Leaders looking squarely to internal audit for the right risk culture

23 August 2017 Consultancy.uk

Executives and senior managers are increasingly looking to internal audit leaders to help their business develop the right risk culture. The trend is providing the internal audit function with a clear opportunity to play a transformative role in responding to the evolving needs of key stakeholders, particularly board members, who want assurance that the organisation is aware of and addressing all types of potential risk.

The global financial crisis a decade ago showed the world that maintaining a strong culture is an imperative for all major businesses – as well as an expectation by their stakeholders. According to Protiviti’s 13th edition of its annual ‘Internal Auditing Around the World’ report series, organisations are, in a bid to ensure they have the right risk culture in place, looking squarely to their internal audit functions to provide assurance on the matter and its effectiveness. 

Leadership is looking to the audit function to assess not only the tone and conduct at the top of the organisation, but also how and if those things are reflected throughout the business. They want to know if the company’s core values and strategic vision are understood and actively practiced by employees. 

“Culture is complex and different within every organisation and remains largely abstract,” said Brian Christensen, an Executive Vice President at Protiviti. “However, even though a company’s culture may be abstract, one thing is clear from an internal audit perspective: developing the right approach for auditing an organisation’s risk culture takes time and careful planning.” He added that fulfilling the mandate requires internal auditors to tread carefully and adhere to a well-structured approach. 

Leaders looking squarely to internal audit for the right risk culture

The consulting firm builds its view on proprietary research and dozens of years of experience in the field. Leveraging the findings, Christensen said that Protiviti learned that, across the board, executives agree that evaluating – or even resetting – processes for their audit teams can improve risk culture across the overall business enterprise. 

While executing their plans, internal audit leaders are taking great pains to formalise the auditing of company risk culture by creating and applying well-structured methodologies, frameworks and processes. While some internal audit groups are going for a major transformation approach, others are taking more incremental steps toward formalising an approach to assessing and monitoring  risk culture. A large bank for instance recently modified its quarterly enterprise risk management dashboard to include a specific line for culture.

The report, which profiles detailed culture cases at 15 large organisations, including the likes of Deutsche Bank, T-Mobile, Abu-Dhabi National Oil Company and Aegon, among others, further provides a range of tips about how internal audit leaders can advance their maturity by embedding cultural facets into their operations.

The report, which profiles detailed culture cases at 15 large organisations, including the likes of Deutsche Bank, T-Mobile, Abu-Dhabi National Oil Company and Aegon, among others, further provides a range of tips how internal audit leaders can advance their maturity by embedding cultural facets into their operations.

“As the objective eye of the organisation, the internal audit function is uniquely qualified to bring a systemic, disciplined approach to a potentially subjective process,” concluded Christensen.

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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.