31 October 2019 Open with your browser  
 
 
[中文版]

Enhance Internal Controls with Automation

Written by: Mr. Jethro Chan – Risk Consultant

In recent years, regulations set by regulatory authorities are becoming stricter to cope with the increasing complexity of banking and financial industry. Financial institutions are required to comply with the relevant rules and regulations in order to prevent financial misstatements, mitigate fraud risk and safeguard against failure.

Penalties and other punishments may be imposed by the regulatory bodies for any failure to abide by the relevant rules and regulations, such as any market malpractice, misconduct, mistakes or non-compliance. In September 2019, Securities and Futures Commission (SFC) announced a HK$2.1 million fine on The Hongkong and Shanghai Banking Corporation Limited (HSBC) for its non-compliance with the telephone recording requirements under the Code of Conduct. The aforesaid disciplinary action stems from HSBC’s failure to set up or enable voice recording for some of the telephone lines in its Private Banking Division, making 5,830 client order instructions received through 59 affected telephone lines be not tape-recorded.

Polishing internal control procedures and systems to prevent misconduct or non-compliance has become one of the major concerns for all financial institutions. However, in a constantly growing financial institution, manual reconciliation processes may not suffice. At such, automated reconciliation may possibly be the solution for the financial institutions to ensure compliance with the internal control requirements while accommodating growth and meeting customers’ expectation.

How could automated process assist financial institutions?
Manual reconciliation is unlikely sufficient to meet the business demands for financial institutions, especially to large-scale financial institutions because of their large transaction volume. The large transaction volume may also rise by years and months when the size of business increases.

Common reconciliations include Ledger to sub-ledger accounts, cash, securities, debit/credit cards and Person-to-person (P2P) payments. Financial Institutions are required to handle all the above reconciliations, yet the reconciliation processes are unlikely to be accomplished with manual reconciliation because human errors easily exist as a result of the large volumes involved.

Automated processes therefore could overcome the weaknesses of manual control processes and assist financial institutions to complete the following tasks:

  • assess material misstatement risks;
  • identify where misstatements could arise in a transaction flow;
  • evaluate controls for the period-end financial reporting process;
  • obey laws, regulations and internal policies;
  • provide timely, accurate reporting in financial, operational and regulatory areas;
  • examine fraud risks;
  • safeguard assets; and
  • analyze and report on internal control effectiveness, including deficiencies or weaknesses

Automated processes help ensure compliance with corporate and regulatory controls and also provide a full audit trail for auditors. All in all this enhances the accuracy, efficiency and completeness of internal control process.

Fraud prevention and detection
According to Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse, the Association of Certified Fraud Examiners estimated that occupational fraud may cost organizations up to 5 percent of their annual revenues. This potential loss approaches $4 trillion annually worldwide.

Well established internal control policies and procedures help detect fraud through management review, account reconciliation and surveillance/monitoring and hence lower the potential impacts of fraud. Automated reconciliation offers controls which enable faster and more efficient detection.

Automated process would become a core application in the market
With the rapid development of the financial market, transactions and products of financial institutions are becoming more complicated. New areas for reconciliation could bring risks of mistakes, misstatements and abuse. Automated process helps accelerate the procedures and reinforces internal controls. Eventually, automation would become one of the major competitive edges for financial institutions.




Source:

Clodagh Swennumson (Sep 2019). Of process and progress: How automated reconciliation manages internal controls. BAI.



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