Bert Purdy

The revised changes to the FDI Act rules, published in the Federal Register on July 20, 2009, and August 12, 2009, became effective August 6, 2009, and clarify the independence standards applicable to an independent public accountant who audits the financial statements of a financial institution with $500 million or more in total assets for years ending on or after June 15, 2010. Click here to read the final rules issued in Financial Institution Letter 33-2009.

The proposed language published in the Federal Register on November 2, 2007, stated “the independent public accountant must comply with the independence standards and interpretations of the Public Company Accounting Oversight Board (PCAOB) that have been approved by the Securities and Exchange Commission (SEC) in addition to the independence standards and interpretations of the American Institute of Certified Public Accountants (AICPA) and the SEC.” Click here to read more about the proposed rules issued in Financial Institution Letter 96-2007.

A comment letter recommended the FDIC further clarify this standard. The FDIC obliged and rewrote the rule to state, “To the extent that any of the rules within any one of these independence standards (AICPA, SEC, and PCAOB) is more or less restrictive than the corresponding rule in the other independence standards, the independent public accountant must comply with the more restrictive rule.”

What do these “more restrictive” independence rules mean with respect to the external auditor? The following are examples of services that, if performed by external auditors, generally result in those auditors no longer being independent under the restrictive guidelines and differences in interpretations and rules of the AICPA, SEC or PCAOB:

• Preparing or drafting the auditee’s financial statements
• With the exception of outside directors, preparing tax returns for management and others in a financial reporting oversight role, i.e., individuals who can influence the contents of the financial statements or anyone who prepares them, including such an individual’s immediate family
• Any internal audit services that have been outsourced to the external audit firm related to the auditee’s internal controls, financial systems or financial statements, unless it is reasonable to conclude the results of these services will not be subject to audit procedures during a financial statements audit
• Bookkeeping or other services related to the accounting records, including but not limited to computation of deferred tax inventory items and income tax provisions, maintaining payroll records and maintenance of depreciation schedules
• Performing any management functions or specified human resources services, such as advising to hire a specific candidate for a specific job
• Performing appraisal or valuation services, unless it is reasonable to conclude the results of these services will not be subject to audit procedures during a financial statements audit
• Audit partner rotates after five years and must not serve as the engagement partner or concurring reviewer for the succeeding five years

Audit committee members should know these independence rules and be aware of the additional costs or issues that could impact the auditee for independence violations. To ensure external audit independence, request that the audit committee evaluate services being performed to determine if current services are precluded by the revised rules.

Contact your BKD advisor for more information about these independence rules or with questions.