By Enoch AKUFFU-DJOBI (PhD)
\xa0 Banks are the lifeblood of any economy, managing vast sums of money, facilitating the transfer of funds between savers and borrowers, investment, and driving economic growth.
However, in recent times, numerous scandals, instances of fraud, and failures within the banking industries at both global and African levels have unveiled an unsettling reality. Internal audits frequently fall short of their intended effectiveness.
This brings up an essential query: Does the internal audit function at banks genuinely act as the independent, unbiased monitor it was intended to be, or has it turned into just another routine compliance task? The answer lies in how seriously banks invest in, empower, and act upon their internal audit systems.
What is the problem?
Banks can fail, just like other firms. But their failure can have broader ramifications—hurting customers, other banks, the community, and the market as a whole.
Client funds might be immobilized, lending partnerships could disintegrate, and financial institutions might choose not to extend further credit facilities that firms rely on for payroll or supplier payments. Furthermore, the collapse of a single banking entity has the potential to trigger a series of similar incidents across the sector.
The internal audit serves as an internal check within financial institutions—to oversee processes, evaluate risks, and guarantee adherence to regulations.
Nevertheless, various prominent banking scandals worldwide have highlighted major flaws in the efficacy and autonomy of internal audit departments.
From the Wells Fargo fake accounts scandal in the U.S. to Wirecard’s accounting fraud in Germany, Punjab National Bank’s SWIFT fraud in India, and Danske Bank’s money laundering case in Estonia, internal auditors either missed clear warning signs or lacked the authority and resources to act on them.
These setbacks have resulted in billions of dollars in financial losses and eroded confidence in the worldwide banking sector.
Frequent problems consist of insufficient independence, audit personnel lacking qualifications, restricted scope, understaffed audit teams, and an inability to address warning signs.
These examples illustrate that internal audits frequently function under limitations, which can impede their capacity to stop or uncover fraudulent activities.
In order to rebuild confidence and minimize the chance of subsequent scandals, it’s essential to reinforce the capabilities of internal auditing teams, enhance their autonomy, and guarantee they have access to necessary resources and jurisdiction to adequately monitor intricate banking activities.
Why Internal Audit Matters
A well-functioning internal audit department acts like an early alert mechanism. It uncovers vulnerabilities in risk management, internal control processes, and adherence to regulations before they escalate into major issues.
However, if the audit function is lacking in independence, resources, or enforcement, banks can become susceptible to fraud, regulatory violations, and harm to their reputation.
Case Study: Ghana — Cleaning Up the Banking Sector (2017–2019)
From 2017 to 2019, the Bank of Ghana rescinded the operating licenses of nine commercial banks along with numerous financial entities. One such bank was Capital Bank, which crumbled because of poor management and the inappropriate use of emergency funding. The inquiry found that internal auditing departments either did not identify or chose not to disclose irregular loans and illicit investment activities; alternatively, these issues were disregarded by senior leadership.
According to a 2020 report from the Bank of Ghana, internal auditors at numerous troubled banks often had limited independence, with their findings frequently being modified or disregarded entirely by bank management.
Several audit committees within the board structures remained dormant, thereby diminishing oversight even more. This extensive failure in auditing processes resulted in a loss exceeding GHS 21 billion from taxpayers' money allocated for recapitalization and recovery efforts.
Case Study: United States - Wells Fargo Fake Accounts Controversy
In the United States, the Wells Fargo scandal from 2016 highlights the severe consequences of an ineffective internal audit system. More than 3.5 million fake accounts were created by staff members aiming to achieve stringent sales goals.
Reportedly, internal auditors flagged concerns about these practices; however, senior management either dismissed or overlooked the warnings.
According to a report from the U.S. Office of the Comptroller of the Currency (OCC), Wells Fargo’s internal audit department was "insufficiently empowered and influential" to thwart or address wrongdoing within the company. This shortcoming resulted in significant financial penalties, extensive job cuts, and severe damage to their public image.
Frequent Flaws in InternalAudit Mechanisms
\xa0Lack of Independence:
At numerous banking institutions, internal auditors provide reports to senior management rather than directly to the board, which can result in potential conflicts of interest.
\xa0Under-Resourcing:
Frequently, audit teams do not have the necessary skilled staff or digital resources to identify complex fraudulent activities.
Ignored Recommendations:
Audit findings frequently go unaddressed or ignored altogether. In the absence of repercussions, these reports become ineffective.
\xa0Cultural and Ethical Challenges:
Fear of retaliation or pressure from top executives may silence auditors, especially in family-owned or politically connected banks.
What Should Change?
To prevent future collapses, banks must strengthen internal audit by:
- Ensuring independence: Auditors should report to the board’s audit committee, not the CEO.
- Investing in capacity: Competent, highly compensated auditors who have access to data analytics tools can identify problems at an early stage.
- Enforcing accountability: Members of the board and executives ought to be held accountable when they disregard warning signs from audits.
- Adopting a risk-based approach: The emphasis should be on critical areas such as credit approval, cybersecurity, and procurement.
- Regular external reviews: Regulators ought to require unbiased assessments of internal audit effectiveness.
Conclusion: Empower the Watchdogs
Regardless of whether you're in Ghana, the United States, or elsewhere, internal auditing serves as an essential safeguard against mismanagement and fraud. However, this function remains effective solely when auditors possess independence, authority, and respect within their organizations. Financial institutions should cease perceiving internal audits merely as a routine procedure and begin recognizing them as crucial instruments for ensuring sustained growth over time.
Without a robust internal audit, another bank failure might just be inevitable. if , but when .
Enoch holds credentials as a Chartered Accountant and Certified Banker and has a strong enthusiasm for fields such as accounting, banking, and corporate governance. With experience in teaching and practical application, he demonstrates dedication to research and disseminating information. You may contact him at enakuffu@gmail.com. Contact: +233244201383.
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