[Federal Register: November 25, 2002 (Volume 67, Number 227)]
[Rules and Regulations]
[Page 70529-70531]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25no02-2]
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DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 562
[No. 2002-54]
RIN 1550-AB54
Regulatory Reporting Standards: Qualifications for Independent
Public Accountants Performing Audit Services for Voluntary Audit Filers
AGENCY: Office of Thrift Supervision, Treasury.
[[Page 70530]]
ACTION: Interim final rule with request for comments.
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SUMMARY: The Office of Thrift Supervision (OTS) is adopting an interim
final rule that amends its annual independent audit requirements for
small, non-public, highly rated savings associations that voluntarily
obtain independent audits. This change will make OTS's requirements
more consistent with those of the other federal banking agencies and
will avoid the potential regulatory burden that could otherwise result
from other regulatory action.
DATES: This interim rule is effective November 25, 2002. Written
comments must be received by December 26, 2002.
ADDRESSES:
Mail: Send comments to Regulation Comments, Chief Counsel's Office,
Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552,
Attention: No. 2002-54.
Delivery: Hand deliver comments to the Guard's Desk, East Lobby
Entrance, 1700 G Street, NW., from 9 a.m. to 4 p.m. on business days,
Attention: Regulation Comments, Chief Counsel's Office, No. 2002-54.
Facsimiles: Send facsimile transmissions to FAX Number (202) 906-
6518, Attention: Regulations Comments, No. 2002-54.
E-Mail: Send e-mails to regs.comments@ots.treas.gov, Attention: No.
2002-54, and include your name and telephone number.
Availability of comments: OTS will post comments and the related
index on the OTS Internet Site at http://www.ots.treas.gov. In
addition, you may inspect comments at the Public Reading Room, 1700 G
Street, NW., by appointment. To make an appointment for access, call
(202) 906-5922, send an e-mail to public.info@ots.treas.gov, or send a
facsimile transmission to (202) 906-7755. (Please identify the
materials you would like to inspect to assist us in serving you.) We
schedule appointments on business days between 10 a.m. and 4 p.m. In
most cases, appointments will be available the business day after the
date we receive a request.
FOR FURTHER INFORMATION CONTACT: Christine Smith, Project Manager,
(202) 906-5740, Examination Policy Division, or Teresa A. Scott,
Counsel (Banking & Finance), (202) 906-6478, Regulations and
Legislation Division, Office of Thrift Supervision, 1700 G Street, NW.,
Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
I. Background and Changes
Savings associations that are publicly traded,\1\ have assets of
$500 million or more,\2\ or have a 3, 4, or 5 CAMEL rating \3\ must
obtain and file an annual independent audit. Small, non-public, 1- or
2-rated savings associations are not required to obtain an independent
audit. Currently, OTS regulations require that public accountants
conducting these independent audits (whether required or voluntary)
follow the SEC independence rules, including those governing
outsourcing of non-audit services. 12 CFR 562.4(d) and (e) (2002).
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\1\ 17 U.S.C. 78m (West 2002). Generally, federally-chartered
publicly traded savings associations file annual audits with OTS,
while generally publicly traded federally-chartered thrift holding
companies file audits with the Securities and Exchange Commission
(SEC).
\2\ 12 CFR 363.2 (2002). These institutions file annual audits
with the Federal Deposit Insurance Corporation and OTS.
\3\ 12 CFR 562.4(b). These savings associations file annual
audits with OTS.
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In 1994 when OTS originally promulgated Sec. Sec. 562.4(d) and
(e), OTS believed that the SEC independence rules provided an
appropriate standard for assessing auditor independence and that this
standard would not unduly burden small, non-public, highly rated
savings associations that file voluntary audits with OTS.\4\ Because
recent statutory changes intended to reach publicly traded institutions
would indirectly affect these voluntary filers, OTS has reexamined the
use of this standard.
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\4\ The SEC modified its independence rules in December 2000.
The modified rules, although more restrictive than those in effect
in 1994, continued to provide an appropriate standard for savings
associations that file audits voluntarily. However, see discussion
below concerning changes required by the Sarbanes-Oxley Act of 2002,
Pub. L. No. 107-204, Sec. 201, 116 Stat. 745 (2002).
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On July 30, 2002, Congress passed the Sarbanes-Oxley Act of
2002.\5\ Title II of that act sets forth standards for auditor
independence. Specifically, section 201(g)(5) prohibits a registered
public accountant from performing an audit for a public company
contemporaneously with providing that company with delineated non-audit
services, including internal audit outsourcing services. This
congressional mandate would affect a change in the SEC independence
rules.
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\5\ Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, Sec. 201,
116 Stat. 745 (2002).
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If OTS rules remain unchanged, a savings association that obtains a
voluntary audit may not use its external auditors to perform non-
auditing services.\6\ Although OTS encourages non-publicly held savings
associations that voluntarily file audits with the agency to follow the
prohibition from Sarbanes-Oxley, OTS is concerned that an absolute
prohibition in this manner may be unnecessarily detrimental to some
voluntary filers. Specifically, OTS believes that small institutions
with less complex operations and limited staff, may, in some instances,
use their independent public accountant to perform both an external
audit and some or all of an audit client's non-audit activities
consistent with the OTS's safety and soundness objectives. Some of
these institutions may not have access to a full range of qualified
public accountants such that they could engage both an external auditor
and a different outside firm to perform non-audit functions. Other
institutions may reasonably have determined that the costs of having a
full time in-house staff to perform those services exceed the benefits.
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\6\ These services include bookkeeping, financial information
systems design, appraisal, valuation, and actuarial services, and
internal audit outsourcing services. For a complete list of
prohibited activities, see id. at Sec. 201.
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Moreover, none of the other banking agencies require that
institutions that file voluntary audits follow the SEC independence
rules. Requiring savings associations to do so may place these savings
associations at an unnecessary competitive disadvantage as these
requirements became more restrictive. Therefore, OTS is amending its
regulation to eliminate the requirement that institutions voluntarily
filing audits comply with the SEC independence rules.\7\
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\7\ OTS understands that passage of the Sarbanes-Oxley Act may
place increased responsibilities on small publicly held savings
associations, including the prohibitions against outsourcing
internal non-audit services to the association's external auditor.
Nothing in this rule affects those requirements.
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On the other hand, OTS continues to believe that auditor
independence is important to the safety and soundness of all
institutions and thus OTS is retaining the requirement that
institutions filing voluntary audits comply with the AICPA Professional
Conduct Code, including those sections that address independence.
Further, OTS may monitor voluntary audit filers' non-audit outsourcing
to ensure that institutions are properly preserving the independence
between the two functions. OTS believes that this approach is the most
effective means of maintaining comparability and consistency with the
other banking agencies. This approach also reduces regulatory burden on
savings associations filing voluntary audits consistent with safe and
sound regulation.
[[Page 70531]]
II. Justification for Interim Rule
A. Notice and Comment Requirement
Section 553 of the Administrative Procedure Act (APA) permits an
agency to issue rules without prior notice and comment if the agency
finds good cause and explains its finding when it publishes the rule. 5
U.S.C. 553(b)(B). A finding that notice and comment are impracticable,
unnecessary, or contrary to the public interest constitutes good cause.
As discussed more fully above, OTS has examined the legislative
changes made by the Sarbanes-Oxley Act and the potential impact of any
implementing regulations on small, non-public savings associations. OTS
believes that the interaction of these changes with OTS's current
regulations on voluntary audits could significantly increase the
regulatory burden on these small thrifts. Small, non-public banks and
non-depository institutions are not covered by the new independence
rules. Small, non-public, highly rated thrifts do not pose any greater
risks.
Elimination of the regulatory requirement decreases burden on the
industry and permits certain savings associations more flexibility in
accessing the marketplace in search of non-audit services that may be
performed by outside entities. The change also aligns OTS regulations
more closely to those of the other banking agencies. Accordingly, OTS
concludes that public notice and comment on these changes in advance of
implementation are unnecessary and contrary to the public interest.
Nonetheless, OTS invites comments on this interim rule during the 60-
day period following its publication. In developing a final rule, OTS
will consider all public comments it receives within that period.
B. Effective Date Requirement
Section 302 of the Riegle Community Development and Regulatory
Improvement Act of 1994 (CDRIA), 12 U.S.C. 4802, requires that new OTS
regulations and amendments to existing regulations take effect on the
first day of a calendar quarter that begins on or after the date of
publication of the rule. This delayed effective date provision applies
only if the rule imposes additional reporting, disclosure, or other new
requirements on insured depository institutions.
As a related matter, section 553(d) of the APA states that a rule
must not be made effective before 30 days after its publication. 5
U.S.C. 553(b)(B). This APA provision does not apply, however, if the
rule grants or recognizes an exemption or relieves a restriction.
OTS concludes that neither CDRIA nor the APA precludes the
publication of this rule with an immediate effective date. This rule
makes only burden reducing amendments to OTS rules and relieves current
requirements on independence and non-audit outsourcing activities.
II. Findings and Certifications
A. Executive Order 12866
The Director of OTS has determined that this interim rule does not
constitute a ``significant regulatory action'' for the purposes of
Executive Order 12866.
B. Regulatory Flexibility Act
Under the Regulatory Flexibility Act, OTS must either provide an
Initial Regulatory Flexibility Analysis (IRFA) with this interim rule,
or certify that the rule would not have a significant economic impact
on a substantial number of small entities. Pursuant to section 605(b)
of the Regulatory Flexibility Act, OTS certifies that this interim rule
will not have a significant economic impact on a substantial number of
small entities. It removes a requirement that could, if left unchecked,
inadvertently lead to potential additional regulatory burden. The
interim rule, which is written in plain language, reduces regulatory
burden.
C. Unfunded Mandates Reform Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995 \8\
(Unfunded Mandates Act) requires that an agency prepare a budgetary
impact statement before promulgating a rule that includes a federal
mandate that may result in expenditures by state, local, and tribal
governments, in the aggregate, or by the private sector, of $100
million or more in any one year. If a budgetary impact statement is
required, section 205 of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. OTS has determined that this
interim rule will not result in expenditures by state, local, or tribal
governments, or by the private sector, of $100 million or more in any
one year. Accordingly, section 202 of the Unfunded Mandates Act does
not require the OTS to prepare a budgetary impact statement for this
rule.
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\8\ Pub. L. 104-4, 109 Stat. 48 (1995) (codified at 2 U.S.C.
Chs. 17A, 25).
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D. Paperwork Reduction Act
The OTS has determined that this interim final rule does not
involve a change to collections of information previously approved
under the Paperwork Reduction Act (44 U.S.C. 3501 et seq.).
List of Subjects in 12 CFR Part 562
Accounting, Reporting and recordkeeping requirements, Savings
associations.
For the reasons set out in the preamble, the Office of Thrift
Supervision amends part 562 of chapter V, title 12, of the Code of
Federal Regulations as follows:
PART 562--REGULATORY REPORTING STANDARDS
1. The authority citation for part 562 continues to read as
follows:
Authority: 12 U.S.C. 1463
2. Amend Sec. 562.4 by revising paragraphs (d)(3) and (e) to read
as follows:
Sec. 562.4 Audit of savings associations and savings association
holding companies.
* * * * *
(d) * * *
(3)(i) Is in compliance with the American Institute of Certified
Public Accountants' (AICPA) Code of Professional Conduct; and
(ii) Meets the independence requirements and interpretations of the
Securities and Exchange Commission and its staff; and
* * * * *
(e) Voluntary audits. When a savings association, savings and loan
holding company, or affiliate (as defined by 12 CFR 563.41(b)(1))
obtains an independent audit voluntarily, it must be performed by an
independent public accountant who satisfies the requirements of
paragraphs (d)(1), (d)(2), and (d)(3)(i) of this section.
Dated: November 18, 2002.
By the Office of Thrift Supervision.
James Gilleran,
Director.
[FR Doc. 02-29833 Filed 11-22-02; 8:45 am]
BILLING CODE 6720-01-P