Business and Industrial Loan ProgramAudit Requirements

DEPARTMENT OF AGRICULTURE

Rural Housing Service

Rural Business-Cooperative Service

Rural Utilities Service

Farm Service Agency

7 CFR Part 1980

RIN 0570-AA11

Business and Industrial Loan Program--Audit Requirements

AGENCIES: Rural Housing Services, Rural Business-Cooperative Service,

Rural Utilities Service, and Farm Service Agency, USDA.

ACTION: Final rule.

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SUMMARY: The Rural Business-Cooperative Service (RBS) is amending the

regulations for the Business and Industry (B&I) Loan Program. The

action clarifies the requirements for annual financial statements and

establishes thresholds for determining which borrowers will be required

to provide audited statements.

EFFECTIVE DATE: April 26, 1996.

FOR FURTHER INFORMATION CONTACT: Richard T. Bonnet, Commercial Loan

Specialist, Rural Business-Cooperative Service, USDA, Ag Box 3221,

Washington DC 20250-3221, Telephone (202) 720-1804.

SUPPLEMENTARY INFORMATION:

Classification

This final rule has been determined to be significant and was

reviewed by the Office of Management and Budget under Executive Order

12866.

Intergovernmental Review

This program is listed in the Catalog of Federal Domestic

Assistance under number 10.768, and is subject to intergovernmental

consultation in accordance with Executive Order 12372, and as stated in

FmHA Instruction 1940-J, ``Intergovernmental Review of Farmers Home

Administration Programs and Activities.''

Environmental Impact Statement

This action has been reviewed in accordance with 7 CFR Part 1940,

Subpart G, ``Environmental Program.'' The Agency has determined that

this action does not constitute a major Federal action significantly

affecting the quality of the human environment and, in accordance with

the National Environmental Policy Act of 1969, Pub. L. 91-190, an

Environmental Impact Statement is not required.

Civil Justice

This rule has been reviewed under Executive Order 12778, Civil

Justice Reform. In accordance with this rule: (1) All State and local

laws and regulations that are in conflict with this rule will be

preempted; (2) no retroactive effect will be given to this rule; and

(3) administrative proceedings in accordance with the regulations of

the agency at 7 CFR Part 1900 Subpart B or those regulations published

by the Department of Agriculture to implement the provisions of the

National Appeals Division as mandated by the Department of Agriculture

Reorganization Act of 1994 must be exhausted before bringing suit in

court challenging action taken under this rule unless those regulations

specifically allow bringing suit at an earlier time.

Unfunded Mandate Reform Act

Title II of the Unfunded Mandate Reform Act of 1995 (UMRA), Pub. L.

104-4, establishes requirements for Federal agencies to assess the

effects of their regulatory actions on State, local, and tribal

governments and the private sector. Under section 202 of the UMRA, RBS

generally must prepare a written statement, including a cost-benefit

analysis, for proposed and final rules with ``Federal mandates'' that

may result in expenditures to State, local, or tribal governments, in

the aggregate, or to the private sector, of $100 million or more in any

one year. When such a statement is needed for a rule, section 205 of

the UMRA generally requires RBS to identify and consider a reasonable

number of regulatory alternatives and adopt the least burdensome

alternative that achieves the objectives of the rule.

This rule contains no Federal mandates (under the regulatory

provisions of Title II of the UMRA) for State, local, and tribal

governments or the private sector. Thus today's rule is not subject to

the requirements of sections 202 and 205 of the UMRA.

Paperwork Reduction Act

The collection of information requirements contained in this

regulation have been previously approved by the Office of Management

and Budget (OMB) under the provisions of 44 U.S.C. chapter 35 and have

been assigned OMB control number 0575-0029. This final rule does not

impose any new information collection requirements from those approved

by OMB.

Background

This regulatory package is an Agency initiative to enhance the

program by reducing the financial burden on small business borrowers of

obtaining annual audits of their financial statements. The existing

regulations require annual audited financial statements from all

borrowers, except those with loans that have been paid down to no more

than $100,000 and to no more than two-thirds of the original balance

and have

[[Page 18494]]

been current on repayments for at least 24 months. The cost of the

audits can often be the difference between a profit and a loss for the

year for small businesses. Many small businesses that need and want the

assistance of the B&I guaranteed loan decide not to apply because they

are unwilling to commit to the cost of an annual audit. Small

businesses that have obtained B&I guaranteed loans sometimes become

delinquent on the loans because the funds were spent on audits or

refuse to honor their agreement to provide the audits.

Discussion of Comments

On March 28, 1994, a proposed rule was published in the Federal

Register (59 FR 14371) to remove or allow the Agency to waive the

requirement for annual audits for all loans of $500,000 or less and for

loans that have been outstanding and have provided audits for three

years, have an unpaid balance not exceeding $1 million, and are current

on repayments. As proposed, all borrowers that did not provide audited

financial statements would be required to provide financial statements

compiled or reviewed by an independent certified public accountant or

licensed public accountant. Guaranteed loan borrowers subject to OMB

Circulars A-128 or A-133 would also have to comply with those

Circulars. Insured (direct) B&I loans are governed by the requirements

of 7 CFR 1942.

Eleven letters commenting on the proposed rule were received. Ten

strongly supported the concept of relaxing audit requirements. None of

the writers objected to the concept. Two writers recommended raising

the threshold for requiring audits in connection with new loans from

$500,000 to $1 million. Also, two writers recommended removing the

proposed requirement that existing borrowers with loans not exceeding

$1 million must provide audited statements for three years before an

exception to the audit requirements may be made. To deal with both of

these issues, the final rule provides for only one threshold for either

new or existing loans. The threshold for requiring audited statements

will be a total Agency guaranteed loan balance exceeding $1 million.

Two writers objected to the proposed requirement that audits be

performed in accordance with Generally Accepted Government Auditing

Standards (GAGAS) rather than Generally Accepted Accounting Principles

(GAAP). The Agency has determined that since most businesses already

use GAAP and there is no reason to require audits be done two different

ways, GAAP will be used. That requirement is changed in the final rule.

One writer recommended the language be revised to make it clear

that the monetary threshold is referring to the total principal plus

interest balance at year end. This suggestion has been adopted.

One writer objected to the use of the term ``quality'' in reference

to whether financial statements are audited, reviewed, or compiled. The

phrasing has been revised in the final rule to eliminate that word

usage.

One writer questioned how an individual borrower could be expected

to know when the Agency wanted audited or unaudited financial

statements in excess of the minimum requirements. We believe it is

sufficiently clear that the Agency will inform the lender and borrower

of the requirements being imposed for each loan. The final rule is not

different from the proposed rule in this regard.

One writer suggested the specific threshold for audits to be

performed under OMB Circulars A-128 and A-133 be removed because the

threshold set by OMB might change. This suggestion has been adopted.

List of Subjects in 7 CFR part 1980

Loan programs--Business, Rural areas, Rural development assistance.

Accordingly, chapter XVIII, title 7, Code of Federal Regulations is

amended as follows:

PART 1980--GENERAL

1. The authority citation for part 1980 continues to read as

follows:

Authority: 7 CFR 1989; 42 U.S.C. 1480; 5 U.S.C. 301; 7 CFR 2.23;

7 CFR 2.70

Subpart E--Business and Industrial Loan Program

2. Section 1980.445 is added to read as follows:

Sec. 1980.445 Periodic financial statements and audits.-

All borrowers will be required to submit periodic financial

statements to the lender. Lenders must forward copies of the financial

statements and the lender's analysis of the statements to the Agency.

(a) Audited financial statements. Except as provided in paragraphs

(d) and (e) of this section, all borrowers with a total principal and

interest loan balance for loans under this subpart, at the end of the

borrower's fiscal year of more than $1 million, must submit annual

audited financial statements. The audit must be performed in accordance

with generally accepted accounting principles (GAAP). In addition, the

audits are also to be performed in accordance with approriate Office of

Management and Budget (OMB) circulars and any Agency requirements

specified in this subpart.

(b) Unaudited financial statements. For borrowers with a loan

balance (principal plus interest at year-end) of $1 million or less,

the Agency will require annual financial statements which may be

statements compiled or reviewed by an accountant qualified in

accordance with the publication ``Standards for Audit of Governmental

Organizations, Programs, Activities and Functions'' instead of audited

financial statements.

(c) Internal financial statements. The Agency may require

submission of financial statements prepared by the borrower at whatever

frequency is determined necessary to adequately monitor the loan.

Quarterly financial statements will be required on new business

enterprises or those needing close monitoring.

(d) Minimum requirements. This section sets out minimum

requirements for audited and unaudited financial statements to be

submitted to the Agency. If specific circumstances warrant, the Agency

may require audited financial statements or independent unaudited

financial statements in excess of the minimum requirements. For

example, loans that depend heavily on inventory and accounts receivable

for collateral will normally be audited, regardless of the size of the

loan. Nothing in this section shall be considered an impediment to the

lender requiring financial statements more frequently than required by

the Agency or requiring audited financial statements when the Agency

would accept unaudited financial statements.

(e) Public bodies and nonprofit corporations. Notwithstanding other

provisions of this section, any public body or nonprofit corporation

that receives a guarantee of a loan that meets the thresholds

established by OMB Circular A-128 or A-133 for coverage under such

circular, must provide an audit in accordance with the applicable OMB

Circular A-128 or A-133 for the fiscal year of the borrower in which

the Loan Note Guarantee is issued. If the loan is for development or

purchases made in a previous fiscal year through interim financing, an

audit, in accordance with the applicable circular, will also be

provided for the fiscal year in which the development or purchases

occurred. Any audit provided by a public body or nonprofit corporation

in

[[Page 18495]]

compliance with OMB Circular A-128 or A-133 will be considered adequate

to meet the requirements of this section for that year. OMB Circulars

are available from the Office of Management and Budget, EOP

Publications Office, 725 17th Street, NW., Room 2200, New Executive

Office Building, Washington, DC 20503.

3. Section 1980.451 is amended by revising paragraph (i)(13)

introductory text to read as follows:

Sec. 1980.451 Filing and processing applications.

* * * * *

(i)-* * *

(13) Proposed loan agreement. (See paragraph VII of Form FmHA 449-

35). Loan agreements between the borrower and lender will be required.

The final executed loan agreement must include the Agency requirements

as set forth in the Form FmHA 449-14 including the requirements for

periodic financial statements in accordance with Sec. 1980.445. The

loan agreement must also include, but is not limited to, the following:

* * * * *

Sec. 1980.454 [Amended]

4. Section 1980.454 is amended by removing and reserving

ADMINISTRATIVE A. 1.

Sec. 1980.469 [Amended]

5. Section 1980.469 is amended by removing and reserving

ADMINISTRATIVE c. 1.

Dated: January 30, 1996.

Jill L. Thompson,

Under Secretary, Rural Economic and Community Development.

[FR Doc. 96-10144 Filed 4-25-96; 8:45 am]

BILLING CODE 3410-32-P