5th anniversary of run on Northern Rock reminder of dangers of not managing risk effectively
14 Sep 2012
The Chartered Institute of Internal Auditors says that the 5th
anniversary of the run on Northern Rock is a reminder of the
importance to businesses of managing risks appropriately, supported
by a fully independent and effective internal audit function.
Five years ago on 14 September, the Bank of England provided
emergency support to Northern Rock, the news of which prompted the
run on the bank and the arrival of the credit crunch on the UK High
Street.
To avoid problems similar to those at Northern Rock, the institute says that internal audit in financial institutions needs:
- The remit and resources to evaluate the controls used to manage the risks posed by its business model
- The independence and objectivity to challenge the assumptions made by management with regard to the organisation's risks and business model
- The status and influence to have regular access to non-executive directors (NEDs) to express concerns and to ensure those concerns are listened to.
- A robust corporate governance environment, with a strong emphasis on challenging management decisions.
Internal auditors help organisations to manage all the major
risks facing them, including financial risks. They play a crucial
role in helping to prevent accounting and other corporate scandals
by supporting the organisation's board and management in
identifying and addressing risk management, internal control and
governance issues before they become a problem.
Dr Ian Peters, chief executive of the institute, says: "Internal
audit is central to good corporate governance, so it is absolutely
crucial for businesses to invest in getting internal audit
right."
"Internal audit has to have the authority and independence to
challenge management when necessary, and be able to report
regularly to the board and non-executive directors."
"It's recognised by regulators that, undertaken properly, internal
audit is central to the management of risks and effective corporate
governance. Shareholders are also increasingly demanding better
scrutiny of the management of risk and internal control to make
sure their investments are secure."
Key steps taken to avoid Northern Rock repeat
The institute says that important steps have been taken by the
industry since Northern Rock to boost the profile and influence of
internal audit within banks in order to help prevent a repeat of
the banking crisis.
In June 2012, the Basel Committee on Banking Supervision issued
new guidelines which called for greater authority, stature and
independence for internal audit in banks.
The committee set out an ambitious scope for banks' internal audit
teams. Amongst other responsibilities, the committee recommended
that internal audit should review capital resources, stress-testing
procedures, including the assumptions that lie behind them, and
systems for measuring and monitoring liquidity positions in
relation to a bank's risk profile, external environment, and
minimum regulatory requirements.
This week, the Chartered Institute of Internal Auditors set up a
committee to produce guidance to strengthen significantly how the
Institute of Internal Auditors' International Standards for best
practice internal audit are interpreted and applied in banks and
other financial institutions.
Alongside the institute, the committee brings together heads of
internal audit, audit committee chairs, risk managers and the
regulatory authorities.
The guidance is intended to place internal audit in a much more
influential role within the corporate governance framework of
systemically important financial institutions.
Dr Ian Peters says: "The initiative is hugely significant for the
financial services sector. Hopefully the guidance will help the
financial services sector avoid the pitfalls exposed at Northern
Rock."
ENDS
