LONDON Feb 11 Internal auditors, slammed by
regulators for failing to spot how banks were rigging the Libor
benchmark, should report directly to the board and have enough
resources to do the job, a British industry body said on Monday.
Internal auditors are employed by companies but are not
directly regulated and have become discredited due to a string
of banking scandals.
The Chartered Institute of Internal Auditors' draft code,
written in consultation with the Bank of England and the
Financial Services Authority (FSA), goes out to public
consultation until mid-April.
Internal auditors should not be barred from assessing the
management of any risk and their scope should be unlimited, it
"The new code is an important contribution to strengthening
internal audit's role in improving the management of risk, in
response to the financial crisis and more recent examples of
failure to exercise proper control," said Roger Marshall.
Marshall helped to draft the code, specifically designed to
give guidance to the financial industry. He chairs the audit
committee at insurer Old Mutual.
Internal auditors assess if big risks in a company have been
properly identified, controlled and reported. This is separate
from the independent, external audit listed companies must have.
Andrew Bailey, executive director at the Bank of England
which sat in as an observer at meetings of the committee that
drafted the code, said the expectations of internal audit within
financial services firms have hitherto been set too low.
"The regulatory authorities expect firms to have robust
internal audit functions... I hope that this guidance will help
internal audit functions position themselves to achieve that,"
Last week, Royal Bank of Scotland was fined $612 million
pounds for rigging the London interbank offered rate or Libor
for several years under the nose of internal auditors.
In 2011 the bank's internal auditors told the FSA that
issues raised by a review of Libor setting were being addressed
and "adequate systems and controls" were in place, the FSA has
In December, the FSA fined Swiss bank UBS for similar
abuses, saying the "routine and widespread manipulation of
submissions was not detected by compliance, nor was it detected
by group internal audit, which undertook five audits of the
relevant business area".
U.S. regulators ordered JPMorgan to improve internal
auditing after its $6.2 billion loss in 2012 linked to its
"London Whale" trade that went wrong.
"To ensure its independence and authority, the primary
reporting line of internal audit should be to the chairman of
the board of directors, not to the chief executive," the code
Senior management could be tempted to block or slow down the
flow of any problematic findings to the board. Internal audit
should also be adequately resourced, the draft says.
Many of the changes to the existing code reflect new
guidance from the global Basel Committee on Banking Supervision
issued in June last year. Internal auditors say privately that
regulatory scrutiny will help strengthen their role and make
them more "relevant".