Category Banking

The 2007 Annual Internal Audit Benchmark Survey of Tier 1 SA banks

12 July 2007 Ernst & Young

Ernst & Young facilitated a benchmarking survey of Internal Audit activities for Tier1 banks in South Africa early in 2006. This was repeated for four of the banks in the first quarter of 2007, to assess how the Internal Audit landscape has changed over the last year and what the nature of these changes were.  

The key focus of the survey is to provide a local benchmark around efficiency measures, the audit methodology, topical issues, governance framework and team composition.

The high level findings/key themes of the survey are as follows:

Efficiency measures
No one bank ranks consistently best or worst on the efficiency measures. For instance, the bank that ranked first in terms of the measure cost per Internal Auditor did not rank first in terms of number of Internal Auditors to assets or 'Internal Auditors to turnover'.  

It was interesting to note that the banks that scored highly in some categories were not necessarily keen to be perceived to be the lowest-cost or most efficient operators. There was a concern that being the lowest cost operator could mean they are running cheap operations. That was definitely more evident in 2005 than it was in 2006, but remains a valid observation.

One of the key findings highlighted by the survey was that Internal Audit is not keeping pace with growth in advances, turnover and employee numbers, despite strong growth in the cost of Internal Audit. There were three banks that reported a significant increase in Internal Audit costs, and one bank which experienced either a marginal or no increase in running costs. Overall, the cost increase for running Internal Audit across the 4 banks amounted to 27.5%.

On the other hand, the overall headcount for internal audit fell 8%, although this was largely due to structural changes in one of the banks, industry headcount rose a nominal 2%. Overall then, given the strong increases in running Internal Audit, coupled with a marginal rising headcount, there was a noticeable rise in the cost of Internal Audit per auditor.

There was also a strong rise in the measure number of employees (in the bank) per Internal Auditor. Strong advances growth and turnover growth meant that the banks continued to add to their employee numbers through 2006, whilst Internal Auditor employee numbers were only marginally up on 2005. One of the Internal Audit managers made the point that this is a more critical measure, and that should this ratio rise too steeply, it would indicate an area of concern.

Despite the strong rising Internal Audit running costs, there is no discernable trend in efficiency (as measured by Internal Audit cost to turnover).Two banks reported improved efficiency ratios, and two reported declining efficiency. The two banks reporting improved efficiency ratios would have seen the cost of internal audit rising at a much slower pace than turnover, whilst in the case of the other two banks, their internal audit running costs rose at a steeper pace than turnover.

Methodology and team composition:
There is a lesser focus on Continuous Audit in 2006, although the decline is only marginal. One would need to run the survey for an additional year to obtain sufficient sample points to determine whether this is a long term trend.

There are considerable differences in experience levels throughout the banks. Some banks make considerably more use of experienced resources, specifically in the commercial audit teams, whilst others have a bias to employees with less experience but with better qualifications. There was not a direct correlation between the cost per internal audit of each bank and the level of experience or level of qualifications. This is most probably attributable to the cost of an internal auditor with more than ten years experience being on par with a newly qualified chartered accountant.

Global benchmark
Providing a global benchmark comparison proves intriguing, although it should be noted that the global benchmark is across different sizes of banks, many of whom much larger than local banks and may include operations that are not comparable to the four South African Banks. On most measures, South Africas four banks do not compare favourably. For instance, the global benchmark for large banks Internal Audit cost to turnover is a mere 0.06%, in comparison with 0.368% locally. Similarly, the global benchmark for assets per Internal Auditor stands at R11.6bn, compared with R3.56bn for South African banks. On the other hand, in terms of the average cost per Internal Audit employee, South Africa stacks more favourably, with one bank ahead of the global benchmark, and the other three banks not excessively above the global average.

Furthermore, South African banks are able to deliver a final audit report far sooner than their global peers, who typically require in excess of 30 days to do so, while South African banks can typically deliver in 11-20 days.

One additional area where local banks stack favourably is in employee turnover ratios. South African banks lose proportionally fewer Internal Auditors than their global counterparts do, typically losing staff at half the pace.

The results of the survey provided the four local banks with an opportunity to benchmark themselves against their peers and understand the key measures in terms of their own strategy. From the feedback it was evident that, for the most part, banks are comfortable with where they are in relation to their peers, provided they could understand the context and that it was in line with their strategy.

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