A framework for the evaluation of the internal control systems in banking organizations was issued in 1998, and lately in 2011 by the Basel Committee on Banking Supervision. The main purpose of the frameworks was to address issues of concern that arise in the course of bank supervision with a view to enhancing supervision through measures that promote sound practice in the management of risks.
To establish a foundation for a safe and sound operation in the banking industry, a system of effective internal controls must be critically entrenched as a component of the bank management. The Basel Frameworks (1998, 2011) stated that the presence of such system will provide an assurance that banking organizations will meet their goals and objectives. It can help banks achieve their objectives in the three areas of performance, information, and compliance.
Specifically, the banks will be profitable, even into the long-term through being effective and efficient in the performance of their banking operations; the attainment of their information objectives entails that their financial and management reporting will be reliable, complete, and timely; and in all, such a system will ensure that the banks comply with laws and regulations including internal policies, plans, and procedures. The frameworks ensure that these objectives are achieved in a manner that is clear and straightforward.
As in COSO, the Basel Frameworks stated that internal control in banking organizations consists of five interrelated elements that will facilitate the achievement of the three aforementioned objectives. The five elements are “Management oversight and the control culture; Risk recognition and assessment; Control activities and segregation of duties; Information and communication; and Monitoring activities and correcting deficiencies” (Basel Framework, 1998, p. 10).
Derivable from these elements are 13 principles for use by supervisory authorities when evaluating banks’ internal control systems. The frameworks, however, stated that the exact application of these principles in any specific areas or activities within the banks is dependent on the assessment of the risks to which the banks are exposed.