bank has an

outside auditing firm that is simply

obtaining confirmations of deposits and

loans, for example, the committee or

board should normally expand the

scope of the auditing work performed to

include additional procedures to test the

bank’s high risk areas.

10. Nonaccounting firms with bank

auditing experience and expertise that

are independent of the bank are

available in some geographic locations.

They may provide acceptable directors’

examinations, analyses, or specified

auditing work at a reasonable cost. In

some instances, these firms’ services

include nonauditing work which

enables them to provide suggestions on

compliance issues and operational

efficiencies. Depending upon the

expertise of the firm and the scope of

the engagement, these nonaccounting

firms may be an appropriate choice for

an external auditing program.

Newly Insured Banks

11. The FDIC believes that an

adequate external auditing program

performed by an independent auditor

should be an integral part of the safe

and sound management of a bank. Thus,

applicants for deposit insurance

coverage will generally be expected to

commit their bank to obtain an audit of

its financial statements by an

independent public accountant

annually for at least the first five years

after deposit insurance coverage is

granted.2 The FDIC may determine on a

case-by-case basis that an independent

audit of financial statements is

unnecessary where an applicant can

demonstrate that the benefits derived

from such an external audit will be

substantially provided by other outside

sources, or where the applicant is

owned by another company and will

undergo an audit performed by an

independent public accounting firm as

part of an audit of the consolidated

financial statements of its parent

company.

Notification and Submission of Reports

12. Whether currently or newly

insured, the FDIC requests each state

nonmember bank that undergoes any

external auditing work, regardless of the

scope of the work, to furnish a copy of

any reports by the public accountant or

other external auditor, including any

management letters, to the appropriate

FDIC regional office as soon as possible

after their receipt by the bank.

13. In addition, the FDIC requests

each bank to promptly notify the

appropriate FDIC regional office when

any public accountant or other external

auditor is initially engaged to perform

external auditing procedures and when

a change in its accountant or auditor

occurs.

Holding Company Subsidiaries

14. When the audit committee or

board of directors of any state

nonmember bank owned by another

company (such as a bank holding

company) considers its external

auditing program, it may find it

appropriate to express the scope of its

program in terms of the bank’s

relationship to the consolidated group.

No section of this statement of policy is

intended to imply that any state

nonmember bank owned by another

company is expected to obtain a

separate audit of the financial

statements of the individual bank.

Where the state nonmember bank is

directly or indirectly included in the

audit of the consolidated financial

statements of its parent company

performed by an independent public

accounting firm, the state nonmember

bank may send one copy of the

comparable reports by the public

accountant or notification of the change

in accountants for the consolidated

company to the appropriate regional

director. If several banks supervised by

the same FDIC regional office are owned

by one parent company, a single copy of

each report applicable to the

consolidated company may be

submitted to the regional office on

behalf of all of the affiliated banks.

Troubled Banks

15. An annual independent external

auditing program complements both the

FDIC’s supervisory process and bank

internal auditing programs by further

identifying or clarifying issues of

potential concern or exposure. It can

also greatly aid management in taking

corrective action, particularly when

weaknesses are detected in internal

control or management information

systems. For these reasons, an annual

audit of bank financial statements

performed by an independent public

accounting firm or, if more appropriate,

specified auditing procedures will be a

condition of future enforcement actions,

when deemed necessary, or if it appears

that any of the following conditions may

exist:

(a) Internal controls and internal

auditing procedures are inadequate;

(b) The directorate is generally

uninformed in the area of internal

controls;

(c) There is evidence of insider abuse;

(d) There are known or suspected

defalcations;

(e) There is known or suspected

criminal activity;

(f) It is probable that director liability for

losses exists;

(g) Direct verification is warranted; and/

or

(h) Questionable transactions with

affiliates have occurred.

16. Such an enforcement action may

also require that (a) The bank provide to

the appropriate FDIC regional office a

copy of the auditor’s report and any

management letter received from the

auditor promptly after the completion of

any auditing work and that (b) the bank

notify the regional office in advance of

the time and date of any meeting

between management and the auditor at

which any auditing findings are to be

presented so that a representative of the

FDIC may be present if the FDIC so

chooses.

Appendix A—Definitions

Audit. An examination of the

financial statements, accounting

records, and other supporting evidence

of a bank performed by an independent

certified or licensed public accountant

in accordance with generally accepted

auditing standards and of sufficient

scope to enable the auditor to express an

opinion on the bank’s financial

statements as to their presentation in

accordance with generally accepted

accounting principles (GAAP).

Audit Committee. A committee of the

board of directors, consisting, if

possible, entirely of outside directors.

To the extent possible, members of the

committee should be knowledgeable

about accounting and auditing. They

should be responsible for reviewing and

approving the bank’s internal and

external auditing programs or
Federal Register / Vol. 61, No. 122 / Monday, June 24, 1996 / Notices 32441

recommending adoption of these

programs to the full board. Both the

internal auditor and the external auditor

should have unrestricted access to the

audit committee without the need for

any prior management knowledge or

approval. Other duties of the audit

committee should include reviewing the

independence of the external auditor

annually, being consulted by

management when it seeks a second

opinion on an accounting issue,

overseeing the quarterly regulatory

reporting process, and reporting its

findings periodically to the full board of

directors.

Directors’ Examination. A review by

an independent third party that has

been authorized by the bank’s board of

directors and is performed in

accordance with the board’s analysis of

potential risk areas. Certain procedures

may also be required as a result of state

law. A directors’ examination consisting

solely of such procedures as cash counts

and confirmations of loans and deposits

would not normally be considered a

well-planned directors’ examination.

(Sometimes directors’ examinations are

similar to so-called ‘‘engagement

audits’’ or ‘‘operational audits.’’

Nevertheless, no widely accepted

national standards exist for the specific

procedures that must be performed in

directors’ examinations or these

‘‘audits.’’)

External Auditing Program. The

performance of procedures to test and

evaluate high risk areas of a bank’s

business by an independent auditor,

who may or may not be a public

accountant, sufficient for the auditor to

be able to express an opinion on the

financial statements or to report on the

results of the procedures performed.

Financial Statements. The statements

of financial position, income, cash

flows, and changes in shareholders

equity together with related notes.

Independent. No certified public

accountant, public accountant, or other

auditor will be recognized as

independent who is not in fact

independent. (Reference is made to

§ 335.604 of the FDIC rules and

regulations for the complete definition

of the term ‘‘independent.’’)

Outside Directors. Members of a

bank’s board of directors who are not

officers, employees, or principal

stockholders of the bank, its

subsidiaries, or its affiliates, and do not

have any material business dealings

with the bank, its subsidiaries, or its

affiliates.

Public Accountant. A certified public

accountant or licensed public

accountant who is duly registered and

in good standing as such under the laws

of the place of his/her residence or

principal office, who is licensed by the

accounting regulatory authority of his/

her state, and who possesses a permit to

practice public accountancy.

Report on the Balance Sheet. An

examination of the balance sheet,

accounting records, and other

supporting evidence performed by an

independent certified or licensed public

accountant in accordance with generally

accepted auditing standards.

Risk Areas. The risk areas are those

particular activities of a specific bank

that expose the bank to potential losses

if problems were to exist and go

undetected. The highest risk areas in

banks generally include, but are not

necessarily limited to, the valuation of

collectibility of loans (including the

reasonableness of the allowance for loan

losses), investments, and repossessed

and foreclosed collateral; internal

controls; and insider transactions.

By order of the Board of Directors.

Dated at Washington, D.C. this 17th day of

June, 1996.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Deputy Executive Secretary.

[FR Doc. 96–16047 Filed 6–21–96; 8:45 am]

BILLING CODE 6714–01–P

FEDERAL RESERVE SYSTEM

Change in Bank Control Notices;

Acquisitions of Shares of Banks or

Bank Holding Companies

The notificants listed below have

applied under the Change in Bank

Control Act (12 U.S.C. 1817(j)) and §

225.41 of the Board’s Regulation Y (12

CFR 225.41) to acquire a bank or bank

holding company. The factors that are

considered in acting on the notices are

set forth in paragraph 7 of the Act (12

U.S.C. 1817(j)(7)).

The notices are available for

immediate inspection at the Federal

Reserve Bank indicated. Once the

notices have been accepted for

processing, they will also be available

for inspection at the offices of the Board

of Governors. Interested persons may

express their views in writing to the

Reserve Bank indicated for that notice

or to the offices of the Board of

Governors. Comments must be received

not later than July 8, 1996.

A. Federal Reserve Bank of Atlanta

(Zane R. Kelley, Vice President) 104

Marietta Street, N.W., Atlanta, Georgia

30303:

1. Shari K. Jones, Rainsville, Alabama;

to retain a total of 38.79 percent, and

James T. Jones, Jr., Rainsville, Alabama,

to retain a total of .34 percent, of the

voting shares of First State Bancshares

of DeKalb County, Inc., Fort Payne,

Alabama, and thereby indirectly acquire

First State Bank of DeKalb County, Fort

Payne, Alabama.

Board of Governors of the Federal Reserve

System, June 18, 1996.

Jennifer J. Johnson,

Deputy Secretary of the Board.

[FR Doc. 96–15976 Filed 6–21–96; 8:45 am]

BILLING CODE 6210–01–F

Formations of, Acquisitions by, and

Mergers of Bank Holding Companies

The companies listed in this notice

have applied to the Board for approval,

pursuant to the Bank Holding Company

Act of 1956 (12 U.S.C. 1841 et seq.)

(BHC Act), Regulation Y (12 CFR part

225), and all other applicable statutes

and regulations to become a bank

holding company and/or to acquire the

assets or the ownership of, control of, or

the power to vote shares of a bank or

bank holding company and all of the

banks and nonbanking companies

owned by the bank holding company,

including the companies listed below.

The applications listed below, as well

as other related filings required by the

Board, are available for immediate

inspection at the Federal Reserve Bank

indicated. Once the application has

been accepted for processing, it will also

be available for inspection at the offices

of the Board of Governors. Interested

persons may express their views in

writing on the standards enumerated in

the BHC Act (12 U.S.C. 1842(c)). If the

proposal also involves the acquisition of

a nonbanking company, the review also

includes whether the acquisition of the

nonbanking company complies with the

standards in section 4 of the BHC Act,

including whether the acquisition of the

nonbanking company can ‘‘reasonably

be expected to produce benefits to the

public, such as greater convenience,

increased competition, or gains in

efficiency, that outweigh possible

adverse effects, such as undue

concentration of resources, decreased or

unfair competition, conflicts of

interests, or unsound banking practices’’

(12 U.S.C. 1843). Any request for

a hearing must be accompanied by a

statement of the reasons a written

presentation would not suffice in lieu of

a hearing, identifying specifically any

questions of fact that are in dispute,

summarizing the evidence that would

be presented at a hearing, and indicating

how the party commenting would be

aggrieved by approval of the proposal.

Unless otherwise noted, nonbanking