may 17, 2007acal presentation by naji fayad1 corporate governance and the role of internal audit the...

May 17, 2007 ACAL Presentation by Naji Fayad 1

Corporate Governance and the Role of Internal Audit The Case of Arabia Insurance Company

Presented by:

Naji Fayad MBA, CA, CIA, CISA, CCSA

Senior Manager/Head of Internal Audit Division Arabia Insurance Company SAL

May 17, 2007ACAL Presentation by Naji Fayad 2

Corporate Governance Process at Arabia Insurance CompanyOutline Initiation of Process Major Components Road Map/Major Tasks Achieved Limitations and Challenges Audit Committee and Internal Audit

Function Lessons learned Final Thoughts


Initiation of Process

Originally started in 1998 New Board of Directors and New

Management in 1999 Seeds of a new culture planted Not an official process but individual

initiatives inspired by the need for improving the company’s internal business environment and creating value and competitive edge


Major Components

Spirit of modernization Strive to effectively compete in challenging

Regional and Global economies Changing Regulatory, legal and business

environments in countries of operation. Tone at the Top (BOD, General Management)

as a major driver in the process of how Arabia is run and controlled

Initiatives inspired from international corporate governance codes and internal brainstorming and discussions


Road Map / Major Tasks Achieved Written Policies and Procedures drafted for all functions Operations Processes streamlined New Organization Chart / Functions interrelations

clarified Audit Committee formed Hiring an Internal Audit Senior Manager Internal Audit Function Established Official Internal Audit Charter Official Audit Committee Charter Various initiatives to Promote Transparency, Disclosure

and Accountability (Top Down) Code of Business Conduct (Best Practices, Whistle

blowing, grievances etc.. with reporting and enforcement mechanisms)


Limitations and Challenges

Cultural Resistance to Change Arabia Size and Geographical spread Being good could sometimes be costly Actual Focus on Financial indicators with

lesser regard to Non-Financial Factors such as good corporate governance (a very common approach worldwide)Note: An international survey conducted by Deloitte & Touche LLP in 2004 revealed a critical fault line between “rhetoric” and “reality” or between “awareness” and “action” in the boardrooms of the world’s leading companies. Non-financial factors are widely regarded as extremely important drivers of success for a company, yet they receive considerably less attention than financial data from the board and senior managers


Arabia Audit Committee and Internal Audit Function

Two of the aspects that were critical in the corporate governance process:Audit Committee Internal Audit


Definition of Internal Auditing

Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes

Source: “Professional Practices Framework”: International Standards for The Professional Practice of Internal Audit, IIA Inc. Altamonte Springs, Florida, USA, January 2004


Definition of Governance The combination of processes and

structures implemented by the board in order to inform, direct, manage and monitor the activities of the organization toward the achievement of its objectives.



Arabia Audit Committee Governance body charged by the Board of

Directors with oversight responsibilities of the organization’s audit and control functions

Established in December 2000 Composed of 3 Members of the Board of

Directors Guided by a Written “Audit Committee

Charter”


Arabia Audit Committee Charter

1. MissionOversight responsibilities for: Considering the effectiveness of system of

internal controls designed by management to: Safeguard assets and income, Manage significant Risks, Assure integrity of Financial Statements, Maintain compliance with the company’s ethical standards, policies and procedures, and with laws and regulations

Ensuring the independence and objectivity of the company’s external auditors and reviewing their performance;

Monitoring the performance of the company's internal audit function


Arabia Audit Committee Charter (Cont’d)

2. Composition Three members of the board. The Board will ensure that members meet the independence requirements and that the members are either financially literate or have industry knowledge.

3. Meetings issues4. Duties And Responsibilities

Oversight of the Financial Statements and Disclosure Matters

Oversight of Company’s Relationship with the External Auditors

Oversight of Internal Audit function Oversight of Company’s Risk Management

Function (in the absence of a Risk Management Committee)

Oversight of the Company’s Compliance5. Reporting issues


Arabia Internal Audit Division

Established in December 2000 Full Time Senior Manager and Team of 4 internal

auditors with relevant financial and insurance experience and professional designations (3 MBA, 1 CA, 4 CIA, 2 CISA, 4 CCSA, 2 CFE)

Reporting directly to the Board through the Audit Committee

Various Reports to Audit Committee (Audit plan, Missions, Quarterly, Yearly, and Ad-hoc reporting, etc..)

Meeting regularly with Audit Committee Mission clearly stated in an “Internal Audit

Charter”


Arabia Internal Audit Charter

The purpose, authority, and responsibility of the internal audit activity was defined in a charter

Charter officially approved by Board and Management in 2001 and documented in BOD minutes

In summary, the Internal Audit charter:1. Establishes the internal audit activity’s

position within the organization;2. Defines Authorities (access to records,

personnel, and physical properties) and Responsibilities

3. Defines the scope of internal audit activities


Arabia Internal Audit Charter Contents Independence and Objectivity section Mission and Duties section

Reviewing and appraising the soundness, adequacy, and application of accounting, financial, and other operating controls

Ascertaining the extent of compliance with established policies, plans, and procedures

Appraising the economy and efficiency with which resources are employed

Ascertaining the extent to which company assets are accounted for and safeguarded from losses of all kinds

Ascertaining the reliability of management data developed within the organization.

Recommending improvements


Arabia Internal Audit Charter Contents

Ethical standards and Internal Audit Professional Code of Conduct

Responsibility and Authority Scope: Operational, Compliance, Financial Internal Audit Planning Methodology:

Risk-Based Assessments Risk Measurements

Audit Reporting Issues Ratings of audit reports Mutual Responsibilities of Management and

Internal Audit Department (Dealing with differences of opinions, Recommendations follow up process, etc..)


Important Duties of Internal Audit Report significant issues related to the processes

for controlling the activities of the organization, including potential improvements to those processes

Provide information on the status and results of the annual audit plan and the sufficiency of department resources

Assessing the overall adequacy and effectiveness of the organization’s internal controls,

Monitoring compliance with the organization’s code of conduct and ensuring that ethical policies and other procedures promoting ethical behavior are being followed;


Relationship with Audit Committee Audit committees and internal auditors have

interlocking goals. A strong working relationship is essential for each to fulfill its responsibilities

Three areas of activities that are key to an effective relationship between the audit committee and the internal audit function: Assisting the audit committee to ensure that

its charter, activities, and processes are appropriate to fulfill its responsibilities

Ensuring that the charter, role, and activities of internal audit are clearly understood and responsive to the needs of the audit committee and the board

Maintaining open and effective communications with the audit committee and the chairperson


Lessons Learned

Effective corporate governance requires a proactive, focused state of mind on the part of directors, CEO and senior management. All must be committed to business success through maintenance of the highest standards of responsibility and ethics

Even the most thoughtful and well-drafted policies and procedures are destined to fail if directors and management are not committed to enforcing them in practice


Lessons Learned

A good corporate governance structure is a working system for effective decision-making and appropriate monitoring of compliance and performance

Sound Governance is dependent on the synergy generated among the four principal components of effective corporate governance systems: Boards of directors, Management, Internal auditors, and External auditors. In that structure, internal auditors and audit committees are mutually supportive


Some related literature from the Institute of Internal Auditors: “Professional Practices Framework”

(PPF) “International Standards for the

Professional practice of Internal Audit” (ISPPIA)


IIA Standard 2130 – Governance

The internal audit activity should assess and make appropriate recommendations for improving the governance process in its accomplishment of the following objectives: Promoting appropriate ethics and values

within the organization Ensuring effective organizational performance

management and accountability Effectively communicating risk and control

information to appropriate areas of the organization

Effectively coordinating the activities of and communicating information among the board, external and internal auditors and management



IIA Practice Advisory PA 2130 Internal Audit Activity as Ethics Advocate Internal auditors and the internal audit activity

should take an active role in support of the organization’s ethical culture. They possess a high level of trust and integrity within the organization and the skills to be effective advocates of ethical conduct. They have the competence and capacity to appeal to the enterprise’s leaders, managers, and other employees to comply with the legal, ethical, and societal responsibilities of the organization



IIA Practice Advisory PA 2130 Internal Audit Activity as Ethics Advocate The internal audit activity may assume one of

several different roles as an ethics advocate. Those roles include chief ethics officer (ombudsman, compliance officer, management ethics counselor, or ethics expert), member of an internal ethics council, or assessor of the organization’s ethical climate



Final Thoughts The published reports of corporate governance

failures in various countries underscore the need for change to achieve greater accountability and transparency by all organizations

Senior management, boards of directors, internal auditors, and external auditors are the cornerstones of the foundation on which effective organizational governance is built

Internal audit activity plays a key role in support of good organizational governance; it has a unique position to assist in improving an organization’s operations by evaluating and improving the effectiveness of risk management, control, and governance processes


Final Thoughts Lebanese Code of Corporate Governance is an

excellent source and roadmap to companies for adoption of corporate governance initiatives

LCCG Contains principles widely accepted in US, Europe, etc. and recently embraced by many Arab Countries in their regulations (Oman CMA, Bahrain CBB, Saudi Arabia SAMA, Jordan)

LCCG is still Voluntary and not legally binding Role of Audit Committee as stated in Appendix F

of the Code could be improved


Thank You

may 17, 2007acal presentation by naji fayad1 corporate governance and the role of internal audit the...

Documents

internal audit functionlessons

internal audit functiontwo

role of internal audit

internal brainstorming

naji fayadlimitations

good corporate governance

new management

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