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Internal Controls in Banking
Oak Tree Press, April 1997, Pages: 140
"The inspectors are in". These words have for decades struck fear into the hearts of even the most compliant bank managers and staff. What followed was a ritual dance of mutual distrust and, quite often, nit-picking on an heroic scale. Perhaps that style suited the command and control environment of what were simple banks - deposit-taking and lending were the core products, indeed very often the only products.
Today these same banks are financial service conglomerates, offering a wide range of services, some extremely complex and most increasingly regulated. At the same time, competition (and good business practice) means that within defined parameters more decisions are being taken closer to the customer, increasing the risk of fraud or error. Pay for performance has introduced yet another potentially incremental risk factor for financial institutions. Overall, an explosive cocktail for the financial institutions of the 1990s.
Fortunately for the depositor, the science (or is it an art?) of internal controls has not stood still. This book is a welcome addition to the knowledge base of those wanting to understand how state of the art internal controls operate. The various essays deal with all aspects of internal control, from a variety of perspectives but always with authority. Underlying all of them is the enormous change of attitude that has taken place in relation to internal controls - the role of audit and compliance functions as partners in the business, not snoops or enemies; the recognition that what gives an organisation adequacy of internal control rests not on the rule book, but essentially on the culture where people know instinctively what is right, are encouraged to express concerns on matters of internal control or risk and, above all, where everyone understands that a problem is to be shared, not uncovered by an audit.
Key Question Answered
Among the key issues raised in Internal Controls in Banking are:
- How best to manage the risks, and opportunities, associated with the increasing role of information technology in control systems.
- The development of the derivatives market and the need for appropriate control systems to manage the risks associated with it.
- The need to design control systems that are effective – without placing a costly and unnecessary burden on the banks
- The differences in ‘culture’ between the banker and the auditor – and the attitude of each to risk.
- The need for banks to develop ‘best practices’ in relation to internal controls across the financial sector to prevent the imposition of more stringent controls industry-wide.
- The relationship between restrictive internal controls and innovation in the increasingly competitive financial markets.
- The quest for a new corporate ethos, a ‘compliance culture’ which could be the most effective tool available in reducing fraud.
About the Contributors
Foreword, David Went
Introduction: Internal Controls in Banking RAY KINSELLA
1. Internal Control in the Computerised Banking Environment ANTHONY WALSH
2. Internal Controls: The EC Response to BCCI JOHN F. MOGG
3. The Bank of England and the Development of Internal Control Systems BRIAN QUINN
4. The Role of Group Audit GRAHAM LEESE
5. Financial Control Systems in the Northern Bank Group JOHN TRETHOWAN
6. Development of Organisational Risk Control Systems CYRIL BENNETT
7. The External Auditor/Reporting Accountant Perspective STEVE ALMOND
8. Internal Bank Controls: An Agenda for Dialogue RAY KINSELLA
Appendix 1 - Section 39 of the Capital Banking Act, 1987
Appendix 2 - Statements of Principles, Banking Act, 1987, The Banking Coordination (Second Council Directive) Regulations 1992