Introduction: In Non-Banking Financial Companies (NBFCs), Internal Auditors (IAs) hold a pivotal role in ensuring robust internal control mechanisms, corporate governance, and risk management. With regulatory changes and evolving financial landscapes, the responsibilities of internal auditors have transformed significantly. This article delves into the traditional role of internal auditors, their evolving responsibilities in NBFCs, recent regulatory changes, and the overall evolution of their role over time.
Background:
In NBFCs Internal Auditor are essential and play crucial role to ensure the effectiveness the company’s internal control mechanism, account processing and corporate governance Auditors are responsible to evaluating the risk management and governance systems and process, which are integral to sound corporate governance.
In India, the Reserve Bank of India (RBI) has made it mandatory to form a Risk-Based Internal Audit (RBIA) system for NBFCs and UCBs (Urban Cooperative Banks) so that the internal audit function aligns with the dynamic financial landscape and the risks faced by these entities. The RBIA policy should be formulated with the approval of the Board and disseminated widely within the organization, clearly documenting the purpose, authority, and responsibility of the internal audit activity.
1) Traditional Role of Internal Auditors in Risk Management?
1) Adherence to Standards – Earlier, internal auditors main focus was on ensuring compliance with the industry standards along with assessing financial records and evaluating the effectiveness of risk mitigation strategies.
2) Risk Assessment – They have played a vital role in identifying potential risks and providing recommendation to strengthen the internal control
3) Collaboration and Reporting – Internal auditors have been responsible for collaborating with management to report findings and ensure necessary corrective actions are taken.
2) What is the Role of Internal Auditors in NBFC’s.
IA in NBFCs play a very crucial role ensuring the effectiveness of internal control mechanisms along with corporate governance, and account processing and are also responsible for evaluating risk management and governance systems, which are also essential for sound corporate governance and are considered the 3rd line of defense.
It involves such steps that helps in determining the type of work the company does, evaluation of the internal control system and checking compliance with norms, also classifying frauds. Internal audits in NBFCs are not made mandate by law, they are crucial for identifying problems within the company’s operations, and help improving governance, control processes, and risk management. Internal audits also help companies to avoid penalties that might be imposed due to lack of Controls.
3) What are the recent regulatory changes in Internal Audit policies for NBFC:
The recent regulatory changes in Internal Audit policies fir NBFC’s is mainly focused on enhancing the Risk Management, Governance and Operational efficiency withing Financial Entities. Some key changes in some areas are:
- Risk-Based Internal Audit (RBIA): The Reserve Bank of India (RBI) made it mandatory to implement the RBIA system for selection of NBFCs with asset size and above. This requirement of this directive is that internal auditors undertake risk assessment and plan their audits in alignment with guidance of RBI and emphasizing the importance of risk management within NBFC’s.
- Audit Frequency: Internal Audits in NBFCs are conducted yearly to identify problems in their functioning whole improving their efficiency, and ensure that business assets are secured adequately. The audit plan is prepared at the start of the year by the Head of the Audit Department and then approved by the Audit Committee, with activities audited at least once a year based on risk perception.
- Compliance and Governance: Internal audits ensure compliance with regulatory requirements, reduce the risk of penalties, detect fraudulent activities, and improve governance within NBFCs. Statutory audits complement internal audits by ensuring accuracy in financial statements and compliance with laws
- Responsibilities: During the course of audit, the department or service under review must provide full cooperation to the Internal Audit Department. The auditee is required to provide all the necessary information even in surprise audits without prior notice.
- Review of Audit Policy: The Internal Audit policy must be reviewed every 3rd year by the Audit Committee to ensure the relevance and effectiveness in aligning with changing risks and governance requirements within NBFCs.
- Evolution of Internal Audit: The role of internal auditors in NBFCs has evolved significantly. Recent regulatory changes have empowered internal audit functions within select NBFCs through RBIA implementation.
- Collaboration Between Internal Auditors and Other Departments: Internal auditors collaborate with various departments to align risk management efforts and ensure comprehensive oversight. Effective communication with different departments enables auditors to gather relevant insights and align audit processes with organizational objectives.
4) How has the role of Internal Auditors evolved in NBFC’s over time
- A Historical Outlook : Earlier, internal auditors used to face challenges in finding material internal control lapses present within Corporate collapses in recent years highlighted the need for a more robust internal audit function to prevent such failures.
- Regulatory Changes: The Reserve Bank of India (RB I) has introduced measures that will help in enhancing the control functions within NBFCs, especially post-crisis events like ILFS. The RBI’s Risk-Based Internal Audit (RBIA) system made it mandatory to have risk assessment and audit planning for selected NBFCs with a certain asset size and above, to empower internal auditors and positioning them as integral parts of risk management.
- Increased Expectation with increase in Challenges and Opportunities: Internal auditors are expected to provide assurance for efficient internal control systems with risk management, and corporate governance. Upcoming future business landscape with digital innovations and complex operations will require internal auditors to assess organizational efficiency and provide recommendation for ongoing endeavors with the increase in complexion of business operations and the need for robust risk and control environments, internal auditors face both challenges and opportunities.
Conclusion:
The primary focus of regulatory changes in the internal audit policies for NBFCs is on strengthening the risk management practices by improving governance structures, and ensuring operational efficiency. The primary aim for such changes is to enhance compliance with regulations, detect fraud, and improve overall governance within NBFCs. The evolving role of internal auditors in NBFC risk management reflects a shift towards greater responsibility, increased expectations for providing assurance on various aspects of governance and risk management, and a need for alignment with regulatory mandates like RBIA to strengthen control environments within NBFCs. With increase in technologies there is also increase in techniques of mis-statement relating to compliance and governance which can be mitigated by help of implementing strong internal control with Diligence in Internal Audit.
Authors:
Umesh Vishwakarma | Director | Email: [email protected]
Yash R. Mishra | Associate Consultant I Email: [email protected]
Author Bio
