Role of branch auditors
In case of credit risk management, the underlying computation for Basel III is based on credit ratings, which may be driven centrally and passed onto branches such that branches follow head office instructions in its entirety. This way the bank branch auditors check only the computation process and test check the source rather than getting into the credit rating process. The branch auditors can assess any issues relating to completeness and correctness of the data which is used to compute the underlying risks emanating from credit market and operational risk. It is finally the pyramid approach whereby all the data from branches will get consolidated at head office. The statutory central auditors may choose to test check certain source data and also verify the basis considered at the head office.
It will not be practical to expect the branch to comprehensively understand the Basel III requirements in its entirety. The bank branch auditor should assess the sufficiency of the instructions provided to the branch by the head office and its adherence at the branch level. Any errors at bank branch level can have a cascading effect at the head office, especially when a large number of branches are involved.
The statutory central auditors should primarily look into the computation of components of various capital as part of their attest function. As regards the overall capital adequacy computation, particularly with respect to RWAs, while the granular data may have been audited by the Branch Statutory Auditors, the Statutory Central Auditors, apart from verifying the consolidation of data emanating from branches/regions/zones/circles etc. should perform the test of reasonableness as well as completeness. As per requirements set by the RBI, the Statutory Central Auditors are required to certify the capital adequacy computation. The statutory central auditors may review the work done by internal auditors, as may be stipulated by the management or the regulators. The Basel Accord does provide specific areas where internal auditors play a role.