Cooperation Between 2. Line and Internal Audit

Abstract

The financial sector has been hit with numerous scandals in the last couple of years, combined with high inflation, the control functions of the financial institutions are now more relevant than ever. The control functions are individual functions with each their own purpose, but are there benefits of cooperation between these functions? And what possibilities are there for cooperation with the current legislation? This paper has focused on banks in Denmark with an internal audit function, therefore primarily larger banks as these are required to have one due to Danish law. The paper has set out to find out if cooperation creates value, and what issues may arise from this cooperation, in relation to the independence of the internal audit function. To answer this the legislation and guidelines affecting the functions have been assessed, the update from the IIAs three lines of defence model to the IIAs three lines model have been assessed, the possible future aspect of the cooperation has been assessed, and a survey has been completed in order to assess the characteristics of the current cooperation between the control functions. The paper has found that the current legislation focuses primarily on the independence of the control functions however, the guidance and models supporting the work of the functions are more open to cooperation between the functions, and some see it as a requirement. This is also shown in the update to the three lines model, which also now focuses on cooperation between the lines. The papers have found that currently almost all respondents are cooperating between the lines however, some only with one of the functions in 2. Line, and not both control functions. The cooperation consists of primarily coordinating activities, but also reliance on work performed by the other control functions. The paper has found that cooperation does create value in terms of better use of resources but also in terms of better coverage of risks in the organization. The paper has not found any significant issues in relation to the independence of the internal audit function as several safeguards are part of the internal audit standards which forms the basis of the work of the internal audit function.