Credit Granting and Underwriting Commercial Markets & Corporate and Asset Backed Lending Final Audit Report Report Nr.

Transcription

1 Credit Granting and Underwriting Commercial Markets & Corporate and Asset Backed Lending Final Audit Report Report Nr. 7/12 July 4, 2012 Distribution: To: CC: President & CEO Senior Vice President & Chief Financial Officer Senior Vice President, Financing Vice President & Corporate Controller Vice President, Corporate and Asset Backed Lending Vice President, Commercial Lending Senior Vice President & Chief Risk Officer Senior Vice President, Corporate Affairs & Secretary Senior Vice President, Human Resources & Communications Senior Vice President, Business Development Senior Vice President, Insurance Senior Vice President, Business Solutions & Innovation Director, Planning & External Relations Principal, Office of the Auditor General Director, Office of the Auditor General Audit Team: Don Gavigan Allison Lowe Vice President Internal Audit Monica Ryan

2 Table of Contents Introduction... 3 Audit Objectives & Scope... 3 Internal Audit Opinion... 3 Audit Findings & Recommendation.. 4 Conclusion... 4 Credit Granting and Underwriting Commercial Markets &Corporate and Asset Backed Lending July 4,

3 Introduction In accordance with our FY 2011 Audit Plan, EDC Internal Audit performed an audit of the Credit Granting and Underwriting process for Commercial Markets and Corporate and Asset Backed Lending. The Commercial Markets Finance Group handles all financing transactions for customers designated as commercial market accounts with sales between $10M - $150M. The sector teams (Aerospace, Surface Transportation &Light Manufacturing, Extractive & Resources and Information Communication Technology & Infrastructure & Environment) within the Corporate and Asset-Backed Lending group handle transactions from customers with sales greater than $150M. Total business volume facilitated in 2011 from these two programs was over $12 billion. Audit Objectives & Scope The overall objective of this audit was to evaluate the design and operating effectiveness of the controls surrounding credit granting and underwriting of the Commercial Markets and Corporate and Asset Backed Lending process. The scope of this audit included detailed testing of controls pertaining to deal initiation, risk assessment, credit analysis and pricing, delegations of authority (DOA) and systems and tools. Excluded from the scope was analysis of the tracking of security/collateral post-origination. Internal Audit Opinion In our opinion, controls surrounding the Commercial Markets and Corporate and Asset Backed Lending Credit Granting and Underwriting process are Well Controlled 1. Through our detailed transaction testing we have verified that key controls designed to mitigate lending, compliance, mandate and transaction processing risk as it relates to this process are effectively designed and operating as intended. One moderate 2 issue was noted and is described in the following section. 1 Our standard audit opinions are as follows: -Strong Controls: Key controls are effectively designed and operating as intended. Best in class internal controls exist. Objectives of the audited process are most likely to be achieved. -Well Controlled: Key controls are effectively designed and operating as intended. Objectives of the audited process are likely to be achieved. -Opportunities Exist to Improve Controls: One or more key controls do not exist, are not designed properly or are not operating as intended. Objectives of the process may not be achieved. The financial and/or reputation impact to the audited process is more than inconsequential. Timely action is required. -Not Controlled: Multiple key controls do not exist, are not designed properly or are not operating as intended. Objectives of the process are unlikely to be achieved. The financial and/or reputation impact to the audited process is material. Action must follow immediately. 2 The ratings of our audit findings are as follows: Major: a key control does not exist, is poorly designed or is not operating as intended and the financial and/or reputation risk is more than inconsequential. The process objective to which the control relates is unlikely to be achieved. Corrective action is needed to ensure controls are cost effective and/or process objectives are achieved. Moderate: a key control does not exist, is poorly designed or is not operating as intended and the financial and/or reputation risk to the process is more than inconsequential. However, a compensating control exists. Corrective action is needed to avoid sole reliance on compensating controls and/or ensure controls are cost effective. Minor: a weakness in the design and/or operation of a non-key process control. Ability to achieve process objectives is unlikely to be impacted. Corrective action is suggested to ensure controls are cost effective. Credit Granting and Underwriting Commercial Markets &Corporate and Asset Backed Lending July 4,

4 Audit Findings & Recommendation 1. Feedback Loop We observed that due diligence is performed on transactions by the deal team and documented in the Credit Memo which is then reviewed by the DOA prior to approval. Despite this analysis and oversight, some loans become impaired due to the realization of risks identified but accepted by the DOA at the time of deal approval or for reasons that could not reasonably have been foreseen. The risk management office (RMO) handles transactions post signing including those requiring waivers, amendments and consents (WACs), special risks and impaired loans. Certain types of these transactions could present opportunities for learnings related to underwriting. We recommend that the Commercial Markets and Corporate and Asset Backed financing teams establish a feedback loop for identifying causes of significant WACs, deal impairments or special risks for consideration by deal teams when assessing future transactions. Rating of Audit Finding Moderate Action Owner VP, Corporate & Asset Backed Lending and VP, Commercial Lending Due Dates - All actions to be implemented by Q Conclusion The audit findings and recommendation have been communicated to and agreed by management who has developed action plans that are scheduled for implementation no later than Q We would like to thank management for their support throughout the audit. Credit Granting and Underwriting Commercial Markets &Corporate and Asset Backed Lending July 4,

5