Compliance andinternalaudit are two closely related but distinctfunctionsthat workcollaboratively tosupport a financial institution’s internal controls andrisk management.To fulfil their oversight role, board members should be familiar with the two functions’ roles and responsibilitiesand how they interactto support effective corporate governance.
For example,compliance professionals ask, “Are we followingrules andcontrols, as well asmeetingregulatoryrequirements?”whereasinternalauditasks, “Aretherules and controls effective,andare we managing risks effectively?”
Here’s a deeper look at the two functions’ similarities and differences:
Different Approacheswitha SimilarGoal
Compliance professionalsmonitorday-to-dayprocesses, procedures, and documentstodetermineif regulatory requirements arebeingmet.An effective compliancefunctionidentifies,sets,and adjustspolicies and procedures, resulting in fewer findings during a formal auditorregulatoryexamination.
Anindependentinternalaudit functionhas noinvolvementin developing or executing programsbutexaminestransactionsandactivity logsbased onrisktodetermineeffectivenessand/oraccuracy offinancial and non-financialprocessesandinternal controls. Examinations may includebusiness continuity plans, compliance programs, credit practices, IT and cybersecurity, financialreporting, and third-party risk management activities.
Internalaudit andcompliance should work together by collaborating closely to create a unified approach to risk management. When these two functions coordinate their efforts, they streamline processes, minimize redundant activities, and prevent organizational silos that could hinder effective data collection and risk tracking. This partnership helpsoptimizeresources, ensuring strong corporate governance, robust ethical standards, effective internal controls, and enhanced fraud prevention. Their joint efforts support a comprehensive compliance and risk oversight framework, making it easier toidentifyand address potential issues proactively.
Your Takeaway
The board plays a crucial role in risk management by providing oversight and strategic direction to ensure that risks are properlyidentified, assessed, and mitigated. Board membersare responsible forsettingthe organization’s risk appetite, reviewing risk management policies, andmonitoringthe effectiveness of internal controls and compliance programs. They collaborate closely with audit and compliance professionals, ensuring that critical issues are escalated and addressedby management, and that corrective actions are implementedin a timely manner.
To learn more about the dynamic relationship betweencompliance andinternalaudit, andtomaximize yourroleas a knowledgeable and engaged board member, contact your èƵ advisor orKristy Clark, CPA, CIA,at[email protected]or248.952.5000.