Cleaning Out the Fridge: The Purpose of an Audit
Can you remember the last time you cleaned out your refrigerator? A grimy fridge isn’t just unpleasant; it can hasten spoilage, encourage mold and bacteria growth, and even increase your electric bills. Still, many of us don’t sort through the food we keep in cool storage as much as we should—it’s just not very high on anyone’s list of priorities. And, as long as no one gets sick, it’s probably no big deal… right?
But suppose for a moment that you’re in charge of a restaurant, and that the appliance in need of cleaning is an industrial fridge. There’s a lot more to wipe up, a lot more to throw away, a lot more sunk costs, and a lot more potential for illness. In short, there’s a lot more risk—and health inspectors are going to want to make sure you’re not passing that risk onto customers.
Sound familiar? If you work for a consumer finance company, you’re dealing with an industrial fridge. Compared with other lines of business, consumer lending necessitates a more thorough and more frequent fridge-cleaning regimen. We’re referring, of course, to organizational audits.
Audits: Painful But Necessary
As with the burden of cleaning out a fridge, no one wants to undergo an audit. Audits are arduous and time-consuming, and they routinely shine a light on host of messy, sticky issues— but, in an industry bound by strict regulations, audits need to happen.
In terms of compliance, audits are one of a few mechanisms through which government agencies, banking partners, and members of executive leadership can ensure that a business is following fair lending practices. Audits not only allow capital lenders to verify that clients conform to their standards and industry regulations, but help organizations uncover areas of risk and take proactive corrective action.
Two decades into the 21st century, the level of complexity in lending regulations has reached an all-time high, but financial services organizations have unprecedented access to auditing tools that uncover compliance data at the granular level. Thinking back to our original metaphor, imagine that your restaurant-sized fridge could clean itself, or at least notify you when it’s time and illuminate the yogurt cups and salsa jars that need to be tossed out. This is the power of a robust compliance management system.
Let’s take a look at how your CMS should handle audits:
What Is the Purpose of an Audit?
An organizational audit function fulfills certain consumer financial protection obligations, and regulators expect you to have one in place. Jusk ask the Consumer Financial Protection Bureau, which asserts that audit coverage is a primary component of an effective CMS:
The audit function should review an institution’s compliance with Federal consumer financial laws and adherence to internal policies and procedures and be independent of both the compliance program and business functions that include customer sales or service.
Source: CFPB Supervision and Examination Manual, available online at: https://www.consumerfinance.gov/policy-compliance/guidance/supervision-examinations
But audits don’t exist merely to appease regulators, or to drain organizational resources and raise the blood pressure of consumer lending executives. As an independent, objective review of your compliance program, an audit can serve numerous, critical strategic purposes.
Audits add value by allowing you to improve your operations without guesswork; they provide a rare glimpse of omniscience. An audit systematically evaluates your risk management methodology and governance processes, thereby equipping consultants with exhaustive information about your organization and deepening your and your board’s ability to make pivotal business decisions.
A compliance audit program provides a board of directors or its designated committees with a determination of whether policies and standards adopted by the board to guide risk management are being implemented to provide for the level of compliance and consumer protection established by the board. The audit should also identify any significant gaps in board policies and standards.
The benefits of audits are not limited to legal and compliance considerations. An audit is an enterprise-wide tool. It can tell you everything about your organization’s competitive advantages and opportunities for growth—everything from the average speed of a customer service response, to your rates of employee turnover, to the nature of your relationships with collection agencies.
Audits can save you money upfront on attorney and advisory fees. Indeed, many large consumer finance companies invest in well-staffed audit departments to maximize the value of business processes and keep track of how carefully employees are following workplace policies and procedures.
Audits generally have three primary objectives:
- Audits identify your compliance weaknesses.
- Audits uncover, resolve, and remediate any deficiencies—for example, where consumers might have been harmed.
- By evaluating real-world execution and operations, audits ensure all your policies and procedures continue meet internal measures of control.
Next Up: What the CFPB Looks for in a Financial Service Provider’s Audit Program
Check back here again next week to learn what regulators are looking for in your organization’s internal audit process. Until then, you can find more resources about audits—and all things Fair Lending compliance—in our Resource Library.