RBI ask banks to align internal audit function with global best practices

The RBI on Thursday asked banks to align their internal audit function with international best practices, like those issued by the Basel Committee on Banking Supervision (BCBS).

As per a 2002 guidance note, banks are required to put in place a risk based internal audit (RBIA) system as part of their internal control framework that relies on a well-defined policy for internal audit, functional independence with sufficient standing and authority within the bank, among others.

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RBI said while the guidance note lays out the basic approach for RBIA functions, banks are expected to re-orient their approach, in line with the evolving best practices, as a part of their overall Governance and Internal Control framework.

"Banks are encouraged to adopt the International Internal Audit standards, like those issued by the BCBS and the Institute of Internal Auditors (IIA)," it said in a circular.

To bring uniformity in approach followed by the banks, as also to align the expectations on internal audit function with the best practices, RBI has advised them certain norms on 'authority, stature and independence', 'competence', 'staff rotation', 'tenor for appointment of head of internal audit', 'reporting line' and 'remuneration'.

RBI further said the internal audit function should not be outsourced. However, where required, experts, including former employees, could be hired on contractual basis subject to the Audit Committee of the Board of Directors (ACB) being assured that such expertise does not exist within the audit function of the bank, it said.

It has also said banks must ensure and demonstrate through proper documentation that their RBIA framework captures all the significant criteria / principles suited for their organisational structure, the business model and the risks.