Changes to FDICIA Audit Requirements
On October 20, 2020, the FDIC issued an interim final rule (IFR) to provide temporary relief from the financial statement audit requirements under FDICIA for banks that have experienced temporary growth due to participation in the Paycheck Protection Program (PPP), or other stimulus activities and programs. The IFR is effective immediately and appears to provide effective relief by allowing most institutions to remain subject to the same FDICIA Part 363 requirements in 2021 as they were subject to in 2020. The following represents our analysis of this IFR and related considerations for banks that may have seen unusual but significant growth in their balance sheets in 2020.
Annual Independent Audits and Reporting Requirements (Part 363)
Currently, an insured depository institutions (IDI) becomes subject to the financial statement audit and additional reporting requirements of Part 363 for any fiscal year in which its consolidated total assets as of the beginning of such fiscal year are $500 million or more. Additionally, an IDI with consolidated total assets of $1 billion or more as of the beginning of any fiscal year must provide a management assessment of, and the independent public accountant’s report on, the effectiveness of internal control over financial reporting (ICOFR). Part 363 also includes requirements related to audit committee composition and independence from management based on consolidated asset size.
IFR and Example of Applicability
The IFR allowing IDIs to determine the applicability of Part 363 of the FDICIA regulations for fiscal years ending in 2021 based on the lesser of the IDI’s (a) consolidated total assets as of December 31, 2019, or (b) consolidated total assets as of the beginning of their fiscal years ending in 2021. For example, an IDI with a fiscal year ending December 31, 2021, would normally determine part 363 compliance requirements based on consolidated total assets as of January 1, 2021. Under the IFR, an IDI experiencing growth would instead use its consolidated total assets as of December 31, 2019, for purposes of determining its compliance requirements. In this example, if the IDI’s consolidated total assets were less than $500 million as of December 31, 2019, it would not become subject to Part 363 for its fiscal year ending December 31, 2021, even if its total consolidated total assets were more than $500 million as of January 1, 2021.
Similarly if ,the IDI’s consolidated total assets were more than $500 million but less than $1 billion as of December 31, 2019, it would not become subject to the ICOFR requirements of Part 363 for its year ending December 31, 2021, even if its total consolidated total assets were more than $1 billion as of January 1, 2021.
It is important to note the FDIC reserves the authority to require an IDI to comply with one or more requirements under Part 363 if the FDIC determines that asset growth was related to a merger or acquisition. We recommend that banks reach out to their regulators for clarification if they anticipate crossing either the $500 million or $1 billion threshold for their fiscal year ending in 2021 if the growth was a result of an acquisition.
Impact to Financial Institutions
We have seen a significant increase in the balance sheets of banks as a result of PPP lending as well as due to a temporary inflow of deposits. Many of these increases are expected to be temporary in nature as the PPP forgiveness process and other market forces unfold through the remainder of 2020 and into 2021. These temporary inflows have resulted in many banks exceeding the thresholds set forth in Part 363 prior to many of their internal plans of growth and could result in additional costs and compliance burdens that may be temporary in nature if the IFR was not issued.
How can we help?
Throughout 2020, we have continuously seen changing regulatory guidance. CLA is here to know you and help you, and we can help you understand this new guidance or assist with your auditing needs. Please contact your CLA representative anytime for more information. We are here to help you navigate through it.
Scott is the leader in CLA’s Financial Institutions group, and a member of the National Assurance Technical Group. He has 15 years of experience with audit and accounting services for financial institutions of all sizes.
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