BCBS: The internal audit function in banks - consultative document

The internal audit function in banks - consultative document
The Basel Committee on Banking Supervision, December 2, 2011

The Basel Committee on Banking Supervision is issuing this revised supervisory guidance for assessing the effectiveness of the internal audit function in banks, which forms part of the Committee's ongoing efforts to address bank supervisory issues and enhance supervision through guidance that encourages sound practices within banks. The document replaces the 2001 document Internal audit in banks and the supervisor's relationship with auditors. It takes into account developments in supervisory practices and in banking organisations and incorporates lessons drawn from the recent financial crisis.

The document builds on the Committee's Principles for Enhancing Corporate Governance [http://www.bis.org/publ/bcbs176.htm] which require banks to have an internal audit function with sufficient authority, stature, independence, resources and access to the board of directors. Independent, competent and qualified internal auditors are vital to sound corporate governance.

As a strong internal control framework including an independent, effective internal audit function is part of sound corporate governance. Banking supervisors must be satisfied as to the effectiveness of a bank's internal audit function, that effective policies and practices are followed and that management takes appropriate corrective action in response to internal control weaknesses identified by internal auditors. An effective internal audit function provides vital assurance to a bank's board of directors and senior management (and bank supervisors) as to the quality of the bank's internal control system. In doing so, the function helps reduce the risk of loss and reputational damage to the bank.

The document is based on 20 principles, organised in three sections: A) Supervisory expectations relevant to the internal audit function, B) The relationship of the supervisory authority with the internal audit function, and C) Supervisory assessment of the internal audit function. This approach seeks to promote a strong internal audit function within banking organisations and addresses supervisory expectations for the internal audit function and the supervisory assessment of that function. It also encourages bank internal auditors to comply with and to contribute to the development of national and international professional standards, such as those issued by The Institute of Internal Auditors, and it promotes due consideration of prudential issues in the development of internal audit standards and practices. An annex to the consultative document details responsiblities of a bank's audit committee.

The Basel Committee welcomes comments on the proposed consultative document. Comments should be submitted by Friday 2 March 2012 by email to: baselcommittee@bis.org. Alternatively, comments may be sent by post to the Secretariat of the Basel Committee on Banking Supervision, Bank for International Settlements, CH-4002 Basel, Switzerland. All comments may be published on the Bank for International Settlements's website unless a commenter specifically requests confidential treatment.

You can download the PDF from here: http://www.bis.org/publ/bcbs210.htm


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Press release: Banks' internal audit function - consultative paper issued by the Basel Committee
December 2, 2011
http://www.bis.org/press/p111202.htm

The Basel Committee on Banking Supervision issued today a consultative paper on The internal audit function in banks.

The objective of the proposed guidance, which revises the Committee's 2001 document Internal Audit in Banks and the Supervisor's Relationship with Auditors, is to help supervisors assess the effectiveness of a bank's internal audit function. The guidance reflects developments in supervisory and banking practices and incorporates lessons drawn from the financial crisis.

The proposed guidance is built around a set of principles that seek to promote a strong internal audit function within banks. The principles cover supervisory expectations related to the internal audit function as well as the supervisory assessment of that function. The principles also review the relationship between a supervisory authority and a bank's internal audit function.

The Basel Committee welcomes comments on the proposed consultative documents. Comments should be submitted by Friday, 2 March 2012 by email to: baselcommittee@bis.org. Alternatively, comments may be sent by post to the Secretariat of the Basel Committee on Banking Supervision, Bank for International Settlements, CH-4002 Basel, Switzerland. All comments may be published on the Bank for International Settlements's website unless a commenter specifically requests confidential treatment.

The Committee is now in the process of developing supervisory guidance on external audit. This guidance will build on existing Basel Committee guidance on this topic, including The relationship between bank supervisors and external auditors (2002) and External audit quality and banking supervision (2008). The Committee expects to publish a consultative version of its external audit guidance in 2012.