Internal Control over Financial Reporting (ICFR) audits are a cornerstone of financial accountability, especially for banks with over $1 billion in assets. The Sarbanes-Oxley Act (SOX) mandates that public companies, including large banks, maintain robust internal controls and undergo ICFR audits to ensure the accuracy and reliability of their financial statements.
We have outlined what you need to know and do to prepare for an ICFR audit.
Understanding the ICFR Framework
The ICFR framework is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with Generally Accepted Accounting Principles (GAAP). The framework focuses on:
- Control Environment: Setting a tone at the top that underscores the importance of internal controls, ethical behavior, and a commitment to integrity.
- Risk Assessment: Identifying and analyzing risks that could impact the financial reporting process and determining how these risks should be managed.
- Control Activities: Implementing policies and procedures to mitigate risks and ensure accurate financial reporting.
- Information and Communication: Ensuring relevant information flows effectively throughout the organization to support financial reporting objectives.
- Monitoring: Continuously assessing the effectiveness of internal controls and making necessary adjustments.
Key Considerations for Banks with Over $1 Billion in Assets
Given the scale and complexity of banks of this size, several key considerations must be addressed when preparing for an ICFR audit:
- Complexity of Financial Transactions
Banks of this magnitude often engage in complex financial transactions, such as derivatives, securitizations, and off-balance-sheet activities. It is crucial that these transactions are thoroughly documented, recorded, and controlled. This requires a deep understanding of the bank’s financial instruments and the associated risks.
- Regulatory Compliance
Compliance with banking regulations, such as those imposed by the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC), is a critical component of the ICFR audit. Aligning internal controls with these regulations is essential to avoid compliance issues that could lead to financial penalties or reputational damage.
- IT Systems and Cybersecurity
Banks rely heavily on IT systems for financial reporting, making IT controls and cybersecurity paramount. The ICFR audit will assess the adequacy of IT general controls (ITGCs), including access controls, change management, and data security. It is critical to ensure these controls are robust, and any vulnerabilities are addressed.
- Third-Party Relationships
Banks often engage third-party service providers for various functions, such as IT services, loan servicing, and data processing. The ICFR audit will evaluate how these third-party relationships are managed, including the controls in place to monitor and mitigate risks associated with outsourcing critical functions.
- Segregation of Duties
Maintaining proper segregation of duties is fundamental to internal control. For large banks, this can be challenging due to the scale of operations. Ensuring that no single individual has control over all aspects of a financial transaction is critical to preventing fraud and errors.
5 Steps to Prepare for an ICFR Audit
- Conduct a Risk Assessment
Start with a comprehensive risk assessment to identify potential weaknesses in the bank’s internal controls. This will help focus audit efforts on high-risk areas and ensure that the most critical controls are evaluated.
- Review and Document Controls
Review existing internal controls and ensure they are adequately documented. This includes financial controls, IT controls, and controls related to third-party relationships. Proper documentation is essential for demonstrating the effectiveness of controls during the audit.
- Test Controls
Before the ICFR audit, perform internal testing of key controls to identify any deficiencies. This proactive approach allows the bank to address issues before the audit begins, reducing the risk of negative audit findings. Additionally, ongoing tests of controls throughout the year can facilitate smoother independent audits and potentially reduce the scope of work.
- Strengthen Communication
Ensure that communication channels are open and effective across all levels of the organization. Key personnel should be aware of their roles in the ICFR process and be prepared to provide auditors with the necessary information and documentation.
- Engage in Continuous Monitoring
Establish a system of continuous monitoring for internal controls. This allows the bank to detect and address control deficiencies throughout the year, rather than waiting for the annual audit. Continuous monitoring is a best practice that can significantly enhance the overall effectiveness of the ICFR framework.
Position Yourself for Success
Preparing for an ICFR audit is a complex and ongoing process, particularly for banks with over $1 billion in assets. By focusing on key areas such as regulatory compliance, IT controls, and third-party relationships, and by proactively testing and monitoring controls, banks can position themselves for a successful audit.
Through careful preparation and a dedication to strong internal controls, banks can not only pass their ICFR audits but also strengthen their overall financial management and governance practices.
Whether you need assistance with ICFR readiness assessments, the preparation of full-disclosure financial statements, or comprehensive audit services, Pinion’s financial institutions team is here to support your bank. Connect with an advisor to get started.
