To the Chief Executive Officers of State Member Banks and Bank Holding Companies with Total Assets of less than $500 Million, in the Second Federal Reserve District:
The Federal Financial Institutions Examination Council (FFIEC) recently issued an "Interagency Policy Statement on External Auditing Programs of Banks and Savings Associations." The policy statement encourages banks and savings associations that have less than $500 million in total assets ("small banks") and that are not subject to other audit requirements to adopt an external auditing program as a part of their overall risk management process. (Banks with $500 million or more in total assets are required to have external audits, in accordance with the Federal Deposit Insurance Act and Federal Reserve guidelines.)
The federal banking agencies view a full scope annual audit of a bank's financial statements by an independent public accountant as preferable to other types of external auditing programs. However, the policy statement recognizes that a full scope audit may not be feasible for every small bank. In such cases, the policy statement encourages those banks to pursue appropriate alternatives to a full scope audit that are set forth in the policy statement. The policy statement also encourages small banks to establish an audit committee consisting of outside directors and provides guidance to examiners on the review of external auditing programs.
The policy statement is consistent with the Federal Reserve's longstanding guidance that encourages the use of external auditing programs. The policy statement is also consistent with the Federal Reserve's goals for ensuring the accuracy and reliability of regulatory reports, improving the quality of bank internal controls over financial reporting, and enhancing the efficiency of our risk-focused examination process. The Federal Reserve is, therefore, adopting the FFIEC policy statement effective for fiscal years beginning on or after January 1, 2000.
An excerpt from the Federal Register of September 28, which contains the interagency policy statement (pdf - 70kb) (beginning on page 52322 of the excerpt), is available as a 
file. Compliance with the policy statement will be reviewed in the course of the normal supervisory process. Questions on this matter should be directed to Roseann Stichnoth, Vice President.
