Audit Committee Requirements for Non-publicly Traded Banks and Banks with Less than $500 Million in Assets!

Written by: Lewis D. Sheffield, Jr.

Banking organizations that are not publicly traded and have less than $500 million in assets are not subject to the Sarbanes-Oxley Act, the NYSE and NASDAQ proposals, or Part 363 of the FDIC’s regulations. This means that banking organizations in this category are not required to establish an audit committee consisting entirely of outside directors. However, to help ensure the adequacy of the bank’s internal and external auditing programs, the FDIC recommends the board organize the audit committee so that outside directors constitute a majority of the membership. They also view certain attributes as particularly important for audit committee membership such as: recognition of the significance of the audit committee’s responsibilities, time commitments, financial literacy, and, above all, independence.

The FDIC also gives some guidance on the duties of the audit committee. The audit committee should be responsible for identifying the risk areas of the institution’s activities and assessing the extent of external auditing involvement needed over each area. This should be done at least annually. Then, they should determine what type of external auditing program would best meet the institution’s needs. When evaluating the external auditing needs, the committee should consider the size of the institution and the nature, scope, and complexity of its operations. It should also consider the potential benefits of an audit of the institution’s financial statements or an examination of the internal control structure over financial reporting, or both. In addition, the committee may determine that additional or specific external auditing procedures are warranted for a particular year or several years to cover areas of particularly high risk or special concern. The reasons supporting these decisions should be recorded in the committee’s minutes. If, in its annual consideration of the institution’s external auditing program, the committee determines, after considering its inherent limitations, that an agreed-upon procedures and/or state-required examination is sufficient, they should also consider whether an independent public accountant should perform the work of auditing the financial statements and/or internal controls over financial reporting. Other duties of the audit committee may include reviewing the independence of the external auditor annually, consulting with management, seeking an opinion on an accounting issue, and overseeing the quarterly regulatory reporting process. The audit committee should also report its findings periodically to the full board of directors.

Many smaller, non-public banking organizations typically have fewer resources and less complex operations than public organizations which could prevent the most efficient audit committee structure. However, even implementing a few of the FDIC’s suggestions could help improve the integrity of an organization even more. A competent, independent audit committee helps keep an organization running efficiently which maximizes profits.

For more information see FDIC FIL-96-99: Financial Institution Letters : Federal Register Notice

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