The Basel Committee on Banking is proposing that banks give their internal auditors more authority, stature and independence in order to help prevent a further banking crisis.
The Chartered Institute of Internal Auditors says that the new proposals, aimed at enhancing the corporate governance of banks, means internal auditors will have more power and responsibility to challenge the way banks are run.
Internal auditors are responsible for providing an independent and objective opinion to the company's board on how the organisation's risk management, governance and internal controls are working.
Under the proposals, internal auditors will, for example be expected to take a more active role in questioning the capital adequacy measures of a bank.
Explains Dr Ian Peters, Chief Executive of The Chartered Institute of Internal Auditors: "The new proposals make clear that internal auditors will not only have to review stress testing processes but should also question the reasonableness of the scenarios that management use and the assumptions underlying these."
"These proposals recognise the value of internal audit as a cornerstone of good governance and we welcome them."
"We are emphasising to the Basel Committee the benefits of a risk based approach, which allows internal auditors to focus on the risks they judge to be of greatest significance at any one time, over a more restrictive approach, where the regulator directs the focus of internal audit work. We want to ensure the balance is effective so that it produces the outcome that we all wish to see - better management of risks.
Consultation on the Basel Committee's proposals finishes on March 2nd. The proposals, when finalised will apply to all banks.
The Chartered Institute of Internal Auditors explain that this is the first major review by the Basel Committee of the internal audit function in banks since 2001.
Adds Dr Ian Peters: "The proposals recognise that internal auditors must be given an enhanced status and standing within the banking sector and can play a greater part in avoiding another banking crisis. The Basel consultation is addressing some of the issues that constrained the internal audit function in banks before the credit crunch."
"Regulators and politicians are demanding far higher standards of risk management and internal control within the financial services sector in order to rebuild consumer confidence and protect the public purse in the event of further bank failure. "The Basel Committee's proposals make it clear that the scope of internal audit's work must be as broad as possible, covering all areas of risks across the whole business of the bank."
"The Basel Committee on Banking Supervision has set out an important guide for banks on how to use internal auditors effectively. They also make it clear that if a bank has a strong internal audit function then this will be seen as a sign of good regulatory standards across that bank."
Internal auditors evaluate the management of risk across all areas of an organisation and report this directly and independently to the most senior level of management.
The Basel Committee is also proposing that internal auditors should have a much more regular and thorough dialogue with regulators over the management of risk at the banks at which they work. But the Chartered Institute of Internal Auditors is stressing the need for internal audit's relationship with the board, executive management and the regulator to be appropriately balanced so internal audit's independence is protected.
The Basel Committee on Banking Supervision is a committee of banking supervisory authorities including representatives of Central Banks and regulators such as the FSA.