Small banks that do not prepare an audited financial statement may continue to use a directors' exam instead, the Federal Deposit Insurance Corp. said this week.

In a memorandum Wednesday to FDIC-supervised banks, the agency said it prefers banks with less than $500 million of assets to hire a public accountant to do a full-scale audit. Directors' exams are acceptable, the FDIC said, but examiners will review their adequacy more carefully.

Though banks and state regulators often define directors' exams differently, such exams typically involve hiring a third party to test and evaluate riskier areas of the bank's business.

The FDIC's memo was an attempt to clarify its current policy on external auditing programs. An agency official said that many banks and examiners were confused when the FDIC rescinded an external auditing policy statement on Dec. 31, then sent a proposed policy statement out for comment in February. What the agency failed to communicate clearly, the official said, was that a 1996 policy statement remains current.

Directors' examinations are a popular alternative at small banks to full-scale financial audits. In 1997, 62% of all small banks hired a public accountant to audit their financial statements. Nearly 31% used a directors' examination instead.

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