Removal, Suspension, and Debarment of Accountants From Performing  Audit Services - District Notice
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Removal, Suspension, and Debarment of Accountants From Performing Audit Services - District Notice


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22 Pages


ll★KFederal Reserve Bank of Dallas2200 N. PEARL ST.DALLAS, TX 75201-2272August 21, 2003Notice 03-45TO: The Chief Executive Officer of eachfinancial institution and others concernedin the Eleventh Federal Reserve DistrictSUBJECTRemoval, Suspension, and Debarment ofAccountants From Performing Audit ServicesDETAILSThe four federal bank and thrift regulatory agencies are jointly publishing final rules,effective October 1, 2003, pursuant to section 36 of the Federal Deposit Insurance Act (FDIA).Section 36, as implemented by 12 CFR part 363, requires that each insured depository institutionwith total assets of $500 million or more obtain an audit of its financial statements and anattestation on management’s assertions concerning internal controls over financial reporting byan independent public accountant. The insured depository institution must include theaccountant’s audit and attestation reports in its annual report.Section 36 authorizes the agencies to remove, suspend, or debar accountants fromperforming the audit services required by section 36 if there is good cause to do so. The finalrules establish rules of practice and procedure to implement this authority and reflect theagencies’ increasing concern with the quality of audits and internal controls for financialreporting at insured depository institutions. Although there have been few bank and thriftfailures in recent years, the circumstances of the failures that have occurred illustrate ...



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Federal Reserve Bank of Dallas
2200 N. PEARL ST.
DALLAS, TX 75201-2272
August 21, 2003
Notice 03-45
TO: The Chief Executive Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District
Removal, Suspension, and Debarment of
Accountants From Performing Audit Services
The four federal bank and thrift regulatory agencies are jointly publishing final rules,
effective October 1, 2003, pursuant to section 36 of the Federal Deposit Insurance Act (FDIA).
Section 36, as implemented by 12 CFR part 363, requires that each insured depository institution
with total assets of $500 million or more obtain an audit of its financial statements and an
attestation on management’s assertions concerning internal controls over financial reporting by
an independent public accountant. The insured depository institution must include the
accountant’s audit and attestation reports in its annual report.
Section 36 authorizes the agencies to remove, suspend, or debar accountants from
performing the audit services required by section 36 if there is good cause to do so. The final
rules establish rules of practice and procedure to implement this authority and reflect the
agencies’ increasing concern with the quality of audits and internal controls for financial
reporting at insured depository institutions. Although there have been few bank and thrift
failures in recent years, the circumstances of the failures that have occurred illustrate the
importance of maintaining high quality in the audits of the financial position and attestations of
management assessments of insured depository institutions. The final rules enhance the agencies’
ability to address misconduct by accountants who perform annual audit and attestation
For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;
Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.- 2 -
A copy of the Board’s notice as it appears on pages 48256–74, Vol. 68, No. 156 of the
Federal Register dated August 13, 2003, is attached.
For more information, please contact Sharon Sweeney, (214) 922-5101, Legal Depart-
ment. Paper copies of this notice or previous Federal Reserve Bank notices can be printed from
our web site at
August 13, 2003
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Part 19
[Docket No. 03–19]
RIN 1557–AC10
Board of Governors of the
Federal Reserve System
12 CFR Part 263
[Docket No. R–1139]
Federal Deposit Insurance
12 CFR Part 308
RIN 3064–AC57
Department of the Treasury
Office of Thrift Supervision
12 CFR Part 513
[No. 2003–33]
RIN 1550–AB53
Removal, Suspension, and Debarment
of Accountants From Performing Audit
Federal Register48256 Federal Register/Vol. 68, No. 156/Wednesday, August 13, 2003/Rules and Regulations
Section 36 authorizes the Agencies to Section 36 of the FDIA also requires that
remove, suspend, or debar accountants an independent public accountant audit
from performing the audit services the insured depository institution’s
required by section 36 if there is good annual financial statements to
cause to do so. The final rules establish determine whether those statements are
rules of practice and procedure to presented fairly in accordance with
implement this authority and reflect the generally accepted accounting
Agencies’ increasing concern with the principles (GAAP) and with the
quality of audits and internal controls accounting objectives, standards, and DEPARTMENT OF THE TREASURY
for financial reporting at insured requirements described in section 37 of
depository institutions. Although there the FDIA. Under section 37, the Office of the Comptroller of the
have been few bank and thrift failures accounting principles applicable to Currency
in recent years, the circumstances of the financial statements required to be filed
failures that have occurred illustrate the with the Agencies must be uniform and 12 CFR Part 19
2importance of maintaining high quality consistent with GAAP. In addition, the
[Docket No. 03–19] in the audits of the financial position accountant must attest to and report on
and attestations of management RIN 1557–AC10 management’s assertions concerning
assessments of insured depository internal controls over financial
3BOARD OF GOVERNORS OF THE institutions. The final rules enhance the reporting. The institution’s annual
FEDERAL RESERVE SYSTEM Agencies’ ability to address misconduct report also must contain the
by accountants who perform annual accountant’s audit and attestation
412 CFR Part 263 audit and attestation services. reports.
Section 36 of the FDIA gives the EFFECTIVE DATE: October 1, 2003.[Docket No. R–1139]
Agencies the authority to remove, FOR FURTHER INFORMATION CONTACT:
suspend, or bar an accountant from FEDERAL DEPOSIT INSURANCE OCC: Mitchell Plave, Counsel,
performing the audit services required CORPORATION Legislative and Regulatory Activities
5under section 36 for good cause. This Division, (202) 874–5090; Richard
authority is in addition to the 12 CFR Part 308 Shack, Senior Accountant, Office of the
enforcement tools the Agencies have Chief Accountant, (202) 874–4911; and
RIN 3064–AC57 Karen Besser, National Bank Examiner, under section 8 of the FDIA, which
Special Supervision/Fraud, (202) 874– enable the Agencies to remove or DEPARTMENT OF THE TREASURY
4464. prohibit an institution-affiliated party
Board: Richard Ashton, Associate (IAP), including an accountant, from Office of Thrift Supervision
General Counsel, Legal Division, (202) further participation in the affairs of an
452–3750; Nina Nichols, Counsel, (202) insured depository institution for 12 CFR Part 513
6452–2961; Arthur Lindo, Project certain types of misconduct. Section 36
[No. 2003–33] Manager, (202) 452–2695; and Salome authority is also distinct from the
Tinker, Senior Financial Analyst, (202) Agencies’ authority to remove, suspend, RIN 1550–AB53
452–3034, Division of Banking or debar from practice before an Agency
Supervision and Regulation; for users of parties, such as accountants, who Removal, Suspension, and Debarment
7Telecommunication Devices for the Deaf represent others.of Accountants From Performing Audit
(TDD) only, contact (202) 263–4869. Section 36 does not define good Services
FDIC: Richard Bogue, Counsel, cause, but authorizes the Agencies to
AGENCIES: Office of the Comptroller of Enforcement Unit, (202) 898–3726; implement section 36 through the joint
the Currency (OCC), Treasury; Board of 8Harrison E. Greene, Jr., Senior Policy issuance of rules of practice. A
Governors of the Federal Reserve Analyst, Accounting and Securities removal, suspension, or debarment
System (Board); Federal Deposit Disclosure Section, Division of under section 36 would limit an
Insurance Corporation (FDIC); and Supervision and Consumer Protection, accountant’s or accounting firm’s
Office of Thrift Supervision (OTS), (202) 898–8905. eligibility to provide audit services to
Treasury. OTS: Christine A. Smith, Project
ACTION: Final rule. Manager, (202) 906–5740, Supervision independent audits and reporting for all insured
depository institutions). The statute gives the FDIC Policy; Teresa A. Scott, Counsel
SUMMARY: The OCC, Board, FDIC, and Board of Directors the discretion to establish the (Banking & Finance), (202) 906–6478,
threshold asset size at which a section 36 annual OTS (each an Agency, and collectively, Regulations and Legislation Division. report is required. That amount is currently set at the Agencies) are jointly publishing
SUPPLEMENTARY INFORMATION: $500 million. See 12 CFR 363.1(a). While a section
final rules pursuant to section 36 of the 36 audit is not required of financial institutions
Federal Deposit Insurance Act (FDIA). I. Background with less than $500 million in total assets, the
Agencies encourage every insured depository Section 36, as implemented by 12 CFR Section 36 of the FDIA (12 U.S.C.
institution, regardless of its size or character, to part 363, requires that each insured 1831m), as implemented by FDIC have an annual audit of its financial statements
depository institution with total assets regulations, requires every large insured performed by an independent public accountant.
of $500 million or more obtain an audit See 12 CFR 363 App. A (Introduction).depository institution to submit an
2of its financial statements and an 12 U.S.C. 1831m(d), 1831n.annual report containing its financial
3 Id. 1831m(c); see also 12 CFR part 363 attestation on management’s assertions statements and certain management
(independent audit and reporting requirements).concerning internal controls over assessments to the FDIC, the appropriate 4 12 U.S.C. 1831m(a)(1) and (2).financial reporting by an independent Federal banking agency, and any 5 Id. 1831m(g)(4)(A).
public accountant (accountant). The 1appropriate state bank supervisor. 6 Id. 1813(u)(4), 1818(e)(1).
insured depository institution must 7 See 12 CFR part 19, subpart K; 12 CFR part 263,
include the accountant’s audit and 1 subpart F; and 12 CFR part 513.12 U.S.C. 1831m, 1831m(j)(2); see also 12 CFR
8attestation reports in its annual report. part 363 (describing the requirements for 12 U.S.C. 1831m(g)(4)(B).
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insured depository institutions with the higher standards elsewhere in the PCAOB and the Securities and
total assets of $500 million or more. A FDIA for IAPs who are independent Exchange Commission (SEC), as such
section 36 action would not restrict the contractors. The commenter also standards and provisions become
ability of accountants and firms to questioned the authority of the Agencies effective; engages in a single instance of
provide audit services to financial to extend sanctions to accounting firms highly unreasonable conduct that
institutions with less than $500 million and offices. results in a violation of applicable
in total assets, however, or to provide In response to the comments, the professional standards in circumstances
other types of services to all financial Agencies have revised the proposal, as in which an accountant knows, or
institutions. discussed in detail below. should know, that heightened scrutiny
is warranted; or engages in repeated
II. Proposed Rule and Comments III. Final Rule
instances of unreasonable conduct, each
Received Below is a more detailed discussion of resulting in a violation of applicable
the issues raised in response to the On January 8, 2003, the Agencies standards, that indicate a lack of
proposal and the Agencies’ responses proposed amending their rules of competence to perform annual audit
thereto. Because each Agency is practice by adding provisions for the services.
codifying the final rules using different Under the proposal, good cause also removal, suspension, or debarment of
section numbers, this discussion will included knowingly or recklessly giving accountants or accounting firms from
follow the order of the proposal, using false or misleading information to the performing the audit services required
9 captions instead of section numbers for Agencies with respect to any matter by section 36 of the FDIA. The
reference. before the Agency; knowingly or proposed rules defined ‘‘good cause’’ for
recklessly violating any provision of the such actions and established procedures Definitions
Federal banking or securities laws or for removal, suspension, or debarment
The proposal defined ‘‘accounting regulations, or any other law, including of accountants. The proposals also
firm,’’ ‘‘audit services,’’ and the Sarbanes-Oxley Act; and removal, contained conforming amendments to
‘‘independent public accountant.’’ suspension, or debarment from practice the existing practice rules of the OCC,
Under the proposal, ‘‘accounting firm’’ before any Federal or state agency Board, and FDIC.
means a corporation, proprietorship, regulating the banking, insurance, or The Agencies received six comments.
partnership, or other business firm securities industry on grounds relevant One comment was from a major trade
providing audit services. ‘‘Audit to the provision of audit services, other association for community banks;
services’’ means any service required to than those actions that result in another was from four large accounting
be performed by an independent public automatic removal, suspension, and firms and a major professional
accountant by section 36 of the FDIA debarment under the proposed rules. association for the accounting industry;
and 12 CFR part 363, including Conduct giving rise to good cause a third was from three accounting firms
attestation services. ‘‘Independent under the proposed rules does not have that provide audit services to publicly
public accountant’’ means any to occur in connection with the held and non-publicly held banks in
individual who performs or participates provision of audit services or in one state; the fourth and fifth comments
in providing audit services. connection with services provided to were from certified public accountants;
The Agencies did not receive any depository institutions. Any actions or and the final comment was from a
comments on the definitions. The final failures to act by an independent public banking, management, and economic
rule adopts the definitions as proposed. accountant or accounting firm that meet consultant. The commenters generally
the criteria for good cause set forth in stated their support for the underlying Removal, Suspension, or Debarment
the regulation, whether or not related to goals of section 36 and the proposal—
Good Cause for Removal, Suspension, the banking industry, could constitute to bolster the quality of audit services.
or Debarment. The proposed rules good cause for Agency action. One commenter expressed concern
defined ‘‘good cause’’ for removal, One commenter expressed a variety of about immediate suspensions. The
suspension, or debarment of reservations about the good cause commenter asked how an insured
accountants from providing audit standard. The commenter’s broadest depository institution can meet the
services required by section 36. Under suggestion was that the Agencies should deadline for submitting section 36
the proposal, the Agencies would have refer all section 36 actions against audits if the institution’s accountant is
‘‘good cause’’ if the accountant does not accountants to the PCAOB and SEC, subject to an order of immediate
possess the requisite qualifications to given the entities’ new roles as suspension and requested guidance on
perform audit services; engages in regulators of accountants under the the Agencies’ expectations under these
knowing or reckless conduct that results Sarbanes-Oxley Act. circumstances. Another commenter
This comment does not reflect the in a violation of applicable professional questioned why the Agencies are
jurisdictional differences among the standards, including those standards pursuing this rulemaking, given the role
Agencies, PCAOB, and SEC. The and conflicts of interest provisions of the newly constituted Public
Agencies have enforcement jurisdiction applicable to accountants through the Company Accounting Oversight Board
that is separate and distinct from the Sarbanes-Oxley Act of 2002 (Sarbanes-(PCAOB) as a regulator of accountants.
10 PCAOB’s and the SEC’s enforcement Oxley Act) and developed by the The commenter’s more specific concern
jurisdictions. Congress gave the
was with the level of due process
10 Pub. L. 107–204, 116 Stat 745 (2002). For Agencies discretion to suspend or debar
associated with immediate and further guidance on the obligations of insured accountants from performing annual
automatic suspensions. A third depository institutions under the Sarbanes-Oxley audit services for good cause under
Act, see OCC Bulletin No. 2003–21, Application of commenter questioned whether the section 36 of the FDIA. While an Recent Corporate Governance Initiatives to Non-Agencies have authority to use a
Public Banking Organizations (containing the
negligence standard of any kind, given Statement on Application of Recent Corporate Governance Initiatives to Non-Public Banking
Governance Initiatives to Non-Public Banking Organizations (May 5, 2003). See also FDIC
9 68 FR 1116 (January 8, 2003); see also 68 FR Organizations by the Board, OCC, and OTS (May 6, Financial Institution Letter 17–2003 (Corporate
4967, 5075 (January 31, 2003) (technical 2003)); Federal Reserve Board SR Letter 03–8, Governance, Audits, and Reporting Requirements)
corrections).(March 5, 2003).
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enforcement action by the PCAOB or the agencies to serve as good cause for of an accounting firm, the Agency ‘‘also
SEC could provide good cause for suspensions or debarments in the may remove, suspend, or debar such
section 36 actions, neither the PCAOB banking industry. firm or one or more offices of such
nor the SEC has statutory authority The proposal was consistent with the firm.’’ The proposed rule listed five
under the FDIA to suspend or debar an Agencies’ current authority under illustrative factors that the Agency may
accountant from performing annual section 8(e)(1)(A)(ii) of the FDIA, which consider when deciding (a) whether to
audit services. Even if the PCAOB or the allows the Agencies to take into account remove, suspend, or debar a firm or one
SEC could accomplish this outcome unsafe business practices in connection or more offices of such firm, and (b) the
indirectly, by barring an accountant not only with any insured depository term of any sanction imposed.
Some of the commenters questioned from associating with an accounting institution, but more broadly, any
11 the authority of the Agencies to take firm, neither the PCAOB nor the SEC business institution. The Agencies
has authority to take action against an action against accounting firms or continue to believe that there may be
accountant who performs services for an offices of firms. One commenter noted cases in which misconduct by
that section 36(g)(4) of the FDIA institution that is not publicly held. accountants at non-depository
specifically permits removal, Accordingly, the Agencies are not institutions could raise serious
suspension, or debarment of ‘‘an adopting the commenter’s suggestion questions about the ability of the
independent public accountant.’’ The that all section 36 cases be referred to accountant to provide audit services for
commenter then asserted ‘‘[t]here is no the PCAOB or the SEC. an insured depository institution. Under
The commenter further asserted that mention in the statute of the possible the final rule, therefore, the Agencies
there might be potential inconsistencies extension of those sanctions to can consider as ‘‘good cause’’
between the good cause standards in the accounting firms or offices, or of suspensions and debarments of
proposed rules and those the PCAOB extended or vicarious liability in any accountants in non-depository
may establish in the future. To address other way or of any kind.’’ The institution contexts that come to the
commenter concluded that the Agencies these potential problems, the attention of the Agencies.
commenter suggested that the Agencies lack authority to implement this aspect Another commenter questioned
should, as stated above, defer to the of their proposal. whether the Agencies have the authority
Another commenter did not PCAOB and the SEC, or at a minimum to use negligence as a basis for a
specifically question the authority of the coordinate with them before taking removal, suspension, or debarment of an
Agencies to propose rules permitting the suspension or debarment actions against accountant. The commenter argued that
removal, suspension, or debarment of an accountants. the negligence standard is not consistent
The Agencies intend to coordinate accounting firm or office thereof. Rather, with remedies available now to the
with the PCAOB and the SEC in section the commenter quoted a portion of the Agencies against independent
36 cases under appropriate legislative history of the Financial contractor IAPs under section 8 of the
circumstances. However, the Agencies Institutions Reform, Recovery, and 12FDIA.
do not believe that the proposed rule Enforcement Act of 1989 (FIRREA), Pub. In response, the Agencies note that
creates a conflict in professional or L. 101–73, 103 Stat. 183 (1989), to the section 36 of the FDIA broadly refers to
substantive standards for accountants effect that enforcement actions should ‘‘good cause’’ as grounds for section 36
among the Agencies, the PCAOB, and usually be limited to the individuals enforcement actions. There is no
the SEC. The proposed rule did not who participated in the wrongful action limitation in the statute on the use of
suggest new standards for accountants. to ‘‘prevent unintended consequences or negligence as a basis for action, nor does
Rather, it incorporated accountants’ economic harm to innocent third section 36 tie ‘‘good cause’’ to existing
14existing responsibility to adhere to parties.’’ The commenter argued that section 8 standards. On the contrary,
applicable professional standards, such the rules should include an explicit section 36 of the FDIA states that the
as generally accepted auditing standards presumption against taking action good cause enforcement remedies are in
and generally accepted standards for against an entire firm, that this sanction addition to those available under
attestation engagements, and existing 13 should only be available in the most section 8. The commenter’s position
SEC and Agency standards, into the egregious circumstances, specifically would essentially require this clause to
definition of good cause. The proposed articulated in the rules, and that a be eliminated from section 36 of the
rules were also consistent with the sanction against a firm should only be statute. Also, the negligence standard is
Sarbanes-Oxley Act and anticipated permissible after the affected firm has one the SEC has used for many years in
future actions by the SEC and PCAOB had the opportunity for a meaningful its suspension and debarment actions
to enforce standards set by those hearing before an independent trier of against accountants. Congress recently
agencies. The proposed rules were also fact.codified this standard for the SEC in the
drafted to accommodate the new The Agencies believe that the Sarbanes-Oxley Act.
standards that will be adopted by the proposed rules, as they pertain to For the foregoing reasons, the
SEC and the PCAOB. actions against accounting firms and Agencies are adopting in the final rules
The commenter’s next point offices, are well within the Agencies’ the good cause standard from the
concerned the possibility that conduct statutory authority. As noted in the proposed rules.
at non-depository institutions could preamble to the proposed rule, under Removal, Suspension, or Debarment
provide the basis for an action against the current practice regulations, the of Accounting Firms or Offices of Firms.
an accountant. The commenter Agencies may ‘‘remove, suspend, or The proposed rules provided that if an
questioned whether the Agencies have debar a firm by naming each member of Agency determines that there is good
the capability to evaluate the relevance the firm or office in the order * * *.’’ cause for the removal, suspension, or
of suspensions and debarments of Thus, the proposal also employed this debarment of a member or an employee
accountants in non-banking contexts, scope and provided guidance on when
e.g., suspensions or debarments by
11 a firm sanction might be appropriate. In 12 U.S.C. 1818(e)(1)(A)(ii); see also
regulators of different types of Hendrickson v. FDIC, 113 F.3d 98 (7th Cir. 1997).
businesses. The commenter opposed 12 See 12 U.S.C. 1818, 1813(u)(4). 14 H.R. Rep. No. 54(I), 101st Cong., 1st Sess., at
13using suspensions by non-banking Id. 1831m(g)(4). 467 (1989), reprinted in 1989 U.S.C.C.A.N. 86,263.
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addition, there is no indication that in business organizations under things, for written notice to the
using the term ‘‘independent public appropriate circumstances. In this respondent of the intended Agency
accountant’’ Congress intended to regard, the House Banking Committee’s action and the opportunity for a public
restrict removals, suspensions, or Report on FIRREA, H.R. Rep. No. 54(I), hearing before an administrative law
debarments solely to natural persons. at 466–67, states: judge. The administrative law judge
The term ‘‘independent public would refer a recommended decision to [T]he Committee strongly believes that the
accountant’’ is used throughout section the Agency, which would issue a final agencies should have the power to proceed
36 and its implementing regulation, 12 against such entities (corporation, firm or decision and order. Each Agency would
partnership) if most or many of the managing CFR part 363, not just in the section have the discretion to limit an order of
partners or senior officers of the entity have 36(g)(4) provision relating to removal, removal, suspension, or debarment so
participated in some way in the egregious suspension, or debarment. Indeed, that it applied solely to audit services
misconduct. For example, a removal and section 36 specifically provides that all provided to specified insured
prohibition order might be justified against
required audit services must be depository institutions, rather than to all the local office of a national accounting firm
performed by an ‘‘independent public insured depository institutions if it could be shown that a majority of the
accountant’’ who has agreed to provide supervised by the issuing Agency. This managing partners or senior supervisory staff
requested work papers and has received participated directly or indirectly in the was referred to in the proposed rules as
serious misconduct to an extent sufficient to 20an acceptable peer review. All required a ‘‘limited scope order.’’
give rise to an order. Such an order might audit and other reports are universally The procedures in the proposed rules
well be inappropriate if it was taken against signed by accounting firms, not for removal, suspension, and debarment
the entire national firm or other geographic 15individual accountants, and peer were drawn principally from the
units of the firm, unless the headquarters of reviews are performed at the firm level. Agencies’ existing practice rules. The these units were shown to have also
Thus, the Agencies believe that Agencies did not receive comment on participated, even if only in a reviewing
enforcement action at the firm level in capacity. these procedures. Therefore, the
appropriate circumstances is entirely Agencies are adopting the procedures as Accordingly, the similar reference in
consistent with the section 36 statutory proposed. section 36 to ‘‘independent public
16scheme. Immediate Suspension from accountant’’ can reasonably be read to With respect to the legislative history Performing Audit Services. The reach firms as well. quoted by the commenter, we note that proposed rule implemented the The Agencies understand that severe
the history is from FIRREA, not the authority in section 36 to ‘‘suspend’’ an economic consequences may result from
Federal Deposit Insurance Corporation independent public accountant by action barring an accounting firm from 17Improvement Act of 1991 (FDICIA), providing that an Agency may issue a performing section 36 audit services.
which added section 36 to the FDIA, so notice immediately suspending an The Agencies are also sensitive to the
it is not directly relevant to our accountant or a firm subject to a notice consequences that barring a firm might construction of section 36. Even if this of intention to remove, suspend, or have on innocent third parties not legislative history were applicable to debar if the Agency determines that directly involved in the misconduct at
section 36, the commenter quoted only immediate suspension is necessary for issue. While the Agencies have had the
a portion of the relevant legislative the protection of an insured depository authority since FIRREA to pursue
history material—the section not quoted institution, or its depositors, or for the enforcement actions against entire firms
supports the view that, in extending protection of the insured depository of professionals, such authority has
Agency enforcement jurisdiction to system as a whole. In making this been used only a handful of times and
independent contractors, including proposal, the Agencies stated that the only in the most egregious
‘‘any attorney, appraiser, or authority to immediately suspend an circumstances. In addition, the Agencies
18accountant,’’ Congress intended such accountant or firm could prevent believe that the five factors specified in
enforcement jurisdiction to extend to seriously harmful conduct relating to the proposed rule appropriately focus
the inquiry on whether sufficient accounting matters at an insured
15 Section AU 508.08 of the AICPA’s Professional
involvement of firm management is depository institution from being Standards describes the basic elements of the
present to justify action against the repeated or escalating while the auditor’s standard report on audited financial
statements. These elements include ‘‘i. The manual entire firm. Accordingly, the Agencies administrative proceedings relating to a
or printed signature of the auditor’s firm.’’ see no reason to amend the proposal to permanent removal, suspension, or
Similarly, Section AT 501.47 of these standards
include an explicit presumption against debarment order are pending. states that a practitioner’s examination report on the
One commenter asked for guidance to action at the firm or office level. The effectiveness of an entity’s internal control over
financial reporting should include ‘‘j. The manual insured depository institutions on what comment concerning the need for a
or printed signature of the practitioner’s firm.’’ In to do if their accountant were prior hearing before action at the firm or
addition, Section AU 9339.06 of the Professional suspended immediately, more office level will be addressed in the Standards presents an example of a letter that an
specifically, how to meet the deadlines sections discussing automatic and auditor should consider submitting to a regulator
prior to allowing the regulator access to audit work for filing annual audits. The commenter immediate suspensions.
papers. This letter ends with ‘‘Firm signature.’’ Proceedings to Remove, Suspend, or was concerned that there would not be
16 The Agencies realize that the final rule Debar. Under the proposed rules, the sufficient time to complete the audit,
includes definitions of both independent public
Agencies would hold formal hearings on given the time it would take for a new accountant (individuals who provide audit services)
removals, suspensions, and debarments accountant to become familiar with the and accounting firm (business entities that provide
auditing services). The dual definitions are required under rules that are consistent with the facts.
because of the additional criteria, beyond those Agencies’ Uniform Rules of Practice and The Agencies understand that an
applicable to individual accountants, that the
19Procedure (Uniform Rules). The immediate suspension may cause Agencies may assess in determining whether to take
Uniform Rules provide, among other disruption to an institution and make it action against a firm. The Agencies continue to
believe that the statutory term independent public
accountant encompasses both regulatory 19 20See 12 CFR part 19, subpart A (OCC); 12 CFR The Agencies will also have the discretion to
definitions. part 263, subpart A (Board); 12 CFR part 308, issue suspension orders where the duration of the
17 Pub. L. 102–242, 105 Stat. 2236 (1991). subpart A (FDIC); 12 CFR part 509, subpart A suspension would be dependent on the satisfactory
18 12 U.S.C. 1813(u)(4). (OTS). completion of remedial action.
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difficult to meet the deadlines for process requirements. The Agencies hearing before the Agency on the
submitting annual audits. The Agencies note that the Supreme Court has propriety of the suspension. The
expect that immediate suspensions approved a procedural framework Agencies intend that, under the final
would only be issued in compelling allowing up to 90 days for a final rules, an immediate suspension could
situations. In the case where an Agency decision by the Agencies on a challenge be issued only where there is probative
head imposed an immediate to an ex parte suspension order issued evidence that substantial harm to an
suspension, the Agency will make by the Agencies against an IAP of a insured depository institution, its
appropriate adjustments to the filing depository institution who has been depositors, or to the depository system
deadlines, if warranted, at the indicted for certain types of crimes. as a whole is likely to occur prior to
institution’s request. FDIC v. Mallen, 486 U.S. 230 (1988). completion of the proceedings on a
Another commenter expressed a The maximum time limits in the permanent order of removal,
variety of objections to the proposed proposed rules were designed by the suspension, or debarment. In addition,
procedures for contesting an immediate Agencies to permit a sufficient period under the final rules, the maximum time
for the creation of a meaningful record suspension. The commenter generally period permitted for a decision on a stay
stated that the proposed procedures do with regard to a stay petition and for petition (50 days) is only slightly longer
not comport with due process and careful and deliberate review of that than half the maximum time limit
suggested that the Agencies modify the record by the Agency decision maker, approved in the Mallen case for an
proposed procedures in a number of consistent with the recognized necessity agency decision on an indictment-
areas to follow more closely those for prompt administrative action on triggered suspension. In the Agencies’
procedures governing issuance of such a petition. As with the post- judgment, the maximum time for
temporary cease-and-desist orders by deprivation Agency hearing at issue in decision in the final rules represents the
the SEC. Except for the modifications the Mallen decision, a stay petition shortest realistic period necessary for
explained below, the Agencies do not could necessitate resolution of factual adequate consideration of the
disputes that would require at least believe that the proposed procedures suspended party’s opposition to the
23some examination of relevant evidence. should be conformed to the procedures suspension. As the Supreme Court
The Agencies intend that an applicable to temporary cease-and- noted in Mallen, the public has a strong
administrative decision on a stay desist orders issued under the securities interest in seeing that the ultimate
petition under the rules should be made laws. With regard to the protection of agency decision with respect to a
at the earliest practicable time. Thus, the nation’s banking system, judicial suspension is made in a ‘‘considered
the time limits imposed in the rules are 24decisions have recognized that there is and deliberate manner.’’
intended to establish only the maximum a compelling governmental interest that The commenter’s second objection to
period allowable for issuing a decision can justify regulatory action with the procedures was to the proposed
and a decision is expected to be made abbreviated procedures when provisions under which the decision on
21 more promptly whenever feasible. necessary. The Agencies expect that a petition to stay an immediate
Nevertheless, in order to further the immediate suspension remedy suspension is made by a presiding
minimize concerns about undue delay would be used only in circumstances officer designated by the Agency.
in the decision on a stay petition, the where serious harm to a depository According to the commenter, the stay
Agencies believe that the date by which institution, its depositors, or to the petition should be decided by an
a hearing on a petition to stay is ordered depository system as a whole would administrative law judge, who by statute
can be shortened without unduly occur unless immediate enforcement has some independence from the agency
impairing the administrative action is taken. whose cases the judge hears.
decisionmaking process. Accordingly, The commenter also had more The Agencies do not believe that an
the final rules require that an Agency specific suggestions for revisions to the administrative law judge must be
must order a hearing on a petition to proposal. First, the commenter stated designated as the decisionmaking
stay to be held 10 days after receipt of that the Agencies’ proposed procedures official with regard to a petition to stay
the petition, rather than within 30 days should allow for a quicker agency the immediate suspension of an
as proposed. decisionmaking process. The accountant or firm. The Agencies note
As the commenter pointed out, the commenter noted that, under the time that under their existing rules of
Supreme Court’s approval of a 90-day frames contained in the proposed rules, practice, a similar type of decision on an
agency decisionmaking period in the an accountant or a firm that petitions interim order, namely the decision with
Mallen decision depended in part on the the Agency to stay a notice of immediate respect to whether a suspension of an
fact that, under the statutory framework suspension may not receive a decision IAP who has been indicted should be
at issue, the suspension of an IAP may with respect to the petition until 70 lifted pending completion of the
be issued only after the individual days after the immediate suspension criminal trial, is made by a presiding
involved has been indicted by an becomes effective. The commenter officer, not by an administrative law
independent entity, like a grand jury. 25noted that, under the SEC Rules of judge. A court decision that prescribed
According to the Court, the indictment Practice, a final agency decision on a the minimum procedures required by
serves to reduce the likelihood that the challenge to a temporary cease-and- due process for these suspensions did
banking agency suspension is desist order issued by the SEC without not suggest that the agency decision on
unjustified. Under the proposed rules,
a prior hearing is required within 20 lifting the suspension had to be made by
an immediate suspension notice may be 22days.
issued by an Agency without any
23The Agencies believe that the The proposed and final rules permit a
similar action by a third party. In the suspended accountant or firm to elect to seek proposed maximum time period
Agencies’ view, however, the lack of an review of the presiding officer’s decision on a stay permitted for an Agency decision on a
petition by the Agency. However, the appeal to the independent triggering event by a third stay petition is consistent with due Agency is not for accountant suspensions does
24 486 U.S. at 244.
not mean that the maximum time limits 21 See, e.g., Fahey v. Mallonee, 322 U.S. 245 25 12 CFR 19.112(b) (OCC); 12 CFR 263.73(a)
in the final rules would result in the (1947). (Board); 12 CFR 308.164(b) (FDIC); and 12 CFR
22 17 CFR 201.513(c). denial of a prompt and meaningful 508.6(a) (OTS).
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an administrative law judge in order to rules and the finding that must be made between protecting the banking system
26meet constitutional requirements. by the Agencies to justify an immediate and protecting the rights of affected
The Agencies recognize, however, suspension are very similar to those parties.
that it may be useful to clarify that the prescribed in section 8(e)(3) of the Automatic Removal, Suspension, and
presiding officer who decides a petition FDIA, which govern the suspension of Debarment. The proposed rule provided
to stay an immediate suspension must an IAP of an insured depository that accountants or firms subject to
be insulated from the Agency staff institution pending completion of certain specified disciplinary actions
responsible for prosecuting the charges administrative proceedings concerning a would automatically be prohibited from
against the suspended accountant or proposed permanent order of removal or providing audit services. No further
29firm. The provisions of the proposed prohibition. Nevertheless, to better proceedings or hearings by the Agency
rules relating to the hearing on a stay express the immediate suspension would be required in these instances.
petition are therefore being modified to standard, the rule has been revised to Under each Agency’s proposed rule, the
add a new sentence, which follows the require ‘‘immediate harm’’ to an insured actions giving rise to such an automatic
requirements of the Administrative depository institution, its depositors, or bar include: (1) A final order of removal,
27Procedure Act for formal agency to the depository system as a whole. suspension, or debarment under section
adjudications. The final rules explicitly The commenter’s fifth criticism of the 36 (other than a limited scope order)
state that an Agency employee engaged proposed rule was that it did not issued by any of the other Agencies; (2)
in investigative or prosecuting functions establish a procedure for judicial review certain actions by the PCAOB
for the Agency in a particular action of immediate suspensions imposed by (specifically, a temporary suspension or
against an accountant or a firm, or in a the Agencies. However, section 36 permanent revocation of registration or
factually related action, may not serve contains no specific provision for a temporary or permanent suspension or
as the presiding officer or otherwise review by the courts of any action taken debarment from further association with
participate or advise in the decision by the Agencies under the authority of a registered public accounting firm); (3)
with respect to a petition to stay the that provision. Administrative agencies certain actions by the SEC (specifically,
immediate suspension. have no authority to create a right to an order of suspension or a denial of the
The commenter’s third suggestion was 30judicial review of agency action. Any privilege of appearing or practicing
that the proposed immediate suspension right to judicial review of an immediate before the SEC); and (4) suspension or
provisions be modified to make clear suspension must be based on some debarment for cause from practice as an
that, except in unusual cases, an statutory authority. accountant by the licensing authority of
accountant or firm should be suspended The commenter’s sixth point any state, possession, commonwealth,
immediately only after prior notice and concerned immediate suspensions of or the District of Columbia.
opportunity for the party involved to accounting firms. The commenter stated Under the proposed rules, contest the suspension. In the Agencies’ that the Agencies’ authority under the disciplinary actions not giving rise to an judgment, the modification to the proposal to immediately suspend a firm automatic bar could still serve as proposed procedures advocated by the from providing audit services is too grounds for an Agency to take action commenter is neither necessary nor broad and subjective and any firm against an accountant or a firm. In this appropriate. There is nothing in section subject to an immediate suspension respect, grounds for Agency action set 36 that requires prior notice and should have greater procedural forth in the proposal specifically opportunity for hearing before a protections than what is provided in the include removal, suspension, or suspension under that provision may be proposed rules. debarment by any Federal or state issued. Moreover, the courts have long The Agencies recognize that the agency regulating the banking, recognized that the strong governmental immediate suspension of an entire firm insurance, or securities industries. If interest in protecting depositors and could have a serious effect on the firm such an action were grounds for an preserving confidence in the financial as well as on the insured depository Agency proceeding, however, the full system can justify immediate action by institutions that may be relying on the array of hearings and procedures in the the regulatory agencies prior to notice firm for audit services. However, as
28 proposed rules would be required. and the opportunity for hearing. explained above, the Agencies intend One commenter objected to the Fourth, the commenter asserted that, that the immediate suspension sanction proposed rules’ approach to the like the SEC Rules of Practice, the would be applied to a firm only when automatic bar, contending that it was Agencies’ procedures should require a
clearly necessary to protect a depository too broad in scope because the reasons showing that irreparable harm would
institution or the depository system and for an action by the SEC, PCAOB, or a result before authorizing an immediate
when the factors specified in the rules state might be irrelevant to the provision suspension. Contrary to this comment,
for applying disciplinary action to a of audit services under the rules. The there is no requirement in section 36
firm support such a regulatory response. commenter argued that, to prevent an that the Agencies show ‘‘irreparable
Because the Agencies believe that these unwarranted automatic bar, an harm.’’ Nor are the agencies aware of
circumstances, though unusual, warrant accountant or a firm should in all cases any authority that requires a finding by
disciplinary action against an entire have the opportunity for a hearing the Government of irreparable harm in
accounting firm should they occur, the before an Agency considering removal, order to satisfy minimum constitutional
Agencies have retained that authority in standards of due process before suspension, or debarment, and that the
the final rule. The procedural immediate action can be taken. The Agency should be required to conduct
protections afforded an immediately Agencies further note that the an independent analysis. The
suspended party in the final rules, suspension procedures in the proposed commenter also asserted that the SEC’s
whether an individual or a firm, automatic suspension provisions are
represent an appropriate balance 26 Feinberg v. FDIC, 420 F. Supp. 109, 120 (D.D.C. more limited and generally require
1976). license revocation, criminal conviction,
27 29 12 U.S.C. 1818(e)(3).5 U.S.C. 554. or prior action by the SEC. Finally, the
28 30 Final agency action would, however, be See, e.g., Fahey v. Mallonee, 332 U.S. at 253;
commenter urged the Agencies to reviewable by a court under the Administrative Mallen, 486 U.S. at 240–41; Feinberg, 420 F. Supp.
at 119. Procedures Act. include in the final rule an expedited
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review process for an automatic suspension or debarment. A bright-line already received due process
removal, suspension, or debarment. test could have the effect of limiting an protections in proceedings before
The Agencies believe that the Agency’s flexibility to give the relief another Agency, the SEC, or the PCAOB.
automatic bar provisions are generally sought by the accountant or firm. Moreover, an accountant or a firm may
appropriate, notwithstanding certain Accordingly, the final rule retains the petition an Agency to perform audit
differences from the SEC’s practice, and provision permitting the accountant or services for a bank or savings
that the protections granted in the rule firm to request that an Agency grant an association. The Agencies believe that
are adequate. In a case where another exception from the automatic bar. these procedures will provide ample
Agency has taken disciplinary action With regard to SEC and PCAOB opportunity for an accountant or firm to
against an accountant or a firm under actions as a predicate for the automatic obtain a fair hearing that comports with
section 36, the Agency has resolved bar, the Agencies believe that the SEC’s due process protections of the
issues that are relevant to the provision and PCAOB’s expertise and jurisdiction Constitution.
of audit services throughout the banking in this area warrant recognition by the Notice of Removal, Suspension, or
Agencies of their actions against an Debarment. The proposed rules required system. If an accountant or a firm were
entitled to a separate hearing before accountant or firm. While there are the Agencies to make public any final
each Agency, four separate hearings differences between insured depository order of removal, suspension, or
would be required to prevent an institutions and institutions under the debarment against an accountant or
accountant or firm from providing audit primary jurisdiction of the SEC, the accounting firm and notify the other
services under the rules, conduct giving rise to suspension or Agencies of such orders. This was
notwithstanding the similarity of the debarment by the SEC is likely to be of consistent with the presumption in
issues. Such a requirement would equally significant concern to the favor of public notice for enforcement
31essentially result in duplicative banking regulators. In the rare case actions in the FDIA. The proposed
proceedings to implement a single where an action by the SEC or the rules also contained notification
PCAOB is based on conduct that is provisions for accountants and firms.action, and the Agencies do not believe
that the repetitive proceedings would unrelated to the provision of audit The proposal required that an
result in any significant additional services to an insured institution, the accountant or accounting firm
performing section 36 audit services for protection for the accountant or firm. Agencies retain override authority, and
any insured depository institution must The Agencies believe it is appropriate an accountant or firm would be able to
provide the Agencies with written and within the statutory direction of request Agency permission to provide
notice of any currently effective section 36 for the joint rules to provide audit services notwithstanding SEC or
disciplinary sanction against the that each Agency will defer to the PCAOB action.
The final trigger for an automatic bar accountant or firm issued by the PCAOB proceedings of the other federal banking
in the proposed rule was suspension or under sections 105(c)(4)(A) or (B) of the supervisors.
It should be noted that the automatic debarment for cause by a state licensing Sarbanes-Oxley Act, relating to
bar resulting from an action by another authority. The Agencies have further revocation of registration and
Agency does not apply in a case where considered the potential effects of this association with a public accounting
provision in light of the comments firm or issuer; any current suspension or the other Agency has issued a limited
scope order effective only with respect received and agree that there are likely denial of the privilege of appearing or
to audit services provided to one or to be instances in which a state’s action practicing before the SEC; or any
more specified institutions. If another is not relevant to the provision of audit suspensions or debarments for cause
Agency sought to remove, suspend, or services—there may be a wide range of from practice as an accountant by any
debar an accountant subject to a limited ‘‘for cause’’ grounds for suspension or duly constituted licensing authority of
scope order, it would have to provide debarment under various state laws. In any state, possession, commonwealth,
the accountant with the hearings and addition, the procedural protections or the District of Columbia. Written
procedures set forth in the rule. afforded to accountants in state notice under the proposed rules is also
Moreover, in the event that the proceedings may not be as uniform and required of any removal, suspension, or
particular facts and circumstances of a as broad as those provided by the debarment from practice before any
removal, suspension, or debarment Agencies, the SEC, and the PCAOB. Federal or state (non-licensing) agency
justify an exception from the automatic, Accordingly, the Agencies have regulating the banking, insurance, or
industry-wide bar, each Agency’s determined that suspension or securities industry on grounds relevant
proposed rule provided that the Agency debarment of an accountant for cause by to the provision of audit services; and
has discretion to override the automatic a state licensing authority should any action by the PCAOB under sections
bar with respect to the institutions it properly be treated as grounds for 105(c)(4)(C) or (G) of the Sarbanes-Oxley
supervises. An accountant or firm discretionary Agency removal, Act, relating to limitations on the
would be entitled to make such a suspension, or debarment, rather than as activities of accountants and accounting
request in any case, and the Agency a trigger for the automatic prohibition firms and any other appropriate
could grant written permission. on the provision of audit services. The sanction provided in the rules of the
One commenter suggested that the final rule amends both the automatic bar PCAOB. Written notice must be given
Agencies should include in the rule section and the section on grounds for no later than 15 calendar days following
substantive standards for when they Agency action to reflect this change. the effective date of an order or action,
will override the automatic bar. In One commenter raised a concern or 15 calendar days before an
response, we note that the general about whether the automatic bar accountant or accounting firm accepts
standard for suspension or debarment provision of the proposed rule could an engagement to provide audit
under section 36—‘‘good cause’’— violate an accountant’s or a firm’s right services, whichever date is earlier.
would apply to the decision of whether to due process by imposing a penalty The Agencies did not receive any
or not to override an automatic bar. It without allowing opportunity for a comments on the notice provisions. The
is impossible to predict all the hearing. As set forth above, the Agencies are therefore adopting the
situations in which the facts will automatic bar only applies in instances
31support an override of an automatic where the accountant or a firm has 12 U.S.C. 1818(u)(1).
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