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The Basel Committee on Banking Supervision has issued a formal set of best practices highlighting the work of internal auditors in banking organizations.

The Basel Committee on Banking Supervision has issued a formal set of best practices highlighting the work of internal auditors in banking organizations, and the need for cooperation between banking supervisors and banks' internal and external auditors.

The best practices, which were issued last year in a consultative document, are built around 20 principles that address a broad range of issues relating to the internal audit function of banks, the supervisor's relationship with auditors and the duties of audit committees. They call for an independent internal audit function with professional competence in all banks. They also underline the board of directors' responsibilities in the areas of internal controls, risk measurement and compliance with laws and regulations.

William J. McDonough, chairman of the Basel Committee and president and chief executive officer of the Federal Reserve Bank of New York, said: "I am pleased that the Committee is issuing a sound practice paper in this important area. A strong culture of internal and external audit is the foundation for ensuring the integrity of a bank's financial statements. 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 role that internal auditors play in banks' internal capital adequacy assessments is also of interest to banking supervisors. Professor Arnold Schilder, member of the Basel Committee, chairman of its Task Force on Accounting Issues and executive director of the Netherlands Bank, stated: "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."

"The establishment of clear guidance on the role of internal audit and the relationship between supervisors, internal auditors and external auditors will also strengthen internal controls in banks," added Schilder.

Some banks outsource different aspects of their internal audit process. But even when outsourcing occurs, the board of directors and senior management remain ultimately responsible for the bank's system of internal control, including the internal audit function.

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