Board of Governors of the Federal Reserve System

The Federal Reserve is issuing the attached policy statement, Supplemental Policy Statement on the Internal Audit Function and Its Outsourcing, to provide institutions² with additional guidance related to interagency guidance that was issued in 2003 and remains in effect.³  Building upon the 2003 interagency guidance, the attached supplemental guidance addresses characteristics, governance, and operational effectiveness of an institution’s internal audit function. 

Further, this supplemental guidance explains changes over the past several years in banking regulations related to auditor independence and limitations placed on the external auditor. In summary, the supplemental guidance addresses:

• Enhanced Internal Audit Practices – discusses the enhancements that an institution should incorporate into its internal audit function to address lessons learned from the recent financial crisis.
• Internal Audit Function – addresses the characteristics, governance, and operational effectiveness of an institution’s internal audit function.
• Internal Audit Outsourcing Arrangements – covers the responsibilities of an institution's board of directors and senior management to provide appropriate oversight of internal audit outsourcing arrangements.
• Independence Guidance for the Independent Public Accountant – addresses certain changes to Section 36 of the FDI Act⁴ enacted since the issuance of the 2003 interagency guidance. Further, the supplemental guidance discusses the restrictions on the services of an institution’s external auditor.
• Examination Guidance – discusses the supervisory assessment of an institution’s internal audit function and the ability of examiners to rely on work performed by internal audit.

Reserve Banks are asked to distribute this supplemental guidance to supervised institutions with greater than $10 billion in total consolidated assets, including state member banks, domestic bank and savings and loan holding companies, and U.S. operations of foreign banking organizations, as well as to their supervisory and examination staff, as appropriate. Questions on the attached guidance should be addressed to Steven P. Merriett, Deputy Associate Director and Chief Accountant-Supervision, at (202) 452-2531; or Terrill L. Garrison, Jr., Senior Accounting Policy Analyst, at (202) 452-2712; or Phyllis L. Harwell, Assistant Director, Consumer Compliance, at (202) 452-3658. In addition, questions may be sent via the Board’s public website.⁵

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