Control units within Maltese credit Institutions and their consolidation : a study

Abstract

Purpose: The study challenges the conventional theoretical approach of the ‘Three Lines of Defense’ Model adopted in most of the Maltese credit institutions. Instead the author proposes a paradigm shifting conceptualised framework that would alter the corporate governance structures’ of banks. This study’s objective is to test the feasibility and willingness of credit institutions to adopt such an approach. Design: In order to test this hypothesis, the author sought out semi-structured interviews with seven Maltese banks, varying in size from significant, medium-sized and small institutions. Furthermore, the author carried out interviews with other external parties, namely the MFSA, Big four firms and other practitioners working both within and outside the financial industry. Findings: There were two contrasting opinions regarding the suggested proposition. On the one hand, those operating within the credit institutions as well as the regulator and the external auditors, do not believe that the proposition of integrating Risk, Compliance and Internal Audit functions in one team would be possible. The reason being that independence, which is the cornerstone of every Internal Audit Function, would be severely impacted. On the other hand, there were those practitioners working outside the banking industry but with sufficient experience and knowledge in the field, who challenged the traditional concept of independence. They argue that the functions should not be separate from each other because they have much in common. Four main themes emerged from the study, which were analysed accordingly. Conclusion: The concept of proportionality cannot be underestimated. For significant banks, this proposition is not feasible because it is logically and humanely impossible. On the other hand, in small banks, where there are much less complexities and processes, this proposition is much more feasible. Adopting this approach would in the long run, transform the small banks into a stronger and leaner organisations. Value: Hopefully this study would challenge the current practices of the internal auditing profession and organisations and invites them to evaluate their structures while recognising the benefits of adopting a combined assurance function.