The Managing Director/Chief Executive Officer of Nova Merchant Bank, Mr. Nath Ude, has charged auditors to urgently be in control and, at the same time, be far ahead of digitisation processes as they affect financial services globally.
Delivering a paper entitled ‘Future of Internal Audit in an Increasingly Digital World’ at the 52nd Quarterly General Meeting of the Association of Chief Audit Executives of Banks in Nigeria
(ACAEBIN) at Oriental Hotel, Lagos, Ude said: “Today, we have the advent of crypto currencies. Regulations around these and future innovations need to be covered by audit teams.
“Processes, controls and regulations around the recognition, reporting, safeguarding and management of crypto currency accounts, account holder information, transactions and all the possible money laundering and financing of terrorism risks that such innovation can bring are areas auditors must watch out for”.
In his nine-point digitisation/internal audit presentation, he declared that the digital role of audit in each organisation must be defined, “the mindsets and aspirations of internal auditors must be assessed and any roadblocks to the achievement of digital auditors must be identified and addressed by each organisation”.
Amid applause, Ude emphasised that “the tools, knowledge and skills of internal auditors must evolve with the evolving times”.
Below is the text of the presentation:
FUTURE OF INTERNAL AUDIT IN AN INCREASINGLY DIGITAL WORLD
A PAPER PRESENTED AT THE 52ND QUARTERLY GENERAL
MEETING OF THE ASSOCIATION OF CHIEF AUDIT EXECUTIVES OF
BANKS IN NIGERIA (ACAEBIN) HELD ON JUNE 23, 2022, AT LAGOS
ORIENTAL HOTEL, VICTORIA ISLAND, LAGOS.
Protocols.
The year 2020 saw the globe plunge into an unprecedented health crisis, the likes of
which could not have been anticipated by global institutions, world governments, health
/ environment / security agencies or any scientific or technology based entities. Today,
in 2022, the impact of the changes the world at large has experienced in every sector
and on every continent are still being dealt with by governments, businesses, and
individuals.
Almost in one fell swoop, things that erstwhile were deemed impossible, difficult, or
challenging became the order of the day. With lock-downs instituted from one country to
the other where people could not go about their daily lives, let alone carry out their
regular business – the lock-downs bringing about stay at home orders; permissions for
only key business to operate; sanitization / protection measures; international travel
bans – and the impact of these on personal relations and business operations, led
people to find alternative ways to keep their lives and businesses going.
1. Working with Technology, Working Through Technology
The resulting adaptations and innovations that occurred in 2020 led to the execution of
a high volume of internet based and technology driven activities and operations,
including the golden “work from home” style of business operations that continued into
2021.
As a high number of people across the globe came to terms with remote operations, the
digital presence of individuals and businesses grew astronomically – from daily
communications on social media platforms, to official meetings on Zoom, Teams, and
other virtual meeting platforms, to e-payments via online banking and mobile
applications, to cloud computing and storage, to remote management and reviews of
numerous tasks and operations using video streaming and other audio-visual tools.
With these, new ways of working with technology and through technology became the order of the day and now in 2022 we are living in a new normal of hybridization – a merging of the innovations, learnings and realisations brought about by the pandemic, with the old ways of physical, in-person operations – which continues to evolve
2. Digitization in the Banking Industry and the New Players
This new normal we are in today shows a continuous integration of digitization in our daily lives and, by extension, in our business operations. As financial institutions, the
emergence of FINTECH companies is not a new topic; we now have banks either
acquiring FINTECHs, FINTECHs acquiring banking licences and banks creating
FINTECH arms. We have now moved forward to telecoms entities providing banking
services to their customers – MTN and Airtel have been granted payment service Bank
(PSB) licences by the Central Bank of Nigeria, where deposit takings, cross border
payments, e-wallet operations, and debit/pre-paid cards can be offered to customers.
MTN’s MoMo Payment Service Bank (MoMo PSB) Limited, formally commenced
operations on the 19th of May 2022 with an agent network of over 166,000 active
agents.
The foregoing mean growth in customer base, transactions, revenue, regulations and by
default, growth in risks, controls, and compliance concerns. The new normal demands
evaluation of the opportunities presented by the changed or hybrid operations in each
specific organisation using methods that match the development. This implies that
relying on or requiring physical proximity to, manual handling or operation of and/or
central or fixed location or base for deliberation, review, assessment or reporting on
activities need to change as the digital space, where most of the new transactions will
take place, is not limited to physical or singular unique location(s).
3. Changing Customers in the Digital Era
Digitization has brought a whole new approach to how people live their daily lives and conduct their businesses. The future is coming, some would argue that it is already
here. Let’s project a little bit into the future: millennials, also known as Generation Y, are
generally those aged 26 to 41 (born 1981 – 1996) are the working age we have today;
Gen Z are generally those aged from 10 to 25 (born 1997 – 2012) are working age and
soon to be working age.
Today’s Gen Z are tomorrow’s millennials, and this group (Gen Z) who have grown up
or are growing up playing with their parent’s mobile phones at the age Gen Y played
physical card or board games; who are attending coding classes during summer
holidays at the age Gen Y was learning about chat rooms on the internet and who play
video games with people half a world away whom they will never meet at the age Gen Y
was going to their friends’ houses to play video games with people in their
neighborhood or school; are the business owners, industry leaders and global leaders
that we will have tomorrow. Can we take a moment to envision a world run by such digitally sensitised people?
4. Evolving Risks in the Digital Era
As our businesses adapt to bring services closer, faster and more conveniently to
current, prospective and future clients, the attendant risks and controls required to
manage such risks cannot be overstated.
Just as banking evolved from having your bank account accessible from a specific
branch of a specific bank located at a specific location, to where we now have
borderless banking accessible from an app in a phone in our pocket; the risks have
evolved from guarding the bank branch to guarding the internet connection points, cloud
storage and intranet connections of our banks – all words and concepts that would have
been strange as recently as 40 years ago.
The exposures to financial loss and data compromise in the digital space is a significant
concern that requires auditors who not only understand internal business processes but
also have the skills base to understand the digital processes and exposures the Bank
faces.
The anonymity that digitalization brings – remote account opening processes, use of
robots by tech-savvy individuals, groups and entities to simplify processes (or
impersonate actual humans), single individuals creating multiple accounts either of their
own making or by impersonating existing individuals – is an avenue for revenue leakage
and reputational damage for Banks. Auditors need to think along such lines in the
execution of their roles.
5. Evolution of Regulatory Requirements
We cannot overlook the regulatory angle of increased digitization. Regulatory
frameworks will, by necessity, continue to evolve in order to put checks in place around
the operation and reporting of new technologies adopted by Banks. From the use of
banker’s cheques to the use money of transfer forms; from the use of ATMs to the use
of internet banking and POS machines; from the use USSD (Unstructured
Supplementary Service Data) codes and mobile money apps to the use of QR (Quick
Response) codes, regulations have evolved to protect customers and Banks from
exploitation, abuse and misuse.
Data privacy laws, information assets of customers and the internal policies on access
to, storage and security over customer and Bank proprietary data/information are areas
auditors need to monitor, with increasing importance as the world moves forward in the
digital space. With open banking today and its use of APIs (Application Programming interfaces) this is a key area that cannot be overlooked.
Today, we have the advent of crypto currencies. Regulations around these and future innovations need to be covered by audit teams. Processes, controls and regulations
around the recognition, reporting, safeguarding and management of crypto currency
accounts, account holder information, transactions and all the possible money laundry
and financing of terrorism risks that such innovation can bring are areas auditors must
watch out for.
The Central Bank of Nigeria issued a circular to all deposit money banks and payment
service providers in February 2021 on its regulatory framework for open banking in
Nigeria; CBN Regulatory Guidelines on the e-Naira was issued in October 2021 – to
provide few examples of new regulations coming up in the digitization age.
6. Auditing in a Digital Era
The tools, knowledge and skills of internal auditors must evolve with the evolving times.
The tools used to carry out audits; the knowledge – terms, terminologies, applications,
options, uses – of digital platforms, outlets, services; and the skills – comfort with basic
computer applications and IT (Information Technology) audit software, development of
IS (Information Systems) audit skills, (re)learning – must rise to meet the changes in the
industry.
The volume and breadth of transactions, reports, customer service requests, incident
reports, regulatory filing and the checks that will need to be done on these items cannot
be done effectively with the usual tools and cannot be done effectively using the usual
processes.
Throughout the history of auditing, audit tools have had to be more advanced or at least
at par with the tools used by process owners. As of today, there is no audit team that
does not use a computer system and one or more software applications to carry out
their audits. From the use of various Spreadsheet software applications to the Computer
Assisted Audit Techniques (CAATs) i.e. specifically designed auditing software; our
current audit teams leverage existing technologies in executing their roles.
Our current audit teams generally are divided – in one way or another – between
business process auditors and IT/IS auditors and perhaps Investigation or Forensic
teams. While IT/IS auditors specialize in the audit of information technology or
information systems, the future demands that business process auditors, who are now
dealing with more advanced and more technical business processes, require more
advanced and more technical IT and IS audit skills to bring increased value to their audit
execution and in proffering recommendations.
We know from experience that the computer knowledge, expertise and experience of
our audit teams has direct impact on their ability to optimize the use of the technology
available to them. Likewise, our auditors’ knowledge, expertise, and experience of
existing and advancing technologies will have a direct impact on their ability to review and advise management on risks and controls related to technologies adopted by the
organization.
7. The Digital Reality – Experiencing Tomorrow, Today
Technological advancement in hardware and software applications, have brought about
automations that continuously reduce the need for human interference in processes and
by default, human interference in auditing of such processes; especially where the
applications are intelligent systems that learn and evolve based on their learnings –
most commonly referred to as AI (Artificial Intelligence).
We have robots responding to customer queries on websites and mobile apps, we have
cookies that record and report on webpages visited by website users, we have
algorithms that report on how often an item was clicked on, how long a page was open
and whether a transaction was concluded on shopping sites, streaming services, social
media sites, etc. We can speak to our phones and other devices, and they respond to
our enquiry.
Virtual reality (VR) systems are growing in the real world – once mainly only focused on
or used by gamers, now we have the metaverse where a whole ecosystem can be
created for people to live digital lives, where meetings can be held in virtual reality
simulated spaces by people in different locations on the globe, each fully seated at a
desk or in a board room with a presentation being made by a facilitator in a virtual office
with attendees using avatars of their choosing.
8. A look at Banking Trends
Accenture’s report on “Banking Top 10 Trends for 2022” provides a good summary of all
the aforementioned topics and considerations. 6 of the 10 items speak directly to what
we have discussed:
1. Everyone wants to be a super-app: Super-apps are dominating more aspects of the
digital world and human interaction. Banks face a high-stakes choice to compete or
collaborate.
2. Innovation makes a comeback: To keep up with fintechs and other competitors,
banks are rediscovering their creative mojo and asking a simple, powerful question:
“Why not?”
3. The digital brain gets a caring heart: Banks are looking for ways to have meaningful
conversations with customers in digital spaces. Technology like AI can help make
the human connection.
4. Digital currencies head for college: With crypto currencies here to stay, experiments
like CBDCs are gathering momentum. The search is on for use cases that prove the economic benefits.
5. Smart operations put zero in their sights: Artificial intelligence and machine learning
in banking now surpass humans in some tasks. Applying this tech will bring zero
waste operations within reach.
6. Payments: anywhere, anytime … and now anyhow: The next payments revolution
will stem from open networks, which empower banks to reimagine their payments
offerings for newly-demanding customers.
9. Conclusion
In conclusion, where in the past auditors used paper and the infamous green pen
auditors and their tools continue to evolve to meet or stay ahead of the technologies
used by businesses.
A new breed of internal auditors will be needed to move organizations forward in the
digital world. Business must recognize and support this as our auditors are a vital part of
our workforce – trainings, sessions, seminars, knowledge sharing, meetings and all
other avenues where new technologies are discussed should have audit team members
in attendance and continually learning to stay ahead of or at least in sync with the
changes.
The journey has already begun, the digital role of audit in each organization must be
defined, the mindsets and aspirations of internal auditors must be assessed and any
roadblocks to the achievement of digital auditors must be identified and addressed by
each organization.
For this, regular upskilling, trainings, attendance at seminars and knowledge sharing
sessions, continuous engagements with groups such as the Association of Chief Audit
Executives of Banks in Nigeria (ACAEBIN), security agencies and continuous
interactions with regulators, would serve to keep auditors abreast of new technologies,
audit approaches and guidelines and regulations affecting new and emerging
technologies.
Thank you for the opportunity given to NOVA Merchant Bank to host the Association on
the 52nd Quarterly General Meeting. I wish you successful deliberation in the course of your meeting.
NATH UDE
MD/CEO
NOVA MERCHANT BANK LTD
