WASHINGTON - The Basel Committee on Banking Supervision issued a set of best practices Tuesday for banks' internal audit departments, outlining the departments' roles at their own companies and their dealings with bank regulators.

The 19-page paper, prepared by the Basel Committee's task force on accounting issues, gives 20 principles on which the committee says an audit program should be constructed. In an accompanying news release, the Basel Committee said that good internal audit programs will be vital to banks' implementation of upcoming changes in international bank capital rules.

Arnold Schilder, an executive director at the Dutch central bank and the task force's chairman, said in the release: "We expect that the supervisory review of banks' risks and capital adequacy will play an important role in the new capital adequacy framework and believe that internal auditors will be able to provide important support in that review."

William J. McDonough, the president of the Federal Reserve Bank of New York President and chairman of the Basel Committee, discussed benefits beyond capital allocation.

"A strong culture of internal and external audit is the foundation for ensuring the integrity of a bank's financial statements," he said in the news release. "Transparency and the investor confidence necessary for the efficient operation of financial markets and rational allocation of capital depend largely on the accuracy of published financial statements."

The paper defines internal audit programs as "an objective assurance and consulting activity" that "helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes."

A recurring theme in the paper is that a bank's board of directors is ultimately responsible for ensuring that enough resources are allocated for internal audits and for fixing any weaknesses in internal controls that the audits uncover.

The paper addresses how an internal audit department should be structured and how it should interact with bank regulators. It also establishes guidelines for banks that outsource their internal audits.

The full paper is available at the Basel Committee's Web site, www.bis.org.


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