“Reviewed the Policy Manual on principles and methodologies including Expected Credit Losses (ECL) computation under SLFRS 9 – “Financial Instruments” adopted by the Management during the year 2020.”
Composition of the Committee
During the year, the Board Audit Committee (the BAC) consisted of the following members. Profiles of the members as at December 31, 2020, are indicated on pages 64 to 69.
|Board members||Mr R Senanayake* (Chairman) (Appointed as a Member/Chairman w.e.f. September 25, 2020)||02/02|
|Mr S Swarnajothi* (Former Chairman) (Retired w.e.f. August 20, 2020)||05/05|
|Mr K Dharmasiri* (Director)||07/07|
|Ms N T M S Cooray* (Director)||07/06|
|Prof A K W Jayawardane* (Director) (Resigned from BAC w.e.f. December 31, 2020)||07/07|
|Justice K Sripavan* (Director) (Resigned from BAC w.e.f. December 31, 2020)||07/07|
|Ms J Lee* (Director) (Appointed to BAC w.e.f. December 31, 2020)||00/00|
|*Independent Non-Executive Director|
|Regular attendees by invitation||Mr S Renganathan (Managing Director/Chief Executive Officer)||07/07|
|Mr S C U Manatunge (Director/Chief Operating Officer)||07/07|
|Mr K D N Buddhipala (Chief Financial Officer)|
|Mr S K K Hettihamu (Chief Risk Officer)|
|Ms A V P K T Amarasinghe (Assistant General Manager – Compliance) – (Appointed w.e.f. November 25, 2020)|
|Mr V S Rajasooriyar (Assistant General Manager – Compliance) – (Retired w.e.f. November 11, 2020)|
|Mr J Premanath (Assistant General Manager – Management Audit)|
|Mr R Mihular (Senior practicing Chartered Accountant, serves the BAC in the capacity of a Consultant and is invited to attend meetings) Independent Consultant appointed to the Committee to provide necessary assistance and enable the Committee to discharge its functions properly|
Secretary to the Committee
Mr J Premanath (Assistant General Manager – Management Audit)
Charter of the Committee
The Board approved Charter of the BAC, (the Committee) clearly defines the Terms of Reference of the Committee. It is annually reviewed to ensure that new developments relating to the Committee’s functions are addressed. The Charter of the Committee was last reviewed and approved by the Board in December 2020.
The Committee assists the Board in discharging its responsibilities and exercises oversight over financial reporting, internal controls, internal/external audits.
The Committee has full access to information, cooperation from Management and discretion to invite any Director or Executive Officer to attend its meetings.
The Banking Act Direction No. 11 of 2007 on “Corporate Governance for Licensed Commercial Banks in Sri Lanka” and its subsequent amendments (hereinafter referred to as the Direction), “Rules on Corporate Governance under Listing Rules of the Colombo Stock Exchange”, and “Code of Best Practices on Corporate Governance”, issued by The Institute of Chartered Accountants of Sri Lanka further regulate the composition, role and functions of the Committee.
The Committee is empowered by the Board to:
- Ensure that financial reporting systems in place are effective and well managed in order to provide accurate, appropriate and timely information to the Board, Regulatory Authorities, the Management and other stakeholders.
- Review the appropriateness of accounting policies and ensure adherence to statutory and regulatory compliance requirements and applicable accounting standards.
- Ensure that the Bank adopts and adheres to high standards of corporate governance practices, conforming to the highest ethical standards and good industry practices in the best interest of all stakeholders.
- Evaluate the adequacy, efficiency, and effectiveness of risk management measures, internal controls and governance processes in place to avoid, mitigate, or transfer current and evolving risks.
- Monitor all aspects of internal and external audit and inspection programmes of the Bank and review Internal and External Audit Reports for follow up with the Management on their findings and recommendations.
- Review the Interim Financial Statements and Annual Financial Statements of the Bank in order to monitor the integrity of such Statements prepared for disclosure, prior to submission to the Board.
Activities in 2020
The Committee held seven (7) meetings during the financial year ended December 31, 2020. Proceedings of these meetings with adequate details of matters discussed are regularly reported to the Board.
Representatives of the Bank’s External Auditors, Messrs Ernst & Young also participated in seven (07) meetings during the year by invitation. The Committee also invited members of the Senior Management of the Bank to participate in the meetings from time to time on need basis.
Reporting of financial position and performance:
The Committee assisted the Board in its oversight on the preparation of Financial Statements to evidence a true and fair view on financial position and performance. This process is based on the Bank’s accounting records and in accordance with the stipulated requirements of the Sri Lanka Accounting Standards. In fulfilling its oversight responsibilities, the Committee reviewed and discussed the interim and consolidated Financial Statements, including the acceptability of the accounting principles, the reasonableness of significant estimates and judgements.
The Committee reviewed the Tax Assessments outstanding and action initiated for follow up for resolution through regular reports submitted by the Chief Financial Officer.
The prevailing internal controls, systems and procedures were assessed by the Committee and it expressed the view that adequate controls and procedures were in place to provide reasonable assurance to the effect that the Bank’s assets are safeguarded and the financial position of the Bank is well monitored and accurately reported.
Progress of implementation of SLFRS 9:
The Committee continuously monitored the progress of implementation of SLFRS 9 as per the requirements of Sri Lanka Accounting Standard – SLFRS 9 on “Financial Instruments” that has been issued effective from January 01, 2018.
The Committee reviewed the Policy Manual on principles and methodologies including Expected Credit Losses (ECL) computation under SLFRS 9 – “Financial Instruments” adopted by the Management during the year 2020.
Internal Capital Adequacy Assessment Process (ICAAP):
The Committee reviewed the effectiveness of internal control mechanism in place to meet the regulatory requirements on ICAAP and the mechanism in place to ensure integrity, accuracy, and reasonableness in capital assessment process of the Bank for the year 2019, as per the Section 10 (in Pillar II – Supervisory Review Process) of the Banking Act Direction No. 01 of 2016 on “Regulatory Framework on Supervisory Review Process”.
Oversight on regulatory compliance:
The Committee also ensured that the Bank complies with all regulatory and legal requirements and closely scrutinised compliance with mandatory banking and other statutory requirements and the systems and procedures that are in place. The quarterly reports submitted by the Compliance Officer were used by the Committee to monitor compliance with all such legal and statutory requirements. The Bank’s Inspection Department has been mandated to conduct independent test checks covering all regulatory compliance requirements, as a further monitoring measure.
The Committee monitored the progress on implementation of the recommendations made in the Statutory Examination Reports of Central Bank of Sri Lanka (CBSL) through regular follow-up reports tabled during the year 2020.
Identification of risks and control measures:
The Bank has adopted a risk-based audit approach towards assessing the effectiveness of the internal control procedures in place to identify and manage all significant risks and that these are being reviewed by the Committee.
The Committee sought and obtained the required assurances from Business Units on the remedial action in respect of the identified risks to maintain the effectiveness of internal control procedures.
Internal audit and inspection:
The Committee ensured that the internal audit function is independent of the activities it audited and that it was performed with impartiality, proficiency, and due professional care.
The Committee approved the Programme of Inspection/IS Audit for the year 2020 formulated by the Inspection Department and the Information Systems Audit Unit (ISAU). The progress and scope of Inspections/IS Audits were continuously reviewed to ensure that appropriate corrective actions have been taken to manage risks identified during the lockdown period and curtailed business operations during the first and second waves of the COVID-19 pandemic. The scope of work was enhanced/realigned to include credit audits and remote, work from home business operations through online and Off-site audit procedures.
The Bank’s Inspection Department carried out, online and on-site inspection of business units including four (4) subsidiaries in Sri Lanka and operations in Bangladesh. Overseas subsidiaries namely Commercial Bank of Maldives Private Limited and CBC Myanmar Microfinance Co. Ltd. and Commex Sri Lanka S. R. L., a subsidiary incorporated in Italy were monitored through an off-site surveillance. With the concurrence of the Board, the Bank continued to engage the services of five (5) firms of Chartered Accountants approved by the CBSL in order to supplement the Bank’s Inspection Department in carrying out inspection assignments.
ISAU conducted on-site/off-site audits (Bank and Group) covering local and overseas operations. Audits conducted through system-based audit tools, reviews of systems change management activities under the agile approach and verification of compliance with industry standards such as ISO 27001:2013/ PCI-DSS/ Baseline Security Standards (BSS) to ensure safeguarding IT assets of the Bank.
The Committee received the attention of significant findings and recommendations related to IT Governance, Cyber Security, Network Security, Physical and Logical Access Management, End point Security and IT Systems Administration made in the reports submitted by ISAU. The Committee also reviewed the reports on findings relating to business continuity planning and disaster recovery arrangements during the year 2020.
Five hundred and forty-seven (547) inspection reports on Business Units including subsidiaries and overseas operations received the attention of the Committee which highlighted the operational deficiencies, risks, and the recommendations. The Committee evaluated the Bank’s system of internal controls and duly reported its findings to the Board.
Major findings of internal investigations with recommendations of the Management were considered and appropriate instructions issued. The Committee also invited representatives from the audit firms assisting in inspections to make presentations on their observations and findings.
The Committee reviewed the Inspection/ Information Systems Audit operational manual and evaluated the internal audit function covering key areas such as scope, quality of internal audits, independence, and resources.
During the year, members of the Committee personally visited the branches in the South Western and Southern regions to gather information in regard to the operations, controls implemented and follow-up action taken for significant audit findings.
With regard to the external audit function of the Bank, the role played by the Committee is as follows:
- Assisting the Board in engaging External Auditors for audit services, in compliance with the provisions of the Direction and agreeing on their remuneration with the approval of the shareholders.
- Monitoring and evaluating the independence, objectivity, and effectiveness of the External Auditor.
- Reviewing non-audit services provided by the Auditors, with a view to ensuring that such functions do not fall within the restricted services and provision of such services will not impair the External Auditor’s independence and objectivity.
- Discussing the audit plan, scope and the methodology proposed to be adopted in conducting the audit with the Auditors, prior to commencement of the annual audit.
- Discussing all relevant matters arising from the interim and final audits, and any matters the Auditor may wish to discuss, including matters that may need to be discussed in the absence of Key Management Personnel.
- Reviewing the External Auditor’s Management Letter and the Management responses thereto.
The Auditors were provided with the opportunity of meeting Non-Executive Directors separately, without any Executive Directors being present, to ensure that the Auditors had the opportunity to discuss and express their opinions openly on any matter. It provided the assurance to the Committee that the Management has provided all information and explanations requested by the Auditors.
At the conclusion of the audit, the Committee also met the Auditors to review the Auditor’s Management Letter before it was submitted to the Board and the CBSL.
The members of the Committee evaluated the Bank’s External Auditor, Messrs Ernst & Young covering key areas such as scope and delivery of audit, resources and quality assurance initiatives, during the year 2020.
Mechanism of internal controls:
Sections 3 (8) (ii) (b) and (c) of the Banking Act Direction No. 11 of 2007 stipulate the requirements to be complied with by the Bank to ensure reliability of the financial reporting system in place at the Bank.
The Committee is assisted by the External Auditor and the Inspection Department to closely monitor the procedures designed to maintain an effective internal control mechanism to provide reasonable assurance that this requirement is being complied with.
In addition, the Committee regularly monitored all exceptional items charged to the Income Statement, long outstanding items in the Bank’s chart of accounts, credit quality, risk management procedures and adherence to classification of non-performing loans and provisioning requirements specified by the CBSL. The Committee also reviewed the credit monitoring and follow-up procedures and the internal control procedures in place to ensure that necessary controls and mitigating measures are available in respect of newly identified risks.
Ethics and good governance:
The Committee continuously emphasised on upholding ethical values of the staff members. In this regard, the Bank has a Code of Ethics and Whistle-blower’s Charter in place which is followed for educating and encouraging all members of staff to resort to whistle-blowing if they suspect any wrongdoings or other improprieties. Highest standards of corporate governance and adherence to the Bank’s Code of Ethics were ensured. All appropriate procedures were in place to conduct independent investigations into incidents reported through whistle-blowing or identified through other means. The Whistle-blower’s Charter guarantees the maintenance of strict confidentiality of the identity of the whistle-blowers.
Sri Lanka Accounting Standards:
The Committee reviewed the revised policy decisions relating to adoption of new and revised Sri Lanka Accounting Standards (SLFRS/LKAS) applicable to the Bank and made necessary recommendations to the Board. The Committee would continue to monitor the compliance with relevant Accounting Standards and keep the Board informed at regular intervals.
Evaluation of the Committee:
An independent evaluation of the effectiveness of the Committee was carried out by the other members of the Board during the year. Considering the overall conduct of the Committee and its contribution to the overall performance of the Bank, the Committee has been rated as effective.
Chairman – Board Audit Committee
February 24, 2021