Interagency Guidance on the Internal Audit Function and its Outsourcing
January 22, 1998
Circular No. 11020

To the Chief Executive Officers of All State Member Banks, Bank Holding Companies, and Branches and Agencies of Foreign Banks, in the Second Federal Reserve District:

The letter from the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System, transmits a joint policy statement developed by the Federal Reserve and the other federal banking agencies. The policy describes sound practices for managing the internal audit function and contains a major section on internal audit outsourcing.

The supervisory letter and the interagency policy statement are being distributed to organizations supervised by the Federal Reserve because they contain important information and guidance on the responsibilities of directors and senior management for ensuring that a banking organization's systems of internal control, including the internal audit function, are adequate for the nature and scope of the organization's lines of business. To properly meet their responsibilities, directors should have in place a means for assessing the effectiveness of the internal control process.

The policy statement also provides guidance on sound practices for audit outsourcing arrangements and provides examiner guidance when questions arise about the independence of an outsourcing firm that serves as a bank's external auditor.

If you have any questions regarding the policy statement, please contact, at this Bank, Kausar Hamdani, Assistant Vice President, Advisory and Technical Services. You may also contact, at the Federal Reserve Board, Gerald A. Edwards, Jr., Deputy Associate Director (202-452-2741) or Gregory Eller, Senior Supervisory Financial Analyst (202-452-5277).