WASHINGTON - Stepping up his campaign against lax auditing practices, Comptroller of the Currency John D. Hawke Jr. said Wednesday that national banks should not be allowed to hire the same accounting firm to perform internal and external audits.

"There are serious risks both that the auditor's independence may be compromised and that banks will be deprived of the benefits that can flow from having internal and external audit functions performed independently," Mr. Hawke said at a Securities and Exchange Commission hearing.

The SEC, in an effort to curb conflicts of interest between publicly traded corporations and their auditors, is considering establishing a standard that an external audit firm would not be deemed independent if it also provided the client's internal audit services.

Mr. Hawke, who last week formally warned national banks to fix weak audit programs, said the SEC proposal is "right on the mark and should be supported."

"The Office of the Comptroller of the Currency has seen a number of cases in which national banks have outsourced internal audit to the same firm that provides their external audit," he testified.

Eight of the 50 largest banks the OCC supervises use outside firms to conduct their internal audit, and seven of those institutions have their external audit done by that same firm, the comptroller said. An OCC survey of national banks in the Northeast found that one-third outsource their internal audit functions, and half of those use the same firm for the external audit.

However, when SEC Commissioner Laura Unger asked if such practices have resulted in any bank failures or enforcement actions, Mr. Hawke said, "I can't say we have found any problems" but "what we are concerned about is the lack of checks and balances when the audits are performed by the same firm."

He emphasized the risks that small institutions face when outsourcing audit work.

"Even more problematic are the outsourcing arrangements that we are seeing among smaller institutions," he testified. "In many cases, neither the bank nor the outside auditors have the staff or resources" to institute safeguards outlined by regulators.

The OCC and other banking regulators discourage banks from outsourcing internal audits. When banks do, management is required to monitor the integrity of the audit, which must follow SEC rules and those of the American Institute of Certified Public Accountants.

Regulators require all banks to conduct internal audits. Only public companies and those with more than $500 million of assets must have an independent external audit performed. However, bank regulators encourage institutions of all sizes to have an external audit.

Community bankers worry that rule changes could make it too expensive or logistically difficult for them to conduct the nonmandatory but highly encouraged external audits, according to Brian Smith, director of policy and economic research at America's Community Bankers. They have similar concerns about the SEC's consideration of whether to prohibit firms from providing some consulting services to audit clients.

Mr. Hawke said he shares the small banks' concerns and warned the SEC that "a blanket prohibition on providing any consulting or nonaudit services to financial statement audit clients may be unduly broad."

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