Responsibility
In line with the Banking Act Direction No. 11 of 2007, section 3(8) (ii)(b), the Board of Directors presents this report on Internal Control over Financial Reporting.
The Board of Directors (“Board”) is responsible for the adequacy and effectiveness of the internal control mechanism in place at Bank of Ceylon, (“the Bank”). In considering such adequacy and effectiveness, the Board recognises that the business of banking requires reward to be balanced with risk on a managed basis and as such the internal control systems are primarily designed with a view to highlighting any deviations from the limits and indicators which comprise the risk appetite of the Bank. In this light, the system of internal controls can only provide reasonable, but not absolute assurance, against material misstatement of financial information and records or against financial losses or fraud.
The Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Bank and this process includes enhancing the system of internal control over financial reporting as and when there are changes to business environment or regulatory guidelines. The process is regularly reviewed by the Board and is in accordance with the guidance for Directors of banks on the Directors’ Statement on Internal Control issued by the Institute of Chartered Accountants of Sri Lanka. The Board has assessed the internal control over financial reporting taking into account principles for the assessment of internal control system as given in that guidance.
The Board is of the view that the system of internal controls over financial reporting in place is sound and adequate to provide reasonable assurance regarding the reliability of financial reporting, and that the preparation of Financial Statements for external purposes is in accordance with relevant accounting principles and regulatory requirements.
The Management assists the Board in the implementation of the Board’s policies and procedures on risk and control by identifying and assessing the risks faced, and in the design, operation and monitoring of suitable internal controls to mitigate and control these risks.
Key features of the process adopted in reviewing the design and effectiveness of the internal control system over financial reporting
The vital processes that have been established in reviewing the adequacy and integrity of the system of internal controls with respect to financial reporting include the following:
- Various committees are established by the Board to assist the Board in ensuring the effectiveness of Bank’s daily operations and that the Bank’s operations are in accordance with the corporate objectives, strategies and the annual budget as well as the policies and business directions that have been approved.
- The Internal Audit Division of the Bank checks for compliance with policies and procedures and the effectiveness of the internal control systems on an ongoing basis using samples and rotational procedures and highlights significant findings in respect of any noncompliance. Audits are carried out on all units and branches, the frequency of which is determined by the level of risk assessed using approved risk rating methodologies to provide an independent and objective report. The annual audit plan is reviewed and approved by the Board Audit Committee. Findings of the Internal Audit Division are submitted to the Board Audit Committee for review at their periodic meetings. Despite the challenges resulted from the pandemic and the economic crisis which prevailed during the year, the Internal Audit Division was able to uninterruptedly deliver its functions by focusing on near real-time and offsite audit methodologies in addition to traditional onsite audits. This enabled the Division to ensure continuous compliance with policies/procedures and assure the effectiveness of the internal control systems of the Bank during this challenging period.
- The Board Audit Committee of the Bank reviews internal control issues identified by the Internal Audit Division, the external auditors, regulatory authorities and the management, and evaluates the adequacy and effectiveness of the risk management and internal control systems. They also review the internal audit functions with particular emphasis on the scope of audits and quality of the same. All minutes of the Board Audit Committee meetings are forwarded to the Board. Detail analysis of the activities undertaken by the Audit Committee of the Bank are set out in the Audit Committee Report.
- In assessing the internal control system over financial reporting, identified officers of the Bank collated all procedures and controls that are connected with significant accounts and disclosures of the Financial Statements of the Bank. These in turn were observed and checked by the Internal Audit Division for suitability of design and effectiveness on an ongoing basis. The assessment did not include subsidiaries of the Bank.
- The Bank adopted the Sri Lanka Accounting Standard – SLFRS 9 - “Financial Instruments” with effect from 1 January 2018. In order to comply with the requirements of SLFRS 9, the Bank developed expected credit loss (ECL) models using a wide range of forecast economic scenarios to determine impairment provisions with the support of an external consultant. These models have been validated by the Internal Audit Division with the assistance of a firm of Chartered Accountants. The Bank has taken adequate measures to comply with the Directions No.13 and 14 issued by the Central Bank of Sri Lanka with regard to classification, recognition and measurement of credit facilities under SLFRS 9 effecting from 1 January 2022 and the same has been audited by the Internal Audit Division.
- The Bank is in the process of implementing an automated financial reporting solution in order to comply with the requirements of recognition, measurement, classification and disclosure of the financial instruments more effectively and efficiently and to facilitate the “Financial Statement Closure” process. This automated solution enables the calculation of impairment provisioning under SLFRS 9 - “Financial Instruments” and facilitates the fulfilling of internal and external reporting requirements.
- The Bank has considered the uncertainties in the economy during the year 2022 with special emphasis on increased inflation and interest rates as well as depreciation of the local currency. The required estimates and judgements were made giving due considerations to those areas which are more susceptible to economic uncertainties. Downgrading of sovereign rating to “RD” from “CC” were also considered when making provisions for foreign currency denominated financial instruments and loans and advances to sovereign.
- The Bank complied with the moratorium packages introduced by the Government and continuously provided relief to those affected by COVID-19 in 2022 as well. The impact of COVID-19 on the Bank’s customers in risk elevated industries were also considered when assessing the impairment provisioning using the Expected Credit Loss (ECL) model under SLFRS 9 - “Financial Instruments”. The Bank revised the Economic Factor Adjustment (EFA) used in calculating expected loss by incorporating the current economic condition to the EFA.
- A steering committee composing of various disciplines of the Bank monitors and coordinates the implementation of the automated financial reporting solution with special emphasis on the directions issued by the regulator for classification, recognition and measurement of credit facilities under SLFRS 9.
- The Bank is continuously monitoring and updating procedures inter-alia relating to impairment of loans and advances of the Bank and foreign branches, financial statement disclosures, risk management, related party transactions and all other significant banking activities based on the changing regulatory and market conditions. The requirements under SLFRSs/LKASs and regulatory directions have been communicated to the relevant stakeholders including the Board and senior management through training and awareness sessions.
- The comments made by the external auditors in connection with internal control system over financial reporting in previous years were reviewed during the year and appropriate steps have been taken to rectify them. The recommendations made by the external auditors in 2022 in connection with the internal control system over financial reporting will be addressed in the future.
Confirmation
Based on the above processes, the Board confirms that the financial reporting system of the Bank has been designed to provide a reasonable assurance regarding the reliability of financial reporting and the preparation of Financial Statements for external purposes and has been done in accordance with Sri Lanka Accounting Standards and regulatory requirements of Central Bank of Sri Lanka.
By order of the Board.
Colombo, Sri Lanka
31 March 2023