Bankers to the Nation

Board Subcommittee Reports

Audit Committee Report

Chairman’s Statement

Terms of Reference

The Terms of Reference of the Audit Committee are governed by the Audit Committee Charter, approved and adopted by the Board. The Committee also ensures that the scope and coverage of the Charter, fulfils requirements of the Banking Act Directions on Corporate Governance for Licensed Commercial Banks issued by the Central Bank of Sri Lanka.

Composition

The Audit Committee is comprised of the following Non-Executive Directors.

  • Mr Ranel T Wijesinha
    Chairman
    Independent Non-Executive Director
  • Mr Sajith R Attygalle
    Member
    Non-Executive Ex-officio Director
    (Appointed w.e.f. 11.05.2016)
  • Mr Charitha N Wijewardane
    Member
    Independent Non-Executive Director
  • Mr Sanjaya Padmaperuma
    Member
    Independent Non-Executive Director
  • Ms Pushpa Wellappili
    Non-Executive Ex-officio Director
    (From 27.02.2015 to 31.03.2016)
    (Mr Attygalle was appointed pursuant to her retirement from public service)

Detailed profiles of members of the Committee appears on pages 38 to 40. The Secretary to the Board, who is an Attorney-at-Law and a Deputy General Manager, functions as the Secretary to the Committee.

Principal Focus

The Audit Committee focuses principally on assisting the Board in fulfilling its duties by providing an independent
and objective review of the financial reporting process.

Medium of Reporting

The proceedings of the Audit Committee meetings are tabled at the meetings of the Board, where all key issues, concerns, actions taken, outcomes achieved or pending, and follow-up initiated, are clarified, discussed and Board approval obtained therefor. The effectiveness of the Committee is evaluated annually by the Committee and results are communicated to the Board.

Committee Meetings and interaction with External Auditors

The Committee met on fifteen occasions during the year under review. The attendance of the Committee members is provided in the table on page 66. The quorum of the Committee is two. The Committee had ongoing interaction with the representative of the Auditor General who was based at the Bank on a full time basis, throughout the year. In order to further facilitate management’s co-operation with the external audit conducted by Messrs Ernst & Young, Chartered Accountants, and to enhance the independence of the external audit, the Chairman of the Audit Committee, met the Senior Partners in charge of the audit, as and when the need arose, in addition to the regular meetings of the Committee. The Committee met the External Auditors at the final meeting prior to finalisation of the year-end audit without the presence of the General Manager and other members of the management, in order to determine whether there were any restrictions to the scope of the audit and received confirmation that there were none.

Activities Performed during the Year

Regulatory Compliance

  • Reviewed compliance with mandatory banking and other statutory requirements.
  • Reviewed the progress of action taken in relation to the findings of the statutory examinations carried out by the regulators.
  • Reviewed the Internal Capital Adequacy and Capital Augmentation Plan and implementation thereof.
  • Reviewed initiatives and action plans designed to progress towards Basel III and SLFRS 9.
  • Reviewed compliance with Anti-money laundering, Countering Terrorist Financing and Customer due Diligence processes.
  • Initiated and reviewed measures of stress testing against key variables.
  • Initiated and reviewed exposure to Government/private sector, to economic sectors, sub-sectors and borrowers and followed up, implementation of appropriate risk minimisation and mitigation measures.
  • Periodically reviewed internal and external audits of the Treasury and the Primary Dealer Unit, conducted by the Internal Audit Department, the representative of the Auditor General and External Auditors, Messrs Ernst & Young, Chartered Accountants.
  • Reviewed compliance with all requirements of the Central Bank of Sri Lanka, in relation to the Authorised Primary Dealers.

Internal Controls

  • On a regular monthly basis and when specific events or cases warranted root cause analyses were conducted and improvements were made to the systems, procedures and internal controls.
  • On an ongoing basis reviewed and strengthened credit/project evaluation processes adapted by the Bank.
  • Conducted a series of case study based training and development sessions to strengthen the adequacy and coverage of credit evaluation.
  • The office of the Chief Internal Auditor and the office of the Chief Risk Officer were regularly instructed to conduct assessments of key areas of exposure or vulnerability and risk minimisation and mitigation measures to strengthen controls were implemented therefor.
  • Guided and assisted the Human Resource Department to design and implement skill enhancement and capacity building measures for staff engaged in credit evaluation and monitoring.
  • Reviewed and strengthened the oversight and monitoring of debt service by significant borrowers and designed measures to prevent/ pre-empt potential loan losses.
  • Designed and implemented new strategies to secure collateral for loans.
  • Reviewed and strengthened procedures and strategies of the Recovery Department.
  • Reviewed information technology related risk assessments and corresponding risk minimisation and mitigation measures with the special emphasis on cyber security.
  • Performed post-implementation reviews of application systems in the Bank.

The Statement by the Directors, on Internal Control and the Auditor General’s Report thereon, is provided on pages 142 to 144. Accordingly, the Committee is of the view that necessary checks and balances are in place to provide reasonable assurance, that the Bank’s assets are safeguarded and that the financial position and the results disclosed in the Financial Statements are free from any material misstatements.

Financial Reporting

  • Reviewed the Bank’s accounting policies and their application to the reporting of the Bank’s activities and financial performance.
  • Reviewed the monthly, quarterly and annual unaudited/audited Financial Statements to ensure that they are prepared and published in accordance with the requirements prescribed by the supervisory and regulatory authorities and applicable accounting standards.
  • Reviewed the significant judgments, estimates and conclusions on the loan loss provisions, relating to individually significant loans and the adequacy of collective impairment allowances on other loans.

Internal Audit

  • Reviewed the independence, objectivity and performance of the internal audit function as well as the adequacy of the department’s resources, with particular reference to the three main units.
    • – Province/Branch and Credit Audit
    • – Information Systems Audit
    • – Investigations
  • Reviewed the effectiveness of the implementation of the Internal Audit Plan.
  • Reviewed the significant Internal Audit findings and management’s responses thereto, with a view to taking timely corrective action.
  • Reviewed the adoption of the Risk Based Internal Control Checklist, Risk Based Audit Guidelines and Internal Audit Procedures of the Bank.
  • Evaluated the performance of the Chief Internal Auditor and reviewed the evaluation of the senior audit staff of the Internal Audit Department.
  • Reviewed training and development needs and requirements for specialised training of the Internal Audit Department and the need for capacity building.
  • Introduced Forensic Auditing to enhance capabilities in prevention, detection and investigation of frauds and irregularities.
  • Enhanced scope and coverage of data mining and analytical techniques.

External Audit

The external audit is carried out by the Auditor General in terms of the Constitution of the country. The Auditor General, was assisted by Messrs Ernst & Young, Chartered Accountants, during the year 2016.

  • Reviewed and followed up upon audit issues identified by the Auditors pertaining to the audit for the year 2015.
  • Reviewed the Report of the Auditor General to the Parliament of Sri Lanka on the accounts of the Bank for the year ended 31 December 2015, the Management Letter, the management’s responses thereto and followed up on corrective measures taken by the Bank.
  • Reviewed the Audit Plan of 2016 submitted by Messrs Ernst & Young, Chartered Accountants and followed up on all their deliverables and the adequacy and effectiveness of the scope and coverage.
  • Reviewed and followed up upon interim and final audit issues identified by the Auditor’s pertaining to the Audit for the year 2016.
  • Reviewed the key reports from the Department of the Auditor General.

Supervision and Audit of Subsidiaries and Associates of Bank of Ceylon

  • Reviewed the Policy on Internal Audit of subsidiaries.

  • Introduced a new mechanism to further strengthen the accountability and oversight over subsidiaries and associates of the Bank.

  • Reviewed the audits carried out on certain subsidiaries based on the policy on the Internal Audit of subsidiaries.

Participation at Meetings

The following management personnel attended each Audit Committee meeting:

  • Chief Internal Auditor
  • Chief Risk Officer
  • Compliance Officer
  • Assistant General Manager (Province/Branch and Credit Audit)
  • Assistant General Manager (Investigation)
  • Assistant General Manager (Information System Audit)
  • Assistant General Manager (Risk Management)
  • Internal Auditor

Representative of the Auditor General (the External Auditor of the Bank) and Partners and Managers of Messrs Ernst & Young, Chartered Accountants who are the External Auditors appointed by the Auditor General to assist in the annual audit of the Consolidated Financial Statements of the Bank and its subsidiaries for the year 2016, also attended every meeting of the Audit Committee.

Members of the management who attended by invitation only are as follows:

  • General Manager
  • Chief Financial Officer
  • Deputy General Manager (Finance and Planning)

The Heads of Divisions were invited to the meetings of the Audit Committee at various times during the year in order to seek clarification on areas such as credit, product and development banking, treasury management, oversight over subsidiaries and branches located overseas, retail banking, foreclosure and recovery, legal issues and information technology risk issues. The direct dialogue thus created and enabled achieving consensus on a series of areas where systems, procedures, controls were strengthened, policy manuals improved or expanded and compliance therewith facilitated. The key management personnel who participated in these discussions were:

  • Deputy General Manager (Product and Banking Development)
  • Deputy General Manager (Corporate and Off-shore Banking)
  • Deputy General Manager (Sales and Channel Management)
  • Deputy General Manager (Recovery)
  • Deputy General Manager (International, Treasury and Investment)
  • Deputy General Manager (Retail Banking)
  • Deputy General Manager (Support Services)
  • Deputy General Manager (Human Resources)
  • Chief Legal Officer
  • Head of Information Technology
  • Head of Technology Transformation

The Chairman held separate one-on-one and group meetings with the General Manager, Chief Financial Officer, Chief Internal Auditor, Chief Risk Officer, Chief Legal Officer and other senior managers and with the Audit Partners/Auditor General’s representative.

Special Initiatives

  • In order to improve the Bank’s asset quality, several training sessions were held at the Head Office and provinces. A case study based approach was introduced in order to strengthen project concept evaluation, industry/market knowledge and the format and content of the Credit Memorandum submitted for Board approval.
  • Organised island-wide capacity building workshops at provinces and branches.
  • Organised a workshop on ‘Integrity at the workplace’, which was conducted by the Chartered Institute for Securities & Investment (CISI), United Kingdom, for Board members, corporate and executive management.

Governance

The Committee, on an ongoing basis, reviewed the manner in which good corporate governance was practiced with particular reference to the:

  • Banking Act Direction No. 11 of 2007 on Corporate Governance and subsequent amendments thereto.
  • The Listing Rules of the Colombo Stock Exchange and the Code of Best Practices on Corporate Governance issued jointly by the Securities and Exchange Commission of Sri Lanka and The Institute of Chartered Accountants of Sri Lanka of 2013 (Code of Best Practice).

The Annual Corporate Governance Report for 2016 is provided on pages 60 to 68.

Procedure for Complaints – Whistle Blowing Policy

The Bank has a long established ‘Policy of Whistle Blowing’ covering procedures for the receipt, retention and treatment of complaints. The complaints may relate to but are not limited to, questionable accounting, internal control weaknesses, bribery and/or commission, falsifying records, insider dealings, money laundering, theft and fraud, misuse of the Bank’s assets, misrepresentation or false statements and any other actions that are unethical, illegal or contrary to proper corporate governance and stewardship policies and will be harmful to the financial health or reputation of the Bank.

The Chief Internal Auditor acts as the complaint overseer while the complaints against the employees in the grades of Deputy General Manager and above shall be submitted to the Chairman of the Board Audit Committee.

Employees are encouraged to raise any legitimate concerns promptly, and are entitled to remain anonymous or to request that their identity not be disclosed. Customers and concerned members of the general public are entitled to submit complaints anonymously and in confidence to the complaint overseer who is required to investigate complaints and report to the Audit Committee within periods stipulated in the Policy.

 

Ranel T Wijesinha
Chairman
Audit Committee

29 March 2017
Colombo

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