Now is the Right Time to Strengthen Internal Audit and Implement International Standards in Banks

27.11.2023 | 12:04 Home / News / Articles /
Ara Chalabyan

Ara Chalabyan teaches finance, managerial accounting, and audit at the American University of Armenia (2018 teaching excellence award), is an expert at the International Monetary Fund on Internal Audit Assessments,  has 22 years of experience in various positions in the banking system, of which 19 years at the Central Bank of Armenia, where he was the Chief Audit Executive from 2010 to 2020, and Director of Corporate Services and Development from 2020 to 2022. From 2013 to 2021, he has been the first president of the Institute of Internal Auditors of Armenia remaining on the Board afterwards. He is a member of the Association of Chartered Certified Accountants (ACCA), the Institute of Internal Auditors (IIA) and the Information Systems Audit and Control Association (ISACA) and is a qualified accountant (ACCA), Certified Internal Auditor (CIA – with top 9th result in 2014 out of 10,000) and certified risk management specialist (CRMA, CRISC). He published articles in banks.am, “Internal Auditor” (outstanding contributor award 2018), and “Внутренний Аудитор” magazines.

On November 22, Armenia celebrated the 30th anniversary of the Armenian dram and the day of a bank employee. In 30 years, the banking system has made significant progress, including a substantial increase in transactions and financial intermediation (more than 5 trillion drams in deposits, more than 4.5 trillion drams in loans, approximately 8.5 trillion drams in total assets), and increased profitability in the last two years (22% Return on Equity in 2022).

Banks are known for their financial transparency, pleasant business environments, and certain practices of corporate governance (Boards, External and Internal Audit, etc.). In particular, annual financial statements of banks are audited by companies from big 10 international networks, they are published on their websites along with other information related to corporate governance.

There are 18 commercial banks in Armenia, no bankruptcy has happened in more than 20 years, although several financial crises have occurred in the world and in the region. The stability of the banking system has been ensured, including through the strict regulation and supervision by the Central Bank.

In recent years, this situation is changing due to a number of reasons - banks have grown significantly, outside the financial system, particularly in the IT industry there are now many competitive jobs, while the Central Bank's capacity has not grown accordingly. This has led to a situation when the best talent is transitioning to commercial banks and a broader financial sector or IT industry. On the other hand, banks have actively begun applying IT systems, which adds additional complexity for the supervision.

In this situation, the Central Bank may strengthen the requirements on corporate governance and shift the emphasis on self-governance of banks. In particular, it refers to appointing independent and experienced board members in banks and the strengthening of the Internal Audit Functions. Banks already apply International Financial Reporting Standards (IFRS), and the external audit companies use the International Standards on Auditing (ISA). However, the internal audit, which has been required in banks since 2005, does not follow international (there are no local) standards (IPPF). Currently, it is the right time to introduce this requirement, considering that banks have grown and the risks with it.

The implementation of international internal audit standards in banks will raise the role of the internal auditors, who today quite often fulfil very technical tasks, in a few essential ways:

1.    Banks will start engaging independent and experienced board members to create independent audit committees,

2.    Banks will encourage their internal auditors to obtain international qualifications (CIA), like accountants and external auditors (ACCA),

3.    Banks' internal audit functions will be evaluated every 5 years by independent qualified assessors, which means that the independence from the executive body and the level of professional qualification of auditors and, most importantly, the depth of risks and problems identified will also be evaluated.

The Central Bank and the Union of Banker can initiate this process with the assistance of the Institute of Internal Auditors. Back in 2012, the Basel Committee on Banking Supervision has published its principles on “Internal Audit in Banks” based on international internal audit standards, and the Institute of Internal Auditors of the United Kingdom, together with representatives of the financial sector, has developed “Internal Audit Financial Services Code of Practice” based on the same standards.

It should be noted that the idea of international internal audit standards in Armenia is not new; the Central Bank has initiated its first independent assessment back in 2007, later successfully passing these assessments every five years. 10 years ago, with the “Law on Internal Audit” the requirement of international internal audit standards for the public sector was introduced (although not implemented in essence). We also have a few banks that voluntarily implemented the standards or have begun to consider the implementation.

To summarize, it is now the right time to start implementing international internal audit standards in banks following the best practice. Usually, internal audit requirements for banks in other countries (US, UK, EU) are tightened when crises cause bank bankruptcies. I believe preventive measures are more desirable, given the social consequences and publicity when the serious problems arise.
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