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Finance companies should have adequate internal controls to ensure the integrity of their liquidity risk management process. These should be an integral part of the company's overall system of internal controls aimed at promoting effective and efficient operations, reliable financial and regulatory reporting, and compliance with relevant laws, regulations and company policies.
A system of internal control for effective liquidity risk management will typically include:
a.
A robust control environment;
b.
A comprehensive process for identification and assessment of liquidity risk;
c.
Control activities such as policies and procedures and segregation of duties;
d.
An effective management information systems; and
e.
Continuous review of compliance with established policies and procedures.
Control activities should be adequately documented in the company's policies and procedures and implemented, including the process for limit review, handling limit exceptions, authorization to set and change limits, escalation procedures and requirement for sign-off by senior management, to provide reasonable assurance that the company's liquidity risk management objectives are achieved.
An effective system of internal controls over liquidity risk includes attributes of a sound liquidity risk management process i.e., liquidity risk identification, measurement, monitoring and reporting. It is expected that finance companies will have systems in place to enable senior management to ensure compliance with company's liquidity risk management policies, manage liquidity risk exposure and analyze risk tolerance through the use of limits and early warning indicators. Finance companies should ensure that all aspects of the internal control system are effective.
The internal audit function should also periodically review the liquidity management process in order to identify any weaknesses or deficiencies. Deficiencies highlighted by the internal auditor should be addressed by management in a timely and effective manner.
