Internal control aligned with strategy and business requirements

15 December 2016 Consultancy.uk

RGP has over the years developed extensive experience in internal control, serving clients across industries from strategy through implementation.

Internal control is a process for assuring achievement of an organisation's objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies. In broad terms, internal control involves all activities that are geared at controlling risks to an organisation.

Based on RGP’s experience from multiple projects in the field, the international consulting firm (RGP has over 3,200 professionals in 60+ offices globally) has identified a range of challenges which internal control teams typically face:

  • More about documentation than control
  • Poor automated oversight
  • Insufficient business alignment
  • Insufficient team resources
  • Lack of responsibility/accountability
  • Insufficient training/support
  • Internal control acting as internal audit
  • Lack of business commitment
  • Acts to serve as an external audit only
  • Too complicated

Internal Control

Integration

Internal control is one of the pillars of the finance function, alongside responsibilities for business support, financial reporting and transaction processing, among others. One of the major pitfalls in internal control is, according to RGP’s view, a lack of consistency of internal control measures, and a misalignment between strategy with objectives and business requirements. This down the line causes inefficiency and ineffectiveness in realising objectives on both control side as business side. 

In the ideal approach, internal control starts with defining the overarching contours, derived from the business strategy and related value drivers. Transaction processing and related financial reporting outcomes serve as a requirement to fulfill value creation, effective business operations, reliable and timely financial reporting and compliance. Once implemented, ensuring alignment between internal control with business processes, as well as other financial aspects within the landscape, is key factor to accomplish an effective operation.

An overview of four testimonials (+ key achievements) from RGP’s internal control track record:

Internal Control Track Record

Internal Control Framework Implementation

RGP’s team of consultants helped a corporate with the setup of internal control, in line with a redesigned strategy and an accompanying ERP roll out. RGP:

  • Managed the full business process redesign during the ERP implementation;
  • Ensured the Control Framework was aligned to business processes;
  • Supported the setup of ITGC;
  • Provided training and post-go live support.

Process Design System roll out

RGP supported an international corporate with the integrated setup of different compliance area’s referring to ISO9001/18001, Customs AEO, SOx. RGP:

  • Implemented an integrated process framework serving for all compliance area’s;
  • Trained staff on serving as process coordinator for relevant compliance area;
  • Delivered and implemented an automated and fully integrated process tooling;
  • Implemented audit software including workflow to business representatives. 

Business requirements redesign

RGP advised a manufacturing firm with managing the setup of internal control, in line with a redesigned strategy and an accompanying ERP roll out. RGP supported:

  • Alignment of business processes (OTC, PTP, LOG/MFG, Finance);
  • Standardisation of risk and control framework;
  • Optimisation of roles in framework for meeting SOD requirements;
  • Development of automated controls (where possible) in ERP application;
  • Redesign of compensating controls/manual controls;
  • Collaborated through a shoulder to shoulder approach with the client.

PTP & OTC authorisation automation

A multinational manufacturing company with EMEA presence in 15 countries faced issues in efficiency and effectiveness of sales/procurement authorisation. RGP:

  • Supported client with managing differences between the countries referring to level of automation, processes and organisation size;
  • Planned and designed an approach to standardise and align processes;
  • Acted as linking pin between business and technical IT staff;
  • Explained and trained local staff in system solution and process implications.
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An 8-step framework for banks to prepare for FRTB changes

02 April 2019 Consultancy.uk

With FRTB expected to come into force in 2022, it is critical that banks implementing necessary changes remain on track for their compliance timelines. Whether a company is aiming for the mandatory Standardised Approach (SA) or the voluntary Internal Models Approach (IMA), the programs often represent a significant investment, requiring process, systems and cultural change. 

Drawing from its experience in helping banks meet the milestone set in their compliance timelines, Capco – a management and technology consultancy for the financial services industry – has developed an eight-point prioritisation framework for FRTB preparation and implementation. Natasha Leigh Giles, a Managing Principal at the consultancy, outlines the main dimensions of the framework: 

Prioritisation framework for FRTB

1. Front office operating model

For those who have already implemented the Volcker rule, the desks are well defined with monitoring and governance frameworks. However, for companies that have not been required to adhere to the U.S. regulation, there may be additional work involved in implementing desk-level controls as required under FRTB. The trading desk structure is especially important for banks planning to implement IMA, as this regime is applied at the desk level and requires that the full flow of the selected desk is able to pass the IMA requirements (including the modelability test for the risk factors). Key business decisions may be required if a desk trades complex products that are more aligned for SA treatment. 

2. Product scope

In order to reach the IMA status, products are required to be supported with additional data sets including historical market and reference data as well as risk factor pricing evidence. The opportunity for 2019 lies in refining the assessment on the feasibility of each product type to ensure a clear scope is agreed for the IMA environment. If the challenges are too complex or costly to overcome, such as access to historical market data, availability of price verification for the risk factors or significant enhancements to support computational capacities, then these products should be scoped out of the IMA program as soon as possible in order to save time and effort on continuing analysis. 

3. Client & trading activities

There is no need to wait until the FRTB implementation timeframe to undertake a holistic review of client and trading profitability – including the capital impacts. For example, running training and awareness campaigns within the front office can help the traders to understand the impacts of their activities and encourage changes in the way that they trade. By considering this holistically as a business and operational change, it can help keep the focus and resources on the primary (profitable) business in preparation for the compliance deadline. 

4. Internal controls

Methodology, reporting, auditability, and process governance for internal controls also need to be monitored in detail. We recommend having clearly defined processes accompanied by effective training across front-to-back office. For some banks, it will be beneficial to audit existing capital adequacy processes to ensure that findings are highlighted in advance of the implementation timeline and the appropriate focus is achieved within senior management.

5. Data & metrics

Financial institutions need to consider their overarching governance and ongoing management for the data (including ownership, quality control, golden source storage solutions, etc.) and the ongoing control framework for ensuring the data remains accurate and relevant for capital adequacy modeling. If there has not been a data lineage exercise already applied, this is a great opportunity to deliver business benefit, even in 2019. By creating agreed definitions, preferred sources, ownership and workflows for managing data quality, the benefits of more accurate data can already be applied to existing capital calculation models. 

Framework for FRTB

6. Model management & validation framework

In preparation for the FRTB regime, an opportunity for 2019 is to understand if there are gaps or control concerns to manage immediately. Model enhancements across SA and IMA will need to be productionized for output accuracy and refinement, however, these need to be maintained alongside existing Basel 2.5 BAU models and other concurrent changes e.g. LIBOR Transition. Business process optimization, testing environments and automation tools, documentation and model validation can all be reviewed for immediate benefits and prepare the process for a smooth implementation of the future FRTB models. 

7. Technology platform & testing environments

With regards to technology planning, the opportunity in 2019 is focusing on gaining agreement of the front-to-back FRTB future state architecture including the use of vendors as applicable. By ensuring a disciplined focus upon design and solution definition across all requirements, it provides a clear baseline for implementation planning and scheduling. Establishing a technology architecture which allows for FRTB data feeds, model enhancements, control definitions and accurate capital calculation outputs will provide the program with essential data and metrics needed for decision making. 

8. Leverging synergies

Once a baseline plan has been established, it is possible to identify synergies across other programs – such as the SA-CCR (Standardized Approach for Counterparty Credit Risk) or the IMM (Internal Models Methodology) – that could deliver overlapping benefits at reduced effort. Understanding requirements, defining the future state architecture, and implementing the change in a complex environment requires a mix of strategic principles and program management. Therefore, we consider it an opportunity for 2019 to take a centralized approach for data lineage and requirements gathering as this would be beneficial for optimizing capital costs across both the market and credit risk environment.

Conclusion

By considering each topic strategically in 2019, benefits such as data quality enhancements, strengthened internal controls and flexible test environments will not only bring immediate business value, but also set a solid foundation for a comprehensive FRTB implementation in the years to come. 

For more information on Capco’s model and the its approach in helping banks plan for FRTB, download the full whitepaper on the firm’s website.