UPDATE 2-UK in-house auditors face more scrutiny

Mon Feb 11, 2013 5:55pm GMT

* Some internal auditors say they need more regulation

* Draft industry code will circulate until mid-April

* UK regulator bans use of internal auditors by accountants (Adds FRC on anticipated timing of change)

By Huw Jones

LONDON, Feb 11 (Reuters) - Internal auditors, under fire from regulators for failing to spot how banks were rigging the Libor interest rate, should report directly to company boards and have enough resources to do the job, a British industry body said on Monday.

Auditors employed by companies to assess if big risks have been properly identified, controlled and reported, are not subject to direct external regulation and have been discredited by a string of banking scandals.

Internal audit is separate from independent, external book-checking that listed companies must undergo. Some internal auditors say privately that regulatory scrutiny will help strengthen their role and make them more relevant.

A new draft code for the industry, written by the Chartered Institute of Internal Auditors in consultation with the Bank of England and the Financial Services Authority (FSA), goes out to public consultation until mid-April.

The draft code, designed specifically to give guidance to the financial industry, says internal auditors should not be barred from assessing the management of any risk and their scope should be unlimited.

"To ensure its independence and authority, the primary reporting line of internal audit should be to the chairman of the board of directors, not to the chief executive," the draft said.

Internal audit should also be adequately resourced, it said.

Many of the changes to the existing code reflect guidance from the global Basel Committee on Banking Supervision issued in June last year.

Britain's accounting regulator, the Financial Reporting Council (FRC), started a separate public consultation on Monday over when to ban external accounting firms from using internal auditors in their work.

"Permitting the direct use of internal auditors involves agreeing lower independence standards for some members of the audit engagement team...," said Nick Land, an FRC board member. "Accordingly, the FRC has concluded that this should no longer be allowed."

Marek Grabowski, FRC head of audit policy, told Reuters the ban was intended to apply to annual reports for 2014.

Last week, Royal Bank of Scotland was fined $612 million for rigging the London interbank offered rate (Libor), for several years under the nose of internal auditors.

In 2011, the bank's internal auditors told the FSA that issues raised by a review of Libor setting were being addressed and "adequate systems and controls" were in place.

In December, the FSA fined Swiss bank UBS for similar abuses, saying the "routine and widespread manipulation of submissions was not detected by compliance, nor was it detected by group internal audit, which undertook five audits of the relevant business area".

U.S. regulators ordered JPMorgan to improve internal auditing after its $6.2 billion loss in 2012 linked to its "London Whale" trade that went wrong. (Editing by Tom Pfeiffer and Dan Lalor)