Four Factors that Cause Weak Internal Control System
The internal control system in banking refers to one that largely identifies the effectiveness of the organization and minimizes the risks associated with the bank’s reputation and compliance to the mission. The assessment of internal control systems is necessary to understand how the bank may eliminate the existing challenges on its way to the successful operation. The internal system guideline is proposed by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.
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The chief executive of ZZ bank points out that the organization presents the appealing incentives and salaries to its employees. However, among the factors, contributing to breakdown in controls, there may be the traders’ malpractice, the human factor prioritizing personal values over those of the organization.
Another potential factor refers to the integrity and ethical values. In particular, it is necessary to revise the policies regarding the mentioned points and also check awareness of employees about them. The lack of proper communication and integration leads to the disengaged action and misunderstanding. Management’s poor operating style and philosophy is one more factor that serves as the indicator of the perspective failure in internal systems control (Baily & Taylor 2014).
In case management cannot provide the open atmosphere to interact with personnel and behaves in a secretive manner, failing to ensure quality, it leads to the internal problems. The fourth factor is the very organizational structure with poor understanding of responsibilities and the lack of proper documentation. Thus, malpractice, the lack of integrity, management style, and the organizational structure are the four factors that may lead to internal control system breakdown.
Disaster Recovery Risk in Banking
The reputation risk and business continuity risk compose disaster recovery risk, the scope of tasks of which is determined by the incidents that can lead to the suspension of the functioning of the entire organization or its key business processes. Their probability is low, ranging from low to medium, yet the damage can be impressive and sometimes causes bankruptcy. Disaster recovery planning can be utilized by the organization to conduct risk analysis and assess their potential impact, then applying the corresponding measures to improve the situation.
However, experts note that the Continuum Planning (BCP) and Disaster Recovery Planning (DRP) techniques do not have time to adapt to the increased demands of the business environment and are working less and less efficiently (Watters 2013). In this regard, many banks are moving to a new methodology for Business Continuity Management (BCM) as more appropriate for achieving the new objectives in operational risk management.
Including all the best achievements of the related disciplines as well as the aspects of process organization and planning, BCM introduces much more detailed procedures for effectively monitoring the implementation of the business continuity process. In addition, the new methodology includes the following key elements: a business continuity strategy, an alternative business strategy, a risk communication strategy, continuous monitoring and risk assessment, regular updating of contingency plans, and the incorporation of continuity elements on the entire infrastructure of the organization.
BCM is a holistic management process that identifies the potential threats to business continuity and provides a conceptual basis for ensuring the sustainability of the business and its ability to respond effectively to emerging negative events (Engemann & Henderson 2012). It is possible to recommend adopting BCM due to its ability to strengthen the focus on individual employees, processes, systems, and products in accordance with the general tendency to increase the so-called “granularity” of management that refers to increasing the concentration of attention of managers on individual business details.
Baily, MN & Taylor, JB 2014, Across the great divide: new perspectives on the financial crisis, Hoover Institution Press, Stanford.
Engemann, KJ & Henderson, DM 2012, Business continuity and risk management: essentials of organizational resilience, FBCI, Brookfield.
Watters, J 2013, Disaster recovery, crisis response, and business continuity, Apress, New York.