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Swiss MR 2011: Up-Skilling Internal Audit To Meet New Challenges

Contributed by Mark Love, Chief Internal Auditor – Barclays Bank (Suisse) SA

Five years ago the Barclays Bank (Suisse) SA Audit Committee started a process of reinvigoration, driven by two key catalysts. These were an internal drive by the Barclays Group to make its subsidiary audit committees more effective, which coincided with the issuance by the Swiss Banking Regulator on 27 September 2006 of the circular on Internal Control in Financial Institutions. The subsequent committee improvements were implemented against the backdrop of the 2008 Financial Crisis. Mark Love, Chief Internal Auditor of Barclays Bank (Suisse) SA examines how the Internal Audit staff of Barclays had to up-skill to meet these new challenges, and the resulting paybacks.

Looking back at how the Barclays Bank (Suisse) SA Audit Committee operates now versus five years previously, five key differences emerge from the Internal Audit perspective:
  1. Greater focus on Capital, Liquidity, Impairment and Valuations
  2. More insightful audit committee reporting
  3. Increased pressure on management (and Internal Audit) for an effective control environment
  4. Stronger relationships with Non Executive Directors (NEDs)
  5. Continual drive for audit efficiencies.

These themes are expanded below, together with their impact on Internal Audit resourcing requirements.

Firstly, the Audit Committee focus on the fundamentals of Capital, Liquidity, Impairment and Valuations has significantly increased, with these being regular agenda items. In particular, whilst Capital and Liquidity used to be accepted as important, but more of a “Group” issue, they are now closely watched with greater local understanding of their position and trend, and the impact to both the local entity and the Group. The Committee has also conscientiously recruited new non executive members with specific knowledge and experience in these subjects. This in turn means that Internal Audit staff participating at the Committee need to have a thorough understanding of these subjects, and where relevant, to be able to interpret their audit findings into the potential effects on Capital, Liquidity, Impairment and Valuations.

Secondly, the Audit Committee has become more demanding on both the information it requires, and how it expects it to be presented. This provides a challenge to Internal Audit to be thoughtful in presenting the information so as to provide a full picture of the control environment, whilst also assisting the Committee to interpret the forest of data to identify the key issues and get traction on them. Formal reporting needs to be insightful and debates normally now get introduced in a presentation style so Internal Audit staff have needed to improve their analysis and presentation skills. Incidentally, this has applied to all departments of the Bank as the committee now calls on departmental heads to present and account for their control environment on both a proactive basis, and as a reaction to any deteriorating control trends. Internal Audit has also increased its focus on Business Monitoring in order to be more forward looking in identifying emerging risks, not just to help shape the formal audit plan, but also to enable timely interventions with management and the Audit Committee where the impact of business developments on the control environment may not have been fully considered. This requires the Internal Audit staff to develop skills of forward looking business analysis to evaluate not just the control environment today, but to provide an insight on where the stress points might be developing tomorrow.

Thirdly, the identification and remediation of poor control environments has moved sharply up the agenda. That is not to say that poor controls were ever tolerated, but control issues now get greater scrutiny, and in particular, their remediation becomes an area of greater focus. This increases the pressure on Internal Audit to “get it right” when making assessments; to be timely in completing their work; to be able to clearly articulate the risk being run; and to withstand any pressures from middle management to “water down” the message. There is nothing new in these fundamental practices, but the stakes have been raised and Internal Audit staff have to be able to operate in a more pressurised environment than might have been the case five years previously. Within the businesses, the career consequences for a poor attitude to the control environment now transparently extends beyond a minor comment in a year end appraisal to bonus adjustments (positive and negative), promotion discussions and formal disciplinary decisions, including the possibility of dismissal. The “people decisions” that Internal Audit increasingly directly influence can be one of the hardest to rationalise, even when the actual decisions became clear.

Fourth, Audit Committee directors (the majority of whom must be independent non executive directors [NEDs] in a Swiss Bank) expect ongoing communication about activities. Directors no longer expect to simply turn up to a quarterly meeting. They want regular content heavy dialogue, briefings in advance of formal meetings, and insightful Management Information; and not just on their own legal entity but to understand the Group position and priorities as well. In turn, if a subsidiary Internal Auditor did not have this perspective before, then they certainly need it now. Additionally, Internal Audit is increasingly expected to be part of the induction and ongoing education of non executive directors. They may even be called upon to provide input at the recruitment stage, exposing Internal Audit to a new dimension in interviewing and people evaluation skills. Regarding NED training, Barclays Group provides regular educational conferences for their NEDs around the world, which are very well attended. These conferences are addressed by senior management, main board directors, external speakers and Internal Audit staff. This provides a further test of an Internal Auditor’s presentational skills, with speakers being subject matter experts – but can they present their message in a conference environment to an influential audience?

Fifth and final point is that the demand for Internal Audit services has continued to increase, not just for formal audits, but also for special investigations and insights from their business monitoring activity. However, Internal Audit is not immune from the harsh economic climate. Audit Committees demand value for money and efficient audit coverage is on their agenda. This means that Internal Audit has to be thoughtful about its “modus operandi” and continually challenge how it fulfils its mandate, safeguarding audit quality, but striving for operating effectiveness. This has driven deeper collaboration, both with their external audit partner, and with management assurance programmes. Whilst liaison with the external audit partner has long been a feature of Internal Audit, new internal “control partners” have sprung up over the last five years as Management teams have increasingly developed their own assurance programmes as a “second line of defence” against control breakdowns. Internal Audit need to evaluate their approach to placing reliance upon management assurance programmes. It might be more efficient to leverage a management assurance programme, or alternatively, to simply be aware of it but to directly test underlying controls to obtain an independent view of the control effectiveness (and what by inference this says about the management assurance programme’s effectiveness). Internal Audit will need to make reasoned judgements that they can justify, even in these circumstances where there may be no “right answer”.

In order to meet these challenges, Internal Audit had to up-skill both technically and hone auditors’ soft skills. Recruitment has also become more challenging as finding this combination of skill sets is not easy. The Barclays Group operates 24 subsidiary audit committees globally, and recognising these challenges has taken a number of initiatives specifically designed to support and develop their subsidiary audit committee facing staff. This has included developing specialized training modules on both technical and soft skills, which are delivered through a range of channels from e-learning to residential courses. Retired executives have been given a new lease of life too as professional role play actors to help practice internal audit meeting skills. This is backed up by regular telephonic and in person conferences to enable sharing of best practices, new ideas, and general mutual support. It is also an opportunity to develop those very important networking skills. Subsidiary Audit Committee reporting is driven off standardised templates which all affected staff have an input into their design. High and consistent standards are then maintained by a rigorous review process.

So what is the payback for Internal Audit? Certainly there have been greater demands over the last five years, but this has led to a more enriched role for those willing to rise to the challenge:
  • Internal Audit has stepped up to more visible role, not just at the Audit Committee, but with Management and Risk Committees as the views of Internal Audit have become more sought after. Whilst there has always been access to senior management, the interaction and visibility is now much greater;
  • The training and support for Audit staff has improved, especially with greater focus on the soft skills that facilitate Internal Audit making its voice heard in an effective way at the correct level in the organisation;
  • And finally, the career path for the Internal Auditor has opened up, as more skills effectively translate into more opportunities. Barclays Internal Audit globally places 15% of its staff year on year into the business, which is a hidden benefit to both the organisation and the individual.

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