Meeting Minutes for 2021 INTOSAI WGFMRR Virtual Meeting (Session I)

January 22, 2021

Introduction and Participants Information

A total of 39 representatives from 19 SAIs attended this meeting, including, Austria, Brazil, Canada, China, ECA, Estonia, Finland, France, Germany, Indonesia, Italy, Korea, Mexico, Pakistan, Poland, Qatar, Russia, Sweden, United Kingdom, and United States. In addition, three external experts from International Monetary Fund, China International Capital Corporation and Bank of China joined the meeting.

Mr. Wang Zhicheng (Director General, Department of Financial system audit, National Audit Office of China) welcomed the participants and thanked all member SAIs for collective support and continuing contribution to the working group. For the past 2020, many of the member SAIs have done productive audit work, which made positive contributions to the economic and social development in coping with the covid-19 pandemic and climate change. The working group also discussed work plan for the next three years and reached some consensus, especially in key working group tasks and cooperating mechanisms.

External Presentation[1] : Emerging financial risks and responses in the Wake of the COVID-19 Pandemic

Presentation of IMF: Financial Market Analysis and Outlook

The covid-19 pandemic continues to affect the global economy and financial system, but there are signs in most regions that financial conditions are easing: Vaccine rollout plus ongoing policy support generates a favorable financial conditions, lift risk assets and drive a cyclical rotation (for example, emerging market assets benefit from ample global liquidity); in the meantime, corporate defaults are contained at a relative low level, beyond expectation under such economic contraction.

Despite the rebound in economic activities, uncertainty still remains in many ways including: massive monetary stimulus trigger a search for yield and lead to a stretched valuations, corporate sector relies on policy support with low interest rates, therefore, default risk may go up when fiscal policy withdrawn given the magnitude economic contraction; many countries still face large financing needs and rollover risk.

About policy priorities, effective and more targeted support is recommended, including expedite vaccinations, and avoid premature withdrawal of lifelines, fiscal and monetary policies should continue to be supportive, at the same time, keeping financial stability risks from materializing. For emerging and frontier markets: policy should be maintained where debt sustainability is not a concern and inflation risks are contained.

Presentation of China International Capital Corporation: Atypical Economic Recovery

Presenter described covid-19 shock and current recovery of the global economy as atypical, which is driven by supply, in contrast with the traditional business cycle recovery. He analyzed different paths and approaches taken by US and China in 2020. The measures taken by China aimed to support supply, which lead to a faster supply recovery, shallower economic contraction, and widening trade surplus. By contrast, The US supports more on demand side, which therefore resulted in faster demand recovery, deeper recession, and widening trade deficit. In 2021, both countries are expected to has a stronger recovery with effective containment of the pandemic.

About emerging risk, presenter’s personal view of major China financial risk is the unsustainable non-government sector debt, the ratio of Debt service payments / New credit has bottomed up and likely to raise in 2021. The pandemic also causes structure and social problems in China. For example the Housing Market: housing prices raised in 2020 while housing rent declined, which means young and low-incoming people were hit more by the pandemic. The emerging risk in US will be inflation overshooting, which will lead to a large increase than currently expected by market, particularly in the service sector.

Presentation of Bank of China: Risks and Policy Response of The Chinese Banking Sector

Presenter analyzed current financial risks faced by Chinese banking sector (which plays a dominant role in China financial market) in the wake of the Pandemic and corresponding policy responses.

Chinese banking sector devotes continuing efforts to implement counter-cyclical policies, provide more credit to meet large funding demand, extend repayment period of loans and amend loan contracts for severely affected borrowers and to promote production recovery. At the same time, risk pressure intensified in banking sector, including: accumulating credit risk and capital pressure accumulated during the process of assets expansion.

A series of measures have been taken to address the risks, with its ultimate goal of promoting the production and stabilization of the economy. Counter-cyclical policies, such as providing re-lending funds, cutting Required Reserve Rates, extending loan repayments and subsiding unsecured loans have been utilized to prevent the “credit crunch” effects. Financial market regulation has been strengthened. In addition, better balance has been achieved between financial innovation and regulation. Banks’ corporate governance is significantly enhanced, and they are encouraged to utilize more innovative instruments to replenish capital. All these measures are aimed at defending the bottom lines of no systemic risks and bolstering the real economy.

SAI Information Sharing: Case Study

Below are summaries of Presentation made by representatives from Office of the Auditor General of Canada (OAG), National Audit Office of China (CNAO), The Audit Board of The Republic of Indonesia, Corte dei conti, and U.S. Government Accountability Office (GAO)

Auditing Covid-19 Government’s Response (OAG)

The Office of the Auditor General of Canada (OAG) was requested to perform an audit of the COVID-19 emergency response taken by the government and finished the report before 1 June 2021. In the audit planning, the OAG decided to analyze spending and programs related to:

• Protection of health and safety

2) Support to individuals and businesses

3) Financial markets liquidity support and capital relief

To overcome the difficulties caused by the Pandemic, the OAG focused on design, implementation and controls, made efforts to minimize the burden on public service delivering the programs and conducted live auditing which refers to ongoing exchange with the government to improve programs.

The OAG introduced their audit on the major program Canada Emergency Wage Subsidy (CEWS) since there were more concerns about the real economy. The purpose of CEWS is to help employers retain their employees during the Pandemic and ensure that workers are able to count on a source of income despite some sectors of the economy being shut down.

Among the early findings of the CEWS audit were that the Covid-19 Pandemic exposed weaknesses in the income support system for individuals and businesses. The audit also demonstrated the importance of sound analysis to inform good policy-making as well as agile and robust IT systems to implement well-designed programs.

Improve Audit Performance on Commercial Bank Through Big Data Analysis Methods (CNAO)

To conduct performance audit on commercial banks using data analysis methods, it is necessary to establish a standard table to integrate the business data of commercial banks, so as to provide data support for unified data analysis. From the perspective of structured data, CNAO made good use of the EAST System and 1104 Report, which were established or designed by the financial supervisor institution CBIRC, to expose problems such as false statistical indicators, violations and potential risks in commercial banks. From the perspective of unstructured data such as policy documents, project information, meeting minutes, CNAO used the following 3 steps to get audit confirmation:

1) Format conversion (Unstructured data source Text data source)

2) Structure creation (Text data source Text processing)

3) Model analysis (Text processing Data analysis)

In this way, CNAO found problems with the financial supervisor like failing to standardize or cancel some intermediary services for administrative examination and approval as required by the State Council.

Audit on Banking Supervision (The Audit Board of Indonesia)

The Audit Board of the Republic of Indonesia has the mandate to perform different kinds of audit on financial supervision institutions. After the financial system reform, the financial system stability committee was established, which was composed by the Ministry of Finance, Financial Services Authority, Central Bank and Deposit Insurance Corporation. The Audit Board attains the authority to audit banking supervision since the FSA established. The objective of the audit is evaluating the governance of FSA’s Bank Supervision to ensure its compliance. The Audit Board perform the audit on bank regulation and the implementation of bank supervision by reviewing bank supervision and regulation documents. The audit discovered the following issues that needed to be improved:

1) The implementation on Integrated financial services sector supervision,

2) The follow up of bank supervision reports,

3) The quality of Information system.

The Audit Board is still working to face challenges that is to communicate audit result to stakeholders, to put bank secrecy into consideration and to develop an integrated audit strategy that cover other economic sectors. Currently, the audit on government policy responses to Covid-19 is ongoing.

Planning and priorities for 2021 in light of the pandemic crisis and of the remedial actions (Corte dei Conti,Italy)

There were severe impacts caused by the pandemic such as the decrease of GDP growth rate, and main recovery measures have been adopted by the government of Italy in healthcare, workforce, fiscal measures, liquidity support and family support.

Under this background, the Corte dei Conti is going to assist public entities in the proper use of EU resources and publish concomitant and along-side reviews. Among the envisaged reports, in mid-2021, the annual report of Corte dei conti on the coordination of public finances will provide an overall assessment on the criticalities worsened by the pandemic crisis, on the macroeconomic situation and on the implementation and the effectiveness of the subsequent measures. In 2021, the Corte dei Conti will seek to further extend and improve the databases at its disposal. Attention will be focused on several issues including the use of funds and the quality of services, healthcare, education, social security and other points of attention.

Methodology and Findings from GAO’s Report on the Benefits and Costs of Anti-Money Laundering Regulations (GAO)

GAO shared a brief introduction of their report on Anti-money laundering regime in the U.S. Anti-money laundering (AML) requirements for banks in the U.S. are governed by the Bank Secrecy Act (BSA) and several other laws and agency regulations. The report examined four issues related to the implementation of the BSA/AML requirements.

1) Law Enforcement’s Use of BSA Reports (Benefits)

2) Selected Banks’ BSA Compliance Costs (Costs)

3) Oversight of Banks’ BSA Compliance

4) Views of Proposed Changes to the BSA

The presentation focused on the first 2 objectives (Benefits and Costs). Regarding the Benefits objectives, GAO used the methodologies such as:

1) Survey of law enforcement personnel from selected agencies

2) Analysis of FinCEN data on law enforcement agencies with and without direct access to FinCEN’ s BSA report database and database use

3) Comparison of results with Department of Justice data on law enforcement agencies.

Based on the research result, GAO made a recommendation to FinCEN to develop and implement written policies and procedures to help promote the greater use of BSA reports by law enforcement agencies that do not have direct access to the database. It was noted that these policies could include outreach strategies and education or training materials. FinCEN agreed with the recommendation.

Regarding the Costs objective, GAO has done a case study methodology to determine the costs incurred by banks to comply with BSA/AML requirements and found out that:

1) larger selected banks incurred greater total costs,

2) smaller selected banks incurred proportionately greater total costs,

3) selected banks managed BSA/AML costs but mostly by limiting access to higher risk products and services.

Working Group Discussion

GAO expressed their consideration of the future arrangement of the group meeting. Given the course of the pandemic so far, it is unlikely to have a in-person meeting of the Working Group. Therefore, GAO is planning to continue doing the virtual meeting at quarterly basis, and the next meeting will probably be held at March or April. GAO called for member SAIs (Appr. 2 to 3 SAIs) to contribute and volunteer to host virtual meeting for the rest of the year, including identifying speakers and facilitating logistics.

GAO provided update information on the working group website which is fully available to whole member SAIs. Some minor technical issues have largely been resolved with the help of SAI India. GAO explained how to get access to working group community practice through the community portal. For SAIs still experiencing technical problems, please do not hesitate to contact GAO. Overall, the working group website is aimed at facilitating information sharing in/between group meetings, and the website also create discussion board for users to engage with and to put forward topics or issues.

CNAO also believed it is more appropriate to conduct periodically off-site communication among group members, especially through the arrangement of virtual meetings. As subgroup chair, CNAO encouraged group members to actively participate in future meetings. CNAO agreed with GAO on encouraging a wider use of the Working group website, and to enhance its function as a platform for member SAIs to sharing audit resources and exchanging views about certain issues. For better use and improvement of the website, CNAO suggested a further collection and classification of audit resources (either history accumulated material or newly received), and to break down into different audit areas, in order to enable easier access to areas of interest.

Some SAIs asked questions about resources that will be provided on the website, for example the SAIs’ presentation material and database. GAO expressed that they will put SAIs’ presentation documents, previous working group documents, as well as relevant video materials of the virtual meeting on the website and welcome further advice or suggestions of group members.

[1] Upon some guest speakers’ request, the whole presentation material will not be circulated among working group, we cited brief points of the presenter, and kindly request readers not to re-forward relevant information.