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they were engaged in (or about to be engaged in), and
the inherent risks associated with those transactions, are
considered to be contributory factors to the 2007/09
Financial Crisis.103

Regulators will be able to gain greater access to
vital information which is required for effective per-
formance of their functions where duties are imposed
on third parties, such as external auditors, in relation to
the disclosure of information which is necessary and
required for the efficient performance of the regulators’
activities—as opposed to a right to report.

The relationship between supervisory authorities
and the external auditors of a credit institution and the
duties of these auditors was identified as an important
lesson from the BCCI case.104 Because of auditors’
access to financial undertakings’ accounts and other
essential documents and information, they assume a vital
position in the overall supervisory process. An analysis
of BCCI revealed that measures, additional to those
already existing, needed to be taken to eliminate the
opaqueness of financial structures and strengthen coop-
eration between all bodies or persons involved in the
supervision of such complex financial structures.105

As a result, the Basel Committee for Banking
Supervision issued “minimum standards” which lay
down rules for effective consolidated supervision and
cooperation between supervisory authorities. This was
not only aimed at strengthening international co
operation between prudential supervisors, but also to
improve transparency of financial, and in particular,
group StrucUires.

D. The Importance of Effective Management
of Internal Controls

“Banks identified as having control problems have
been characterised by organisational Strucuires in which
responsibilities were not clearly defined: hence (1) No
senior management monitored the performance of
activities (carried out within the organisation) closely
to observe unusual activities (2) No senior management
had a comprehensive understanding of the activities and
how profits were being generated.”106

The collapse of Barings in 1995 which was attributed
not only to lack of quality and employee deception, also
brought the issue of internal controls and management
systems to the fore.107 Barings collapse illustrated weak-
nesses in the bank regulator Ssupervisory regime—which
included flaws within its evaluation of internal controls
at banks, flaws inherent in the internal communication
within levels of management of the bank regulator, and
the weaknesses in the way the bank regulator’s existing
rules were applied.108

The Basel Committee categorised into five groups,
types of control breakdowns which are characteristic of
ailing banks and these are as follows:109

Lack of adequate management oversight and account-
ability, and failure to develop a strong control culture
within the bank110

Inadequate recognition and assessment of the risk
of certain banking activities, whether on or off balance
sheet

The absence or failure of key control StrucUires
and activities such as segregation of duties, approvals,
verifications, reconciliations and reviews of operating
performance

Inadequate communication of information between
levels of management within the bank—particularly
the communication of information to higher ranked
officials (senior management)

Inadequate or ineffective audit pro-
grammes and monitoring activities

E. The Contribution of Corporate Governance
to an Effective System of Internal Controls

Various corporate collapses have resulted in changes to
financial reporting, corporate governance and audit.111
The emphasis on internal controls and risk manage-
ment emerged from realisation that due to change in
the business environment, even effective safeguards may
be insufficient to eliminate all possibilities of failure.112

Keasy and Wright define corporate governance
as the “examination of the Strucuires and processes
associated with production, decision making, control
and so on within an organisation.”113 The two aspects
of governance are considered to be i) Supervision
and monitoring of management performance (the
enterprise aspect) and ii) ensuring accountability of

Volume 30 ∙ Number 9 ∙ September 2011

Banking & Financial Services Policy Report ∙ 37



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