External auditors to the financial institutions have failed - despite being required since 1990 to do so - to report material defects in internal controls or suspicions of impropriety to the Central Bank, the Comptroller & Auditor General (C&AG), Mr John Purcell, said yesterday.
In a "value for money" examination of the Central Bank's financial regulation function, Mr Purcell added that auditors did not routinely issue management letters raising specific internal control issues.
"There is scope for improving the reporting arrangements so that more assurance on internal control can be obtained from the work of external auditors," he said.
Mr Purcell said consideration must be given to requiring an annual "positive assurance statement" from external auditors to confirm that no control defects or suspicions of impropriety had come to their notice.
A Central Bank spokesman said this would require new legislation. He added that it had made a submission on this matter to the review group on auditing, which must report to the Tanaiste, Ms Harney, this summer.
Asked whether the Bank was surprised that auditors had failed to raise such matters as largescale DIRT evasion at the commercial banks, the spokesman said the provision related to prudential regulation of the banks, which was concerned with solvency.
He said the Central Bank had told the Dail Committee of Public Accounts' DIRT inquiry last year that the evasion of DIRT did not threaten the solvency of the banks. The spokesman added that the committee had accepted this.
The C&AG report on an examination carried out last year said the Central Bank had not met its own targets for planned inspections and reviews in recent years.
While the Central Bank's banking supervision department had responsibility to perform an annual inspection at 22 institutions, only 13 examinations had taken place in 1998. Two organisations in this group had not been examined since September 1995 and December 1996 respectively.
The department was required to carry out inspections every two years at a further 27 institutions, but only 19 had been performed in 1997-1998. Of this group, seven had not been inspected since 1997.
Despite the figures, the C&AG reported that the Central Bank was happy that all "required" examinations had taken place.
Asked whether the Bank was concerned that nine institutions appeared not to have been inspected since 1997, a spokesman said: "All necessary inspections did take place. It's not necessary to carry out inspections if certain other regulatory controls are met."
The C&AG report said the more recent emergence of investment institutions meant the Central Bank had responsibility for a greater degree of consumer protection than its regulation of banks and building societies.
On the regulation of the overall financial system, the C&AG said certain risks were overlooked by the Central Bank leading to significant drawbacks.
While the Bank maintained there were no grounds for domestic problems to cause the system to fail if the prudential health of each individual institution was assured through monitoring, the C&AG said there was no means to evaluate the effectiveness of this.
"A more comprehensive set of measures should be developed which identify the contribution of the Bank's risk management activities to the level of stability achieved," said the C&AG.
In a statement, the Central Bank said it had encountered difficulty recruiting staff, adding that tribunals and public inquiries had required reallocation of resources.
The report said there was a strong structural basis for anti-money laundering measures in the financial institutions. However, the development of process to determine the effectiveness of the measures was at an early stage.
