Without a doubt, the LIBOR transition is disruptive and a challenge to the banking sector. The impacts of this change create a spider web of altered processes, new roles and responsibilities, policy adjustments, and the list goes on. With each change that’s made, the butterfly effect is triggered and the opportunity for new and increased risks presents itself. While the rest of the bank is working on re-shaping the norm to fit into the impending LIBOR-less world, it’s as critical as ever—nay, I daresay more critical—to keep watchful eyes on risk. One pair of those eyes, of course, is that of Internal Audit (IA).
Internal Audit’s role in the LIBOR transition
Internal Audit should play a strong supporting role for: navigating risks to the organization from the LIBOR transition; moving towards a new benchmark rate by the 2021 deadline; and influencing management to adopt appropriate policies, procedures and effective controls across the processes and technology impacted by the LIBOR transition.1 This approach requires assessing risk by engaging in the risk assessment and LIBOR transition process from the beginning, to evaluate if an appropriate LIBOR transition plan is established. It also includes influencing executives and non-executives early to accept accountability and ownership regarding potential risks. Aligning risk requires collaboration with second line control functions on key risks related to the LIBOR transition, governance structures and control activities to mitigate risk exposure.2
To evaluate management’s transition approach, assess risk and align risk with other second line functions, Internal Audit needs to enhance its governance and execution capabilities and establish an Internal Audit strategy that aligns with the Institute of Internal Auditors (IIA) guidance. Key drivers in this endeavor include a cross-functional Internal Audit strategy, governance and execution.
Cross-functional Internal Audit strategy
The following components are included in a cross-functional Internal Audit strategy:
- Program governance review: Assess, from a governance perspective, the risk and governance framework, accountability, and ownership and organizational structure. Additionally assess, from a process lens, the alignment of the LIBOR Transition Plan with regulatory guidelines and industry “best practices,” define milestones and establish targeted communications. Identification of relevant LIBOR referenced products, “fallback language” codicils, and clients and transactions impacted should also be included in the review.
- Review and assess: Provide an independent perspective regarding management’s progress with new line of business processes, procedures and controls, client outreach and bilateral contract negotiations. Additionally, IA should monitor contract remediation, litigation risk tracking, infrastructure design, valuation risk model calibration, and tracking of progress and deliverables across transition workstreams (e.g., new product launches, trading strategies).
- Post-implementation Internal Audit and monitoring: Review and verify implementation of the LIBOR transition in accordance with the defined plan, regulatory requirements and transition of the risk and governance framework into business as usual (BAU). This could include: analysis of metrics such as limit breaches and complaints received to assess the effectiveness of the BAU process; continued legal and compliance monitoring controls; continued regulatory horizon scanning; and monitoring of discontinuation risks, such as monitoring controls over performance of new models. Check whether lessons learned have been appropriately captured and used to enhance the governance and risk framework.
People: Perform a skills assessment to assess existing capabilities and identify areas where additional expertise, resources and training are needed. Develop a plan to address gaps identified and update the training program.
Policies and procedures: Update Internal Audit policies and procedures to capture methodology for Internal Audit activities related to the LIBOR transition including: any governance audits, real-time review and challenge of changes to processes and controls, and post-implementation review. Also consider updates to reporting standards based on LIBOR audit activities.
Risk assessment: Dynamically update risk assessment results to reflect impacts throughout LIBOR implementation, continuously update the annual plan to reflect changes in the risk and control environment, and update individual audit scopes based on ongoing changes to risk assessment and the annual plan.
Internal Audit testing underway: Leverage subject matter expertise (e.g., LIBOR regulatory compliance, risk management, finance, technology) to update individual audit testing plans for LIBOR related changes to processes and controls. Perform testing of updated LIBOR controls using a risk-based approach, leveraging agile automated test scripts to increase the level of assurance and efficiency across new or changed LIBOR processes.
Reporting: For audit committee and senior executive team reporting, report Internal Audit’s view of transition status and the effectiveness of the LIBOR transition program to mitigate risks including any deficiencies identified. Also monitor external engagement strategy (i.e., regulators).
Early on, key foundational activities are necessary to permit effective Internal Audit coverage of LIBOR transition risks to highlight critical improvements throughout the transition.
Skills assessment and resource needs: It is necessary to assess existing resource and skill capabilities to allow downstream audit activities. Defining an assessment framework and required LIBOR specific skills is a critical first step.
Training: Training can allow firms to fill skill gaps by up-skilling existing resources to execute LIBOR audit activities. Initially, Internal Audit departments should assess if training capabilities exist in-house or if leveraging external resources could provide a more efficient approach to comprehensive program delivery. To inquire about Accenture’s LIBOR Internal Audit training materials, please reach out to me.
Firm status project plan: The development of the Internal Audit plan and timeline should be informed by the status of the firm’s LIBOR transition activities. As a first step, set up a cadence with management to understand their evolving timeline/project plan and establish an audit dashboard based on management’s project plan.
LIBOR Internal Audit strategy: Early participation in firm committee meetings and liaising with management is critical to understanding the firm’s LIBOR strategy and timeline. This can help inform resourcing needs for cross-functional execution and development of an enterprise-wide plan for Internal Audit coverage.
Dashboard reporting: Effective reporting is essential to provide transparency into Internal Audit’s activities and view of management’s status to facilitate improvements throughout the LIBOR transition. Start by liaising with other second line functions to understand reporting already in place.
Every financial institution in the world is working to mitigate risks associated with the fast-approaching cessation of LIBOR. These activities span across enterprise-wide functions in financial institutions and have far reaching consequences. With this in mind, it’s essential for Internal Audit to be actively involved throughout the LIBOR transition.
Influencing management to adopt effective processes and controls to mitigate risks is paramount to Internal Audit’s role in the LIBOR transition. As a means to this end, Internal Audit should evaluate its governance and execution capabilities and establish an Internal Audit strategy that aligns with the IIA guidance.
Learn more about LIBOR and Internal Audit
- “Supplemental Policy Statement on the Internal Audit Function and Its Outsourcing,” Board of Governors of the Federal Reserve System, January 23, 2013. Access at: https://www.federalreserve.gov/supervisionreg/srletters/sr1301a1.pdf.
- “Goodbye LIBOR – what the end of the interbank lending rate means for you,” Chartered Institute of Internal Auditors. Access at: https://www.iia.org.uk/audit-risk-magazine/features/goodbye-libor-what-the-end-of-the-interbank-lending-rate-means-for-you/.
Newsletter Author: Erin Nunes
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