Composition of the Committee

The Board Audit Committee (“BAC”) appointed by and responsible to the Board of Directors (“the Board”) comprises two (02) Non-Executive, Independent Directors, and one (01) Non-Independent, Non-Executive Director.

The following members serve in the Board Audit Committee (BAC):

• Mr Chaaminda Kumarasiri – Chairman (BAC), Independent, Non-Executive Director
• Prof Sampath Amaratunge – Independent, Non-Executive Director
• Mr K G Wijerathne – Non-Independent, Non-Executive Director

The Chairman of the BAC Mr Chaaminda Kumarasiri is an Independent Non-Executive Director. Brief profiles of Mr Chaaminda Kumarasiri and other members of the BAC are given on pages 20 to 23 in the Annual Report.

Mr Lakshman Abeysekera – Independent, Non-Executive Director served as the Chairman of the BAC and resigned from the Committee on 26 May 2020. Mr Chaaminda Kumarasiri was appointed as the Chairman of BAC on 26 May 2020.

The Committee take this opportunity to place on record the appreciation for the valuable service rendered by Mr Lakshman Abeysekera as the Chairman of BAC.

The Chief Internal Auditor functions as the Secretary to the BAC.

Terms of reference

The BAC was functioned as per the Terms of Reference approved by the Board of Directors. The Board reviews the Terms of Reference once a year and/or when necessary and it ensures that new developments are adequately addressed. The Committee is responsible to the Board of Directors and reports on its activities regularly. The BAC also assists the Board in its general oversight of financial reporting, internal controls, and functions relating to internal and external audits.

Regulatory compliance

The roles and functions of the BAC are regulated by the Banking Act Direction No. 12 of 2007, the mandatory Code of Corporate Governance for Licensed Specialised Banks in Sri Lanka, issued by the Central Bank of Sri Lanka, the Rules on Corporate Governance as per the Section 7.10 of Listing Rules issued by the Colombo Stock Exchange and the Code of Best Practice on Corporate Governance issued jointly by the Securities and Exchanges Commission of Sri Lanka (SEC) and The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka).

Duties and role of the Board Audit Committee

The BAC is responsible for:

• Reviewing financial information of the Bank in order to monitor the integrity of the Financial Statements of the Bank, its Annual Report, accounts and quarterly reports prepared for disclosure;
• Reporting to the Board on the quality and acceptability of the Bank’s accounting policies and practices;
• Assessing the reasonableness of the underlying assumptions for estimates and judgements made in preparing the Financial Statements;
• Reviewing the accounting and financial reporting, risk management processes and regulatory compliance;
• Reviewing of the Financial Statements (including interim financial statements) prior to publication to ensure compliance with statutory provisions, accounting standards and accounting policies;
• Reviewing internal audit reports and liaising with Corporate Management in taking precautionary measures to minimise control weaknesses, procedure violations and frauds;
• Assessing the independence and reviewing the adequacy of the scope, functions and resources of the Internal Audit Department, including the appointment of the Chief Internal Auditor (CIA) and the performance of the CIA and senior staff members of the Internal Audit Department;
• Overseeing the appointment, compensation, resignation, dismissal of the External Auditor, including review of the external audit, its scope, cost and effectiveness and monitoring of the External Auditor’s independence;
• Reviewing adequacy and effectiveness of the Bank’s systems of internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Financial Statements for external purposes has been done in accordance with the applicable accounting standards and the regulatory requirements;
• Engaging independent advisors on specialised functions where it is deemed necessary.

Meetings

For the purpose of discharging its duties, the BAC met seventeen (17) times during the year. Attendance of the Committee members of each of these meetings is given in the table in page 127 of the Annual Report. The minutes of the meetings have been regularly reported to the Board of Directors. Chief Internal Auditor and Chief Financial Officer have attended meetings on invitation and Chief Executive Officer and the relevant Senior Management/Officers in other grades are also participated in the meetings on invitation. On the invitation of the Committee, the Engagement Partner and the Senior Officers of the Banks External Auditors, Messrs Ernst & Young attended for six (06) Committee meetings during the year. In four (04) out of seventeen (17) meetings, it has been discussed and recommended the Quarterly and Annual Financial Statements for the Board approval. The Committee met the Chief Internal Auditor without the presence of Management in several occasions to assess the independence and other confidential matters. The BAC met the External Auditors in six (06) occasions during the year and in which two (02) occasions were without the presence of the CEO and the Management to ensure that there was no limitations of scope in relation to the External Audit and to allow for full disclosure of any incident which could have had a negative impact on the effectiveness on the external audits. It was concluded that there was no cause for concern.

Financial reporting

The Committee, as part of its responsibility to oversee the Bank’s financial reporting process on behalf of the Board of Directors, has reviewed and discussed with the Management and the External Auditors with regard to the interim and the Annual Financial Statements prior to their release for publication. The review included the quality and acceptability of accounting policies and practices, the clarity of the disclosures and the extent of compliance with Sri Lanka Accounting Standards (SLFRS and LKAS), the Companies Act No. 07 of 2007, the Banking Act No. 30 of 1988 and amendments thereto and other relevant financial and governance reporting requirements. To facilitate their review, the BAC considered reports from the Chief Financial Officer and also reports from the External Auditors on the outcome of their review of the annual audit.

The BAC continuously monitored the implementation of the Sri Lanka Financial Reporting Standard – SLFRS 9 “Financial Instruments” issued by The Institute of Chartered Accountants of Sri Lanka which became effective from 1 January 2018. The Impairment Model was re-validated during 2020 and independently validated by the External Auditors.

The committee also closely monitored the training and awareness session on SLFRS 9 “Financial Instruments” conducted to the Board of Directors and the Senior Management during 2020.

As part of the BAC’s responsibilities, notably its review of financial results, reports from Internal and External Audits, the Bank’s Accounting Policies, as well as the Annual Financial Statements; the BAC took cognisance of the Key Audit Matters as reported in the Independent Auditors’ Report. In addition, the Committee reviewed Management’s judgements on significant Accounting and External reporting requirements and obtained External Auditor’s agreement with the treatment thereof.

Internal Control over Financial Reporting (ICOFR)

The Bank is required to comply with Section 3 (8) (ii) (b) of the Banking Act Direction No. 12 of 2007 on Corporate Governance for Licensed Specialised Banks issued by the Central Bank of Sri Lanka and assessed the adequacy and effectiveness of internal control over financial reporting as of 31 December 2020.

The above was conducted based on the criteria set out in the Guidance for Directors of Banks on “The Directors' Statement of Internal Control”, issued by The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) in 2010.

The Bank’s assessment was concentrated on processes documented by the respective process owners with the guidance of the Bank’s Internal Audit and External Auditors. Based on Internal Auditors’ and External Auditors’ assessments, the Board has concluded that, as of 31 December 2020, the Bank’s internal control over financial reporting is effective. Directors’ Report on the Bank’s Internal Control over Financial Reporting is provided on pages 130 and 131 in the Annual Report. The Bank’s External Auditors have reviewed the effectiveness of the Bank’s internal control over financial reporting and have reported to the Board that nothing has come to their attention that causes them to believe that the statement is inconsistent with their understanding of the process adopted by the Board in the review of the design and effectiveness of the internal control over financial reporting of the Bank. External Auditor’s Report on the Bank’s Internal Control over Financial Reporting is provided on page 132 of the Annual Report.

Annual corporate governance report

As required by Section 3 (8) (ii) (g) of the Banking Act Direction No. 12 of 2007, on Corporate Governance for Licensed Specialised Banks issued by the Central Bank of Sri Lanka, the Annual Corporate Governance Report for 2020 is provided on pages 85 to 109 in the Annual Report. The External Auditors of the Bank have performed procedures set-out in Sri Lanka Related Services Practice Statement 4750 issued by The Institute of Chartered Accountants of Sri Lanka (SLRSPS 4750), to meet the compliance requirement of the corporate governance directive. Their findings presented in their report addressed to the Board are consistent with the matters disclosed above and did not identify any inconsistencies to those reported by the Board on pages 85 to 109.

External audit

With regard to the external audit function of the Bank, the role played by the BAC was as follows:

• Conducting the annual evaluation of the independence and objectivity of the External Auditor and the effectiveness of the audit process.
• Met with the External Auditors to discuss their audit approach and procedure, including matters relating to the scope of the audit and Auditor’s independence.
• Reviewed the Audited Financial Statements with the External Auditor who is responsible for expressing an opinion on its conformity with the Sri Lanka Accounting Standards.
• Reviewed the Key Audit Matters (KAM) Report and Management Letters issued by the External Auditor together with Management responses thereto.
• Reviewed the non-audit services provided by the External Auditor and was of the view that such services were not within the category of services identified as prohibited under –

  a. The guidelines issued by the Central Bank of Sri Lanka, for External Auditors, relating to their statutory duties in terms of Section 39 of the Banking Act No. 30 of 1988 and amendments thereto.

  b. The Guideline for Listed Companies on Audit and Audit Committees issued by the Securities and Exchange Commission of Sri Lanka.

• Reviewed the independent confirmation issued by the External Auditor as required by the Companies Act No. 07 of 2007, confirming that they do not have any relationship or interest in the Company, which may have a bearing on their independence within the meaning of the Code of Conduct and Ethics of The Institute of Chartered Accountants of Sri Lanka.

The BAC has recommended to the Board of Directors that Messrs Ernst & Young, Chartered Accountants, be reappointed for the financial year ending 31 December 2021 subject to the approval of shareholders at the Annual General Meeting.

Internal audit

The BAC monitored and reviewed the scope, extent and effectiveness of the activities of the Bank’s Internal Audit Department. This included reviewing of updates on audit activities and achievements against the Internal Audit Plan, advising Corporate Management to take precautionary measures on significant audit findings and assessment of resource requirements including succession planning of the Internal Audit Department. The BAC had necessary interactions with the Chief Internal Auditor throughout the year.

During the year, BAC reviewed the Internal Audit Plan and monitored the progress of same on regular basis.

The Committee reviewed the performance appraisal of the Chief Internal Auditor and other senior staff members of the Internal Audit Department.

The Internal Audit Department conducts continuous monitoring over the selected types of transactions using data streaming software. This initiative has helped Internal Audit Department to improve its pro-activeness.

Audit findings presented in the reports are prioritised based on the level of risks. The Committee followed up on internal audit recommendations with the Corporate Management regularly. Internal audit reports were made available to examiners of the Central Bank of Sri Lanka and External Auditors, when requested by them.

The BAC reviewed the process over recognition of interest income by the bank on the Moratorium loans granted under the COVID-19 relief scheme of the Central Bank of Sri Lanka.

Along with the significant findings, the Internal Audit Department has engaged in sharing and providing knowledge through audit exit meetings to the Bank’s staff for better control awareness and identifying early warning signals. In keeping with BAC recommendations, the internal audit has also provided inputs to the Corporate Management for effective control and prevention of frauds.

Internal Audit Charter and Internal Audit Manual

The internal audit function is governed by the Internal Audit Charter which defines the Vision, Scope, Independence and the Authority. The Internal Audit Charter and the Internal Audit Manual were reviewed/revised and approved by the BAC and the Board.

Whistle blowing

SANASA Development Bank’s Whistle-blowing Policy is intended to serve as a channel of fraud risk management. The policy allows any team member who has a legitimate concern on an existing or potential “wrong doing”, by any person within the Bank, to come forward voluntarily, and bring such concerns to the notice of an independent/ designated authority. Concerns raised are investigated and the identity of the person raising the concern is kept confidential, even anonymous complaints are looked at. A process has been established to track such whistle blowing and take necessary actions.

Reporting to the Board

The minutes of the BAC meetings are tabled at the Board meetings enabling all Board members to have access to them.

Professional advice

The BAC has the authority to seek external professional advice on matters within its purview; and consultations are obtained when need arises.

Board Audit Committee evaluation

The annual evaluation of the BAC was conducted by the Board of Directors during the year and concluded that its performance was effective.

On behalf of the Board Audit Committee (BAC),

Chaaminda Kumarasiri
Chairman
Board Audit Committee (BAC)

19 March 2021
Colombo, Sri Lanka