Role of Internal Audit in Model Risk Management Process

model risk management services

The use of financial models has increased significantly in the financial industry over the last few years. So, auditors need more preparation for risk evaluation associated with them. While top-tier banks have in-house teams to handle this new task, financial institutions with smaller teams need strategic planning to fulfill this requirement. They must realize the role of internal audit in the model risk management process and manage its impact on the institution’s financial models. That is where model risk management services come of the essence.

Understanding Internal Audit

Internal audit is a typical service many consulting firms provide. Experts in the field assist firms in improving and implementing compliance, risk management, and governance-related processes within the organization. Many financial institutions also have in-house internal audit teams, depending on the company’s size and budget. Some organizations partner with outsourcing consulting firms for more expertise and higher-scale internal audit.

An internal audit team helps a company achieve its goals by evaluating the model risk environment. It helps a business survive the competition by doing the following:

  • Monitoring, assessing, and analyzing the risks within an organization
  • Ensuring compliance with federal and state laws and policies
  • Reassuring and recommending the proper steps to the company’s governing boards and owners

Internal audit helps with different business aspects, ranging from modifying the company culture to choosing the right technology. Auditors analyze and record the existing processes, often through personnel interviews, and recommend steps to improve efficiency. A professionally organized internal audit plays a crucial role in a company’s model risk management process, as it assesses the efficacy of internal controls and develops a better risk management program to save time and cost.

An internal audit requires sufficient funds, management support, skilled professionals, access to information, and organizational independence. That is why an organization needs reliable and trustworthy model risk management services for the purpose.

Why is Internal Audit Crucial for Model Risk Management?

Internal audit is highly important for model risk management. Internal auditors assess model risk and include it in the audit process with sufficient coverage for various regulatory areas. They have technical specialization required for the purpose. Their responsibilities include:

  • Reviewing the frequency, timeliness, inclusivity, and documentation of various activities related to model validation.
  • Independently validating internal controls required for the models’ usage, validation, and development.
  • Ensuring compliance of control groups and model owners with the model risk policies.
  • Checking if the framework addresses individual models in the model risk and aggregates them.
  • Reporting their findings to the company’s regulators, board, and senior management and monitoring them after remediation.

The complexity of models is expected to grow with the increasing need for models and improving technological processes. Teams with limited capacities must find qualified resources to achieve success. A pool of internal auditors with statistical and technical expertise is essential to audit the models. If an in-house team is feasible, consider outsourcing the internal audit to model risk management services.

Choosing an Internal Audit Team

An organization can choose an internal audit team by checking these key traits:

  • Experience and Knowledge: The auditing team’s experience and knowledge of the subject are highly crucial. A lower level of expertise will harm the audit ad increase the risk involved.
  • Competence: Evaluate the team’s objectivity and competence in the field and select the most appropriate field experts. 
  • Evidence: Obtain appropriate and sufficient evidence to assure that the audit team is qualified to perform and address the identified risks.
  • Technology Use: An internal audit team that uses technology to automate its processes maximizes its efficiency and ensures success. Correct implementation of technology helps achieve better visibility, organization, reporting, time allocation, and communication. 
  • Creativity: A creative, progressive, and forward-thinking internal audit team attracts and retains top talent, helping the organization excel.

For managing risk with an internal audit team, the key lies in understanding that a successful team stems from creative individuals offering high-end model risk management services. Building a great team does not happen overnight, but outsourcing the operations to already trained teams saves a lot of time, money, and effort required otherwise. Great auditors spend resources and time aligning to the organization’s key objectives and creating engaging and meaningful audit reports. Hiring a high-performing internal audit team strengthens several areas in an organization and gradually improves the business as a whole.

By kazim kabir

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