Basel Committee issues paper on internal audit in banks

28 August 2001

The Basel Committee on Banking Supervision is today issuing a best practice paper that highlights the important work of internal auditors in banking organisations and the need for cooperation between banking supervisors and banks' internal and external auditors.

The paper is built around 20 principles that address a broad range of issues relating to the internal audit function of banks, the supervisor's relationship with auditors and the duties of audit committees. It calls for an independent internal audit function with professional competence in all banks. The paper also underlines the board of directors' responsibilities in the areas of internal controls, risk measurement and compliance with laws and regulations.

William J McDonough, Chairman of the Basel Committee and President and Chief Executive Officer of the Federal Reserve Bank of New York, said: "I am pleased that the Committee is issuing a sound practice paper in this important area. A strong culture of internal and external audit is the foundation for ensuring the integrity of a bank's financial statements. Transparency and the investor confidence necessary for the efficient operation of financial markets and rational allocation of capital depend largely on the accuracy of published financial statements."

The role that internal auditors play in banks' internal capital adequacy assessments is also of interest to banking supervisors. Prof Arnold Schilder, Member of the Basel Committee, Chairman of its Task Force on Accounting Issues and Executive Director of the Netherlands Bank, stated: "We expect that the supervisory review of banks' risks and capital adequacy will play an important role in the new capital adequacy framework and believe that internal auditors will be able to provide important support in that review."

Prof Schilder also noted: "The establishment of clear guidance on the role of internal audit and the relationship between supervisors, internal auditors and external auditors will also strengthen internal controls in banks."

Some banks outsource different aspects of their internal audit process. The paper released today emphasises that even when outsourcing occurs, the board of directors and senior management remain ultimately responsible for the bank's system of internal control, including the internal audit function.

The paper, prepared by the Basel Committee's Task Force on Accounting Issues, was issued as a consultative document last year. It has now been finalised after consideration of the comments received.