Audit Staffs Cut Since '90 At Small and Midsize Banks

Small and medium-size banks have shrunk their auditing departments in the past five years, leaving the watchdogs with bigger work loads, according to a new survey.

Ironically the study, released Monday at the Bank Administration Institute's compliance conference, comes just as regulators are increasing their emphasis on internal auditing. For example, a senior Federal Reserve Board official said this month that the central bank planned to order audits when its examiners find troubled bank departments.

The Fed and the Office of the Comptroller of the Currency also are reconfiguring exams to focus more on risk management, the traditional purview of internal audit departments.

Overall, banks with $300 million to $500 million of assets has 24% fewer internal staff auditors last year than in 1990, the survey found. The decline was 19.6% for banks with $3 billion to $10 billion of assets.

Comparative data for banks with more than $10 billion of assets were unavailable.

Cutbacks allowed most banks to slash overall spending on internal audit functions, but increased spending on technology drove spending per auditor up at all categories of banks. Banks with $300 million to $500 million of assets saw the biggest jump, with cost per auditor rising 36%, to $49,500. Medium-size banks, with $1 billion to $3 billion of assets, increased spending 15%, to $51,500 per auditor. Costs rose slightly at the megabanks too, to $75,700 per auditor.

Many banks also boosted spending on external audits. The study found banks with $3 billion to $10 billion of assets spent an average of $321,500 apiece on their annual audits, a 22% jump from 1990.

Banks between $300 million and $500 million of assets spent 20% more on their annual audit last year than in 1990. Institutions with $1 billion to $3 billion of assets bucked the trend: they paid less for external audits.

"I don't think this is going to come as a surprise to anyone," said Curtis C. Verschoor, a retired DePaul University research professor who helped conduct the survey. "People who have been watching the bank industry see cost-cutting trends all down the line. Auditors are living through the need to do more with less."'

Ninety-seven banks responded to the study, conducted for BAI last fall. The complete results of the survey will not be released until later this year, but an overview was presented Monday.

Technological innovations are allowing banks to conduct more audits with fewer employees, according to James J. Carey, general auditor and senior vice president at First Chicago NBD Corp.

"Technology can get a lot of lower-level work done quicker than was possible before," Mr. Carey said. "It streamlines a lot of the work junior auditors used to do."

Computers and spreadsheet programs allow the remaining auditors to become more productive, added Richard J. Mitsdarfer, an auditor with Citizens Banking Corp. in Flint, Mich.

"Everybody has enhanced their technology," Mr. Mitsdarfer said. "It used to be that everything was done with pencil and paper. But now if a bank downsizes, it may not need to replace someone because of technological advances."

The study also examined trends in bank governance, finding that the chief auditor at many institutions also supervises the compliance staff.

It found that about a third of the compliance officers at banks under $1 billion of assets report directly to the general auditor.

But Amy Bisselle, compliance officer at Boston-based BayBanks Inc., said internal audit and compliance should not be intertwined.

"We want to make sure that the internal testing of the function is done without a bias," Ms. Bisselle said. "These departments have separate purposes. In a lot of banks, that's not clearly defined. But they should be kept separate."

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