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Workshop on Internal Audit of Financial Sector Supervisory and Regulatory Authorities

Partners for Financial Stability (PFS) Program Geoffrey Mazullo, Director www.ewmi.hu. Overview of Internal Audit Function in Financial Supervisory and Regulatory Authorities (Results of Questionnaire). Workshop on Internal Audit of Financial Sector Supervisory and Regulatory Authorities

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Workshop on Internal Audit of Financial Sector Supervisory and Regulatory Authorities

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  1. Partners for Financial Stability (PFS) Program Geoffrey Mazullo, Director www.ewmi.hu Overview of Internal Audit Function in Financial Supervisory and Regulatory Authorities(Results of Questionnaire) Workshop on Internal Audit of Financial Sector Supervisory and Regulatory Authorities Wednesday, June 30, 2004 Tallinn, Estonia

  2. Internal Audit in FSRAs - I Survey Universe – 66 FSRAs around the world • 53 (80%) of these 66 FSRAs have an Internal Audit (IA) function • 3 of 53 have an Audit Committee. Location of IA: • 24 of 53 have IA under the President/CEO • 12 of 53 have IA under the Management Board • 5 of 53 have IA under the Chairman • 4 of 53 have IA under the other Official • 3 of 55 have IA both under the Chairman and CEO • 2 of 53 have IA Under the Supervisory Board.

  3. Internal Audit in FSRAs - II • The other IAs were under: • Deputy Director General • Administrative Director • Head of Administrative Department • Head of Administrative-Budgeting Department. • 5 of 53 FSRAs have a structural unit with very similar tasks (2 have IT Auditing Units, 3 have Risk Management Units).

  4. Internal Audit in FSRAs - EU & US • There are 22 Financial Supervision and Regulatory Authorities in Europe and the US that have an Internal Audit function. Questionnaire Universe: • We sent a questionnaire and an invitations to this workshop to more than 30 FSRAs, primarily, but not exclusively, in Europe and the US. • We received answers from 10 FSRAs, including the Bank of Spain and the US Federal Reserve Board.

  5. Questionnaire Results - I We received completed questionnaires from (in alphabetical order by country): • Czech Securities Commission(Czech Republic) • Estonian Financial Supervision Authority • Financial Services Authority (UK) • Bundesanstalt für Finanzdienstleistungsaufsicht(Germany) • Hungarian Financial Supervision Authority (Hungary) • Commission de Surveillance du Secteur Financier(Luxemburg)

  6. Questionnaire Results - II • Netherlands Authority for the Financial Markets (The Netherlands) • Comision Nacional del Mercado de Valores (Spain) • Banco de España(Spain) • US Federal Reserve Board (USA) • US Securities and Exchange Commission (USA)

  7. About IA in FSRA - EU & US - I Staff Members: • 0 persons in 1 FSRA • 1 person in 2 FSRAs • 3 persons in 3 FSRAs • More persons in 4 FSRAs.

  8. About IA in FSRA - EU & US - II Audit: • 2 FSRAs have an Audit Committe • 8 FSRAs don’t have an Audit Committee • Not one FSRA has a structural unit, process, system or field of work out of the scope of IA, except one which does not audit the Office of Compliance Officer.

  9. Other tasks of IA Units IA units also carry out other tasks as follows: • Compliance - 1 FSRA • Prevention of Corruption - 1 FSRA • Governance - 4 FSRAs • Quality Assurance - 6 FSRAs • Risk Assessment - 7 FSRAs • Avoiding of Conflict of Interests - 8 FSRAs • Ethical Issues - 6 FSRAs.

  10. Most relevant strengths The most relevant strengths of the FSRAs that completed the questionnaires are: • Statutory basis, authorities, skills and responsibilities; • Independence; • Inclusion of internal audit and investigative functions in one office; • Dual reporting; • Coordination with similar offices. • and • Capacity to improve the governance and management of the FSRA.

  11. Most relevant risks - I The most relevant risks of the FSRAs that completed the questionnaires are: • One single auditor • Not properly fulfilling the set objectives • High degree of independence (For example, the IA unit can be perceived as antagonistic to management, rather than supportive of management) • Dual reporting role could lead some to question its loyalty to the FSRA • Very specific sector with high degree of IT processes and important information.

  12. Most relevant risks - II • Need to maintain current knowledge on all aspects of the FSRA’s primary mission areas • The correct understanding of Risk Based Auditing Approach • Political-economic environment • Lack of resources • Relatively high demand • “Examiners of professional judgement” can be difficult to audit.

  13. Fields of future cooperation The completed questionnaires request interest in future cooperation on the following areas: • Sharing experiences and knowledge - 10 of 10; • Methodology - 5 of 10; • Training – 4 of 10. • Other - 2 of 10.

  14. Regular Meetings The need to have a networc and co-opreation is evidentally clear, but there is no common understanding of the regularity and form of co-operation: • Face-to-face annual meetings – 5 of 10 • As often as needed - 2 of 10 • Tergeted workshops 2 of 10 • Face-to-face semi-annual meetings – 1 of 10 • Video conferences - 1 of 10 • Web-based conferences - 1 of 10 • Not specified – 2 of 10, Not yet clear – 2 of 10.

  15. Issues / Themes to Discuss - I • Whether or not to establish a formal group; the group’s objectives; how our cooperation might be structured; and how and when we should meet. • The similarities and differences between different internal audit offices of FSRAs. • Standards setting ( not general standards but the specifics ones for internal audit in the FSR A) – performance terms, evaluation of the added value of internal audit • Weaknesses and opportunities of the IA unit of the FSRA • Identifying main risks of FSRS’ activity. • Has EU explansion created any additional risks of FSRAs?

  16. Issues / Themes to Discuss - II • “Getting the Balance Right” - Where is the right line between overregulation and normal day-to-day work of control and compliance? (Internal Auditors, External Auditors and Compliance Officers versus Top and Middle Management) • What is the role of an internal auditor in the Quality Management Process? • What is the role of an internal auditor in the process of handling ethical issues? • What is the role of the internal auditor in governance issues?

  17. Issues / Themes to Discuss - III • Maintaining quality in a moving environment (laws and regulation, financial products, etc.) • To institute a culture of quality and of risk management and control in FSRAs. • Audit approaches to areas of common interest, specifically globalization of the financial/banking industries and requirements associated with the new Basel II Capital Accords • “We are facing a challenge with the harmonisation of financial market regulation, and that involves internal control too.” • Not specified themes.

  18. QuestionsOpinionsDiscussion? Thank you very much for your cooperation in this regional initiative. Please note that the workshop materials will be published on the audit page of the PFS Program website. The URL is: http://www.ewmi.hu/auditing.php

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