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ECB recommends good practices for banks’ internal audit functions

Financial Regulation Advisory

ECB recommends good practices for banks’ internal audit functions

The ECB has indicated that its Banking Supervision team will continue to assess banks’ progress in enhancing their internal audit function through peer benchmarking, sharing good practices and ongoing industry dialogue.

Wed 22 May 2024

4 min read

In its most recent Supervision Newsletter, the European Central Bank (ECB) published an article outlining examples of good practices in banks’ internal audit functions that it has observed during extensive reviews over the past few years.

The internal audit function performs a crucial role within a bank given its responsibility for independently evaluating the quality and effectiveness of a bank’s risk management, internal controls and governance processes, and providing objective assurance that the bank’s activities and functions comply with applicable legal and regulatory requirements. The ECB’s observations on good practices will provide banks with the opportunity to consider if enhancements to their respective internal audit functions are required to improve their effectiveness and efficiency.

The ECB expects EU banks to have in place robust and fully independent internal audit functions in line with the European Banking Authority’s Guidelines on internal governance. As the Guidelines apply not only to banks but also to investment firms that are subject to Title VII of CRD IV (Directive 2013/36/EU), the good practices outlined in the ECB’s article will also be relevant to these investment firms.

Examples of good practices in an internal audit function

The following examples of good practices fall within three key areas that drive an effective internal audit function: (1) the governance of the internal audit function; (2) the audit cycle, audit plan and resources; and (3) the stature of the internal audit function and follow-up on findings.

Governance

Audit cycle, audit plan and resources

Stature of the function and follow-up on internal audit findings

Additional opportunities for enhancement

The ECB’s article also outlines several shortcomings that were identified during the ECB’s review of banks’ internal audit functions falling within the same key areas as the good practice examples. Banks and investment firms now have the opportunity to assess if any of these are matters that need to be addressed within their organisation and take remedial steps where necessary.

The following shortcomings were identified by the ECB:

Governance

Audit cycle, audit plan and resources

Stature of the function and follow-up on internal audit findings

Conclusion

The ECB indicated that its Banking Supervision team will continue to assess banks’ progress in enhancing their internal audit function through peer benchmarking, sharing good practices and ongoing industry dialogue. The ECB’s forthcoming updated guide on governance and risk culture will further clarify supervisory expectations in this area – the ECB’s plans to publish an updated guide were referenced in a recent speech by Mr Anneli Tuominen, Member of the Supervisory Board of the ECB.

For further information in relation to this topic, please contact Dario Dagostino, Partner, Patrick Brandt, Partner, Mark Devane, Partner, Sarah Lee, Senior Knowledge Lawyer or any member of ALG's Financial Regulation Advisory team.  

Date published: 22 May 2024 

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