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The financial industry is seemingly under constant disruption, including a significant reliance on digital solutions and online banking to meet customer needs. Credit unions and other financial institutions are continually adapting to shifting regulations, evolving technology and heightened cybersecurity threats while striving to maintain compliance and operational efficiency. In this dynamic environment, internal audit functions play a critical role in identifying risks and ensuring adherence to policies and procedures. However, even the most well-intentioned and prepared audit teams are guilty of common mistakes that undermine the effectiveness of an internal audit.
Financial institutions must recognize and address these frequent internal audit missteps to strengthen governance and mitigate risk. Below are some of the most common miscues that we have seen and strategies for avoiding them.
Insufficient Risk Assessments
Risk assessment is the foundation of an effective internal audit function. However, many institutions fail to conduct thorough, data-driven assessments, instead relying on outdated methodologies or gut instinct. As a result, audits may focus too heavily on low-risk areas while overlooking emerging threats. Clinging to old ineffective processes seems to be more of an issue with smaller financial institutions like neighborhood credit unions and similar organizations.
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We recommend implementing a formal, structured risk assessment process that is regularly updated. Your processes should utilize data analytics to quantify risks and prioritize audit activities accordingly. In conducting your risk assessment, engage key stakeholders, outside of risk management and compliance teams, to ensure a comprehensive risk perspective.
Failure to Adapt to Regulatory Changes
Financial institutions operate in one of the most heavily regulated industries, with frequent updates from agencies such as the NCUA, CFPB and Financial Crimes Enforcement Network (FinCEN). Yet, it is common for many institutions to struggle to stay ahead of regulatory changes, leading to compliance gaps and potential penalties.
Regulatory changes should be one of the most important safeguards to adhere to, and it is critical to assign dedicated personnel to monitor regulatory updates and assess their impact. If unable to comply, there needs to be a process to identify noncompliance early, whether that be through compliance monitoring tools or manual processes. It could be costly to not comply. Employee education is critical and you should conduct ongoing training for audit and compliance teams to ensure they remain current.
Overreliance on Automated Processes
While automation can be useful to streamline operations, it should not replace critical thinking and analytical judgment, and these processes and automation need regular reviews to prevent oversight. Some audit teams become overly reliant on standardized processes, failing to assess the unique risks and nuances within their institution or update them to identify new threats or vulnerabilities.
Automation can be used as a starting point to reduce inefficiencies but audit procedures should be tailored to reflect institution-specific risks. Auditors should be curious and engage in discussions with frontline staff to gain deeper insights into operational challenges rather than just relying on automation. Maximize the value of your internal audit function and your protection, and foster a culture of continuous improvement by regularly revising audit programs.
Inadequate Cybersecurity Auditing
With the emergence and reliance on digital banking, cybersecurity risks are among the most pressing concerns for financial institutions. Many financial institutions lack the technical expertise to assess these risks effectively in their internal audit. Gaps in cybersecurity auditing can leave institutions vulnerable to data breaches, ransomware attacks and other cyber threats, so this is an extremely critical area for improvement throughout the industry.
If possible, your institution should expand audit procedures to include penetration testing, incident response evaluations and vendor risk management. It may even be beneficial to consult an external cybersecurity resource to supplement your team. To ensure effectiveness, align cybersecurity audits with frameworks such as the NIST Cybersecurity Framework and FFIEC IT Examination Handbook.
Ignoring Third-Party Risks
Credit unions and other financial institutions are relying more on third-party vendors for technology, payment processing and other critical services. However, many internal audit teams overlook vendor risks, incorrectly assuming that third-party providers maintain their own robust controls.
Expanding your audit scope to include vendor due diligence, contract compliance and data security measures is critical so this area is not overlooked. You should also require third-party vendors to provide independent audit reports, such as SOC 2 reports, to validate their control environments and make changes if necessary. As with all areas, it is key to establish ongoing monitoring processes rather than relying solely on pre-contract due diligence.
Poorly Communicated Audit Findings
Audit findings are only as valuable as the institution’s ability to act on them and relay them adequately. In some cases, audit reports are overly technical, lack actionable recommendations or fail to resonate with key decision-makers.
It is best practice to use clear, concise language in audit reports, avoiding excessive jargon so that they can be easily understood and acted upon. Prioritize findings based on risk level and provide practical recommendations for remediation. As a next step, hold follow-up meetings with management to discuss audit results and agree on corrective action plans.
Strengthening the Internal Audit Function
Avoiding these common internal audit missteps requires a proactive, dynamic approach. Credit unions and financial institutions should continuously refine their audit processes, invest in training and technology, and nurture collaboration across departments.
By strengthening the internal audit function, institutions can navigate regulatory complexities, mitigate risks and reinforce trust with members, regulators and stakeholders. In a rapidly evolving financial ecosystem, getting internal audit right is not just a best practice – it’s a necessity.
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