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:
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."