“Banks will need to review their internal audit system”

How significantly has COVID-19 impacted internal audit functions in banks?

COVID-19 is a pandemic of unparalleled proportions causing enormous prejudice to the economy. While financial institutions have a key role in minimizing the consequences, Internal Audit Functions have to be active in this mission from within their institutions and it goes without saying that they are significantly impacted.

The impact is multifold and comprise amongst others working from home to protect staff members from contagion, reassessing audit priorities and redeploying resources, revising audit plans and fine-tuning audit scope where applicable.

A quick departure from established routines was required to focus on more contextually relevant matters. In any event, Internal Auditors have to be dynamic and agile.

Which items top the internal audit agenda during the confinement period?

First and foremost, Internal Auditors shall not miss this unique opportunity COVID-19 provides to closely monitor the execution of the Business Continuity Plan in the real practice. They also need to execute their advisory role to the fullest and remain available to assist any crisis committee in a timely and constructive manner.

The crisis has led to an increase in phishing, email scams, social engineering and fraud attempts worldwide. Internal Auditors must ensure there is more vigilance, fraud monitoring in place and customer awareness undertaken on security best practices.

It is implied that aspects of compliance with the modalities of the confinement such as obtaining a permit to travel for those designated to work onsite and meeting health and safety requirements within office premises will be on the internal audit agenda during this time.

Where should internal audits focus in future?

The world is facing extraordinary times that require extraordinary actions. Banks will be major players and inevitably their Internal Audit Functions have to adapt and evolve. Internal Audit resources will continue to be used in a risk based manner but certain areas will need more attention from Internal Auditors immediately after the sanitary crisis.

IFRS 9 and accounting for impairment of financial assets top the key focus areas. Local confinement measures together with global repercussions hitting Mauritius will significantly impact Tourism, Textile Real Estate and Aviation resulting in major impairments for clients operating in these sectors. Moreover, IFRS 9 does not provide a mechanistic approach in accounting for expected credit losses and to reflect the current environment, changes are anticipated to the loss estimation methodology resulting in more judgement having to be used.

Secondly, the pandemic resulted in greater use of digital means for payments as opposed to cash. Working from home has worked well for many bank employees and this set-up may be retained to some extent post crisis. Internal auditors need to upskill to review more technology oriented models and structures, the more so with rising unemployment fraud attempts by hackers are likely to increase.

Thirdly, the impact of monetary and fiscal policies will need to be closely monitored by Internal Auditors as major reforms are anticipated in the country to achieve certain macro-economic objectives. For example, the Monetary Policy Committee of the Bank of Mauritius reduced the Key Repo Rate by 100 basis points, from 2.85 per cent to 1.85 per cent per annum on 16th April 2020. Such measures may impact in a pertinent manner certain line items in the financial statements of banks. Moreover, the economic conditions post CVID-19 with reduced exports may lead to a shortage of FOREX in the Mauritian banking circuits calling for certain banks to revise their operating models.

Fourthly, there were recent downward movements in commodity prices and global stock markets including S&P 500, Dow Jones, FTSE 100.  Due to uncertainty, investors react emotionally and become more risk-averse. There will be an increased demand for products where capital is protected or a switch to low equity balanced funds and banks shall cater for the revised needs of customers, both immediate and in the longer run. As part of strategic reviews, Internal Auditors should determine whether the new trends are factored in and whether banks are exploring new opportunities or markets.

Last but not least, there will be changes to legislation and regulations. As an example, the Mauritian Government has announced that a bill is being drafted to ease the lockdown. Regulators may also bring changes to prudential norms and these factors will automatically impact the work of Internal Auditors including the approach used for specific audit missions.

To conclude, though we expect a hard hit economy, the full impact of COVID remains uncertain. Therefore, all stakeholders including Internal Auditors should remain mindful that new factors will crop up eventually. It is paramount to have an internal audit leadership which is pragmatic during the crisis without disregarding its primary functions which are ensuring that the organization’s objectives are achieved and safeguarding sound governance practices.