Federal regulators on Tuesday requested industry comment on a plan urging all banks with less than $500 million of assets to establish an external auditing program.

Under the plan, issued by the Federal Financial Institutions Examination Council, each small bank's board of directors should establish an independent audit committee that meets annually to decide whether an outside auditor should be hired.

Among three options, regulators called for a certified public accountant to review a bank's financial statements, provide feedback on improving accounting policies and internal controls, and to evaluate information systems.

If institutions choose not to do such an extensive review, they could rely on an auditor to examine just the balance sheet or simply to review high-risk businesses such as lending or securities activities.

However, if a bank chooses to forgo the full financial statement audit, the reasons for that decision should be documented in the board of directors' minutes, the regulators said.

Ann Grochala, director of bank operations for the Independent Bankers Association of America, said she is concerned that examiners will view the guidance as strict requirements and force banks to conduct external audits annually.

Also on Tuesday, regulators proposed revamping the rating system used to judge the health of trust operations. The plan is meant to bring the trust rating system's measurements in line with the CamelS system used for judging a bank's overall performance.

Under both systems, institutions receive a grade on a scale of 1 to 5, with 1 as the best. For trusts, however, a 3 rating is considered adequate. Under the new plan, a 3 grade would indicate supervisory concern, as it does for banks.

Trusts would be judged on five components of their operations: management; operations, internal controls, and auditing; earnings; compliance; and asset management. Two currently used factors, account administration and conflicts of interest, would be combined to form the compliance component.

Comments on the two proposals are due April 20.

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