Audit Requirements

Proposed Readoption: N.J.A.C 3:29

Authorized By: Nicholas Ketcha, Acting Commissioner for Banking, Department of Banking and Insurance

Authority: N.J.S.A. 17:1-8.1, 17:1-15(e) and 17:12B-176

Calendar Reference: See Summary below for explanation of exception to calendar requirement.

Proposal Number: PRN 2001-432

Submit comments by January 18, 2002 to:

Karen Garfing, Assistant Commissioner

Office of Regulatory Affairs

New Jersey Department of Banking and Insurance

PO Box 325

Trenton, NJ 08625-0325

Fax: (609) 292-0896



The agency proposal follows:


The Department of Banking and Insurance ("Department") proposes to readopt without change N.J.A.C. 3:29, the audit requirements for State associations, which is scheduled to expire on May 3, 2002 pursuant to N.J.S.A. 52:14B-5.1c.

The Department has reviewed these rules pertaining to State associations, commonly known as savings and loan associations, and has determined them to be reasonable, necessary and proper for the purpose for which they were originally promulgated.

N.J.S.A. 17:12B-176 requires that a thorough audit be performed by a competent accountant. These rules proposed for readoption define a competent accountant as a certified public accountant, or an accounting firm licensed and/or registered in New Jersey or approved by the Commissioner. It is the responsibility of the board of directors to choose a competent auditor. However, the rules proposed for readoption provide that if the board fails to provide for the making of a proper audit or if the required audit is not properly made, prepared or filed, the Commissioner of Banking and Insurance ("Commissioner") is charged with the duty of making the audit or causing it to be made.

The scope of the audit shall, in general, be set forth by the audit program prepared by the American Institute of Certified Public Accountants. The audit report must contain the following statements: (1) comparative statements of condition; (2) comparative statements of operations; (3) reconciliation of retained earnings; (4) reconciliation of equity capital; and (5) statements of cash flows. Where continuous audits are made, verification notices may be mailed periodically, provided that the membersí subsidiary ledgers are reconciled with the general ledger control at the time of each mailing.

The rules proposed for readoption further provide that the auditor shall comment on pertinent matters affecting the association. The following are listed as examples of appropriate subjects for comment: (1) investment on which no income is received; (2) summary of changes in other real estate; and (3) insufficient surety bond coverage and other insurance. At least one audit must be made in a calendar year. Further, it is not necessary that the audit coincide with the fiscal year and the audit may be made on a "surprise" basis.

The audit must be certified by the person making the audit. The certification, which must be made by the person making the audit, must include the following: (1) a statement that the audit was made in accordance with the provisions of N.J.S.A. 17:12B-176 and applicable statutes and rules; and (2) a statement that the financial statements contained in the audit report fairly present the financial position of the association at the audit date and its operations for the periods reported upon. If the auditor cannot make any of the parts of this certification, the certification should be qualified to show any exceptions.

The Department is considering an amendment to N.J.A.C. 3:7-3, the rules involving audits of banks and savings banks, and as part of that amendment may propose to incorporate the audit requirements for State associations in that section and repeal this chapter.

A 60 day comment period is provided for this proposal; therefore, pursuant to N.J.A.C. 1:30-3.3(a)5, the proposal is not subject to the provisions of N.J.A.C. 1:30-3.1 and 3.2 governing rulemaking calendars.

Social Impact

The rules proposed for readoption apply to all State chartered associations. They impose reasonable requirements on State associations to ensure that audits are performed in a meaningful way. These audits allow the Department to identify troubled institutions, to monitor compliance and to make recommendations or suggestions for improvements in internal control. Soundness of State associations and the safety of depositor funds within those institutions has a beneficial social impact and is furthered by the rules proposed for readoption.

Economic Impact

Audits of this kind are required by statute. Further, it is prudent business practice for a financial institution such as a State association to have an audit by an independent auditor. The provisions of these rules that set forth the standards for such an audit are also in accord with general practice in the banking industry. Accordingly, it is expected that these rules will have little, if any, economic impact on regulated institutions. In the rare instance in which a State association might not otherwise use a certified public accountant or an accounting firm licensed or registered in New Jersey, and the accountant is not approved by the Commissioner, some additional expense may be incurred in the hiring of such professionals. The economic benefit that accrues to the public is the continued soundness of the institutions being audited and the safeguarding of depositorsí monies. Lastly, the rules currently in effect are readopted without amendment.

Federal Standards Statement

The rules proposed for readoption do not contain standards or requirements that exceed standards or requirements imposed by Federal law. Relevant Federal standards that are equaled but not exceeded are set forth at 12 C.F.R 563c.

Jobs Impact

The Department does not anticipate that any jobs will be generated or lost as a result of the rules proposed for readoption. State associations will use existing staff and a retained professional accountant for continued compliance with the existing rules. Further, the rules currently in effect are readopted without amendment.

The Department invites commenters to submit any data or studies concerning the jobs impact of the proposed readoption together with their written comments on other aspects of this proposal.

Agriculture Industry Impact

The Department does not expect any agriculture industry impact from the rules proposed for readoption.

Regulatory Flexibility Analysis

The rules proposed for readoption place reporting, recordkeeping and compliance requirements on State associations, approximately 50 percent of which are small businesses as defined by the Regulatory Flexibility Act, N.J.S.A. 52:14B-16 et seq. However, the reporting, recordkeeping and compliance requirements will result in little, if any, administrative costs. Instead, the reporting, recordkeeping and compliance requirements, described in the Summary above, reflect current practice, and serve to codify documentation which is typically part of an audit.

The rules proposed for readoption are intended to advance the safety and soundness of State associations and protect the funds of individual depositors. It is for this reason that no differentiation in compliance, based on business size, is made.

Full text of the proposed readoption may be found in the New Jersey Administrative Code at N.J.A.C. 3:29.