Framework for the Evaluation of Internal Control Systems

As part of its on-going efforts to address bank supervisory issues and enhance supervision through guidance that encourages sound risk management practices, the Basle Committee on Banking Supervision 1 is issuing this draft framework for comment by bank supervisors and other interested parties. It is intended that this framework will be used by supervisors in evaluating banks' internal control systems. A system of effective internal controls is a critical component of bank management and a foundation for the safe and sound operation of banking organisations. A system of strong internal controls can help to ensure that the goals and objectives of a banking organisation will be met, that the bank will achieve long-term profitability targets, and maintain reliable financial and managerial reporting. Such a system can also help to ensure that the bank will comply with laws and regulations as well as policies, plans, internal rules and procedures, and decrease the risk of unexpected losses or damage to the bank's reputation. The paper describes the essential elements of a sound internal control system, drawing upon experience in member countries and principles established in earlier publications by the Committee. The objective of the paper is to outline a number of principles for use by supervisory authorities when evaluating banks' internal control systems.