Capital Briefs: Banks Must Ensure Control in 3d-Party Audits

Banks that hire outside companies to conduct internal audits must retain enough people to oversee the inspections, said Gerald A. Edwards, Federal Reserve assistant director for regulatory reporting and accounting issues.

Speaking Friday before the American Institute of Certified Public Accountants, Mr. Edwards said Fed officials have "several concerns" about the increasing use of accounting firms for internal audits.

"When outsourcing audit functions, sometimes institutions will eliminate the relative handful of internal staff," he said. "But management must assert responsibility for day-to-day audit functions."

To assure control over third-party internal audits, institutions must also:

*Insure that a bank's audit committee receives complete reports from the accounting firm and periodically reviews the firm's performance.

*Develop contingency plans in case the auditor's contract is terminated.

*Provide government examiners access to the auditor's working papers.

*Guarantee the independence of accountants hired for external audits.