In line with the Section 3 (8) (ii) (b) of the Banking Act Direction No. 11 of 2007, and principle D.1.5 of Code of Best Practice on Corporate Governance 2017 issued by CA Sri Lanka (Code) the Board of Directors presents this report on internal control.
The Board of Directors (the Board) is responsible for the adequacy and effectiveness of the system of internal controls in place at Commercial Bank of Ceylon PLC (the Bank). However, such a system is designed to manage the Bank’s key areas of risk within an acceptable risk profile, rather than to eliminate the risk of failure to achieve the policies and business objectives of the Bank. Accordingly, the system of internal controls can only provide reasonable but not absolute assurance against material misstatement of management and financial information and records or against financial losses or fraud.
The Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Bank and this process includes enhancing the system of internal controls as and when there are changes to business environment or regulatory guidelines. The process is regularly reviewed by the Board and accords with the “Guidance for Directors of Banks on the Directors” Statement on Internal Control’ issued by CA Sri Lanka. The Board has assessed the internal control taking into account all main principles for the assessment of internal control system as given in that guidance.
The Board is of the view that the system of internal controls in place over financial reporting is sound and adequate to provide reasonable assurance regarding the reliability of financial reporting, and that the preparation of Financial Statements for external purposes is in accordance with relevant accounting principles and regulatory requirements.
The Management assists the Board in the implementation of the Board’s policies and procedures on risk and control by identifying and assessing the risks faced, and in the design, operation and monitoring of suitable internal controls to mitigate and control these risks.
The key processes that have been established in reviewing the adequacy and integrity of the system of internal controls with respect to financial reporting include the following:
Since the adoption of new Sri Lanka Accounting Standards comprising SLFRSs and LKASs in 2012, processes that are required to comply with new requirements of recognition, measurement, presentation and disclosures were introduced and implemented in 2013. Continuous monitoring is in progress and steps are being taken to make improvements to the processes where required, to enhance effectiveness and efficiency. The Bank has documented procedures relating to these new requirements and updates the procedure manuals as and when necessary and also obtained approval of the BAC and the Board for changes made to the documented procedures. Automating the processes relating to various computations required under SLFRSs and LKASs including loan impairments are in progress. The Banks’ Internal Audit Department commenced testing these processes since first quarter 2013 and continued to do so in 2018 as well. The test results were tabled regularly for review by the BAC during the year 2018.
The Board also has taken into consideration the requirements of the Sri Lanka Accounting Standard – SLFRS 9 on “Financial Instruments” that is effective from January 01, 2018, as it has a significant impact on the calculation of impairment of financial instruments on an “expected credit loss model” compared to the “incurred credit loss model” which was hither to applied until December 31, 2017 under the Sri Lanka Accounting Standard – LKAS 39 on “Financial Instruments – Recognition and Measurement”.
The Bank carried out a gap analysis with the assistance of Messrs KPMG and Messrs Ernst & Young to identify areas expected to have a potentially higher impact on amounts already reported in Financial Statements as at December 31, 2017 consequent to adoption of SLFRS 9. Subsequent to that and as per the Implementation Plan of the Working Committee formed, Bank developed statistical models to compute the expected credit loss as require by SLFRS 9. The Bank has completed the initial high level assessment of the potential impact on its Financial Statements for the year ended December 31, 2017, resulting from the application of SLFRS 9 with the assistance of Messrs KPMG. The above assessment together with the impact of the additional loan loss provision on the Financial Statements as at December 31, 2017, resulting from the application of SLFRS 9 which has been disclosed in the Financial Statements was validated by the Bank’s External Auditors, Messrs Ernst & Young. The progress of the implementation of SLFRS 9 in the Bank is monitored by the BAC on an ongoing basis. The policies, procedures and controls related to SLFRS 9 implementation are being developed.
The comments made by the External Auditors in connection with the internal control system during the financial year 2017 were taken into consideration and appropriate steps have been taken to incorporate them where appropriate.
The Assurance Report of the External Auditors in connection with internal control over financial reporting is appearing in the section on Independent Assurance Report in the chapter on Governance.
Based on the above processes, the Board of Directors confirms that the financial reporting system of the Bank has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Financial Statements for external purposes has been done in accordance with the Sri Lanka Accounting Standards and regulatory requirements of the Central Bank of Sri Lanka.
The External Auditors, Messrs Ernst & Young, have reviewed the above Directors’ Statement on Internal Control included in this Annual Report of the Bank for the year ended December 31, 2018 and reported to the Board that nothing has come to their attention that causes them to believe that the statement is inconsistent with their understanding of the process adopted by the Board in the review of the design and effectiveness of the internal control system over financial reporting of the Bank. Their independent assurance report on the “Directors’ Statement on Internal Control over Financial Reporting” is given in the section on Independent Assurance Report in the chapter on Governance of this Annual Report.
By Order of the Board,
K G D D Dheerasinghe
M P Jayawardena
Managing Director/Chief Executive Officer
February 22, 2019