From anti-money laundering regulations and cybersecurity controls in digital banking, to ESG reporting and third-party vendor oversight, financial institutions in the U.S. face stringent guidelines and expectations for their operations.
As such, CFOs at these institutions are under immense pressure to make sure that they have the proper audit capabilities in place and that audits are watertight.
So says Patrick Farrelly, managing partner and director, who provides accounting and advisory services to publicly held, otherwise regulated, and private businesses in the financial services, broker-dealer, manufacturing, and distribution sectors. He has more than a decade of experience managing and developing audit strategies for some of the most high-profile clients at a Big Four firm.
Farrelly shares how CFOs at financial institutions can make sure their audits are up to scratch today.
What are some of the biggest gaps that tend to crop up in audits that banking CFOs should watch out for?
Some of the most common audit gaps in banking relate to inadequate documentation, incomplete loan reviews, insufficient internal controls over financial reporting and weaknesses in model risk management. Regulatory compliance, especially around anti-money laundering and fair lending, also tends to present issues.
As banks increase digital transactions, IT and cybersecurity controls are increasingly scrutinized, and gaps in data governance and system integrations often surface. Misalignment between accounting estimates, such as allowance for credit losses, and underlying data or assumptions is another area of concern.
CFOs should also be aware of emerging risks, like ESG reporting and third-party vendor oversight, as these are increasingly becoming part of audit scopes.
What are some of the best practices for avoiding these issues and closing these gaps?
Strong governance frameworks and a culture of compliance are essential. CFOs should ensure robust internal control environments, with clear documentation and ownership of processes. Regular pre-audit reviews, including mock audits, help identify gaps early.
Coordination between accounting, risk, compliance and internal audit teams fosters alignment on key issues. Investing in technology for real-time monitoring of transactions and data accuracy is critical. Training and continuous education for staff on regulatory updates and evolving risks ensure preparedness.
Finally, maintaining open communication with auditors and regulators throughout the year—not just during audits—can help preemptively address potential concerns.
How do these challenges differ between smaller banks and mid-sized or larger banks?
Smaller banks often face resource constraints, leading to gaps in segregation of duties, documentation and specialized knowledge in such things as complex credit modeling. They may rely on manual processes, increasing error risk.
Mid-sized and larger banks, while typically better resourced, grapple with the complexity of operations, including sophisticated loan portfolios, derivatives and multi-entity consolidations. Their challenge lies in managing consistent processes across divisions and geographies, and addressing heightened regulatory expectations.
Larger banks also face more scrutiny around cybersecurity, stress testing and capital adequacy. While gaps exist at all levels, their nature and scale vary significantly by bank size and complexity.
From a talent perspective, what should CFOs at financial institutions be thinking about as they manage audit teams or look to build audit teams?
CFOs should focus on building multidisciplinary audit teams with expertise in accounting, regulatory compliance, IT, cybersecurity and risk management. Recruiting and retaining talent familiar with current and emerging banking regulations, such as those for current expected credit losses, ESG and cybersecurity frameworks, is key.
CFOs should prioritize ongoing training and certification opportunities to keep teams updated on evolving standards. Cross-functional collaboration, especially between finance, risk and IT, strengthens audit readiness.
Additionally, fostering a culture that values integrity, continuous improvement and transparency encourages proactive identification of issues. As technology evolves, CFOs should also look for audit professionals with data analytics and automation skills to enhance audit efficiency and insight.
Read the full article published by CFO Leadership.
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PATRICK FARRELLY
Office Managing Partner, Capital Region, UHY LLP Managing Director, UHY Advisors
Patrick Farrelly provides a wide range of audit and assurance services including financial audit, forensic audit, compliance audit, reviews, compilations, internal control assessments and other accounting advisory services. In his role, he focuses on delivering the highest of quality services to publicly-held, otherwise regulated, and private businesses in the financial services, broker-dealer, manufacturing and distribution sectors. He has over a decade of experience managing and developing audit strategies for some of the most high profile clients at a Big Four firm.