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China's banking regulator is expected to launch a guideline within the year for commercial banks to enhance their internal audit functions.

 

With the guideline, banks will be urged to transform their internal audit departments into more independent and efficient entities to supervise a bank's daily operations.

 

Ernst & Young, a global auditing and business advisory service, said the China Banking Regulatory Commission (CBRC) is seeking comments on its consultative draft of the guideline.

 

The firm gave the above news and revealed that the draft, which began last April, is right on schedule.

 

China's commercial banks are now marching toward an internationalized market, while at the same time, they face mounting internal and external pressures to promote corporate governance and risk control.

 

This became especially urgent last Thursday when the CBRC confirmed a corruption scandal exposed by a media report involving the Bank of China (BOC)'s Sima Road sub-branch in Shuangyashan of Northeast China's Heilongjiang Province.

 

The bank reportedly incurred 400 million yuan (US$49 million) in losses after a businessman fraudulently obtained banking bills from the Sima Road sub-branch in Shuangyashan and cashed them at other banks.

 

A number of bank officials, including the former head of BOC's Sima Road sub-branch, have been named as suspects.

 

"If domestic commercial banks' internal audit is strengthened, I believe such scandal and great losses could be avoided," said Alfred Yeung, partner of global financial services at Ernst & Young.

 

"The scandal reveals that China's commercial banks still have a long way to go before they catch up with advanced international banks. After all, banks in China have only undergone reforms for a few years."

 

Yeung emphasized that the transformation process should be incorporated within the bank's long-term strategies, and it should be a continuing self-improvement process.

 

"It takes time and courage to embrace this challenge," said Yeung.

 

However, commercial banks are facing challenges in the transformation of their internal audit.

 

Freddie Chui, also a partner of global financial services of Ernst & Young, said Chinese banks may experience difficulty in arranging the internal audits. Lack of skilled manpower, particularly in information technology, could also be an issue, he said.

 

Given those challenges, Chui suggested that certain international leading practices could be a useful reference for banks in China.

 

"Chinese banks may gain the board and management's support, provide the internal audit departments with necessary resources and focus on streamlining the communication and reporting channels with the Audit Committee and management before they gradually transform their internal audit functions to provide timely, reliable and objective assurance services," Chui said.

 

(China Daily March 16, 2006)