Internal Controls: Your Bank's Seat Belt System

Your Bank's Seatbelt: Why Internal Controls are Non-Negotiable

You’d never drive without a seatbelt. It's a simple, non-negotiable step that protects you from severe injury in the event of an accident. While door locks are a barrier to keep things out, the seatbelt provides the critical restraint needed to keep you safe inside.

Much like a seatbelt, effective internal controls protect a financial institution from the severe impacts of fraud, financial misreporting, and regulatory penalties. They are the non-negotiable safeguard that keeps your bank secure.

Ready to buckle up? Let's look at the key components of a strong internal control environment.

---

1. Communication: The Owner’s Manual and the Driver's Nudge

Every vehicle comes with an owner's manual that explains how to operate its safety features, and a good driver will remind passengers to buckle up. In a bank, policies and procedures (P&Ps) are that manual. They provide clear instructions on how job functions should operate and how controls are executed.

A common pitfall is relying on outdated P&Ps or failing to communicate updates effectively. When P&Ps are not regularly reviewed and updated, or when training is skipped, employees are left operating in a state of confusion. This lack of clarity can lead to inconsistent execution, leaving your organization vulnerable to risk.

To ensure your controls are consistently applied, you must:

• Periodically review and update P&Ps to reflect current policies and processes.
• Facilitate training and communication (via team huddles, emails, or alerts) whenever a change is made, just like a driver's reminder to buckle up before the vehicle moves.

---

2. Compliance: Obeying the Rules of the Road

Just as seatbelt laws vary from state to state, so do the regulations that govern financial institutions. It's up to every driver to understand and follow the rules of the road. In banking, state and federal regulations are your rules—and they are constantly changing.

Many organizations get caught in the trap of "reactive compliance," scrambling to catch up only after an audit, exam, or customer complaint identifies an issue. This chaotic, last-minute approach not only puts the institution at risk of penalties but also impacts employee morale and the quality of the control assessment.

A proactive approach is vital. When new regulatory guidance is issued, you must:

• Swiftly identify the impact on your organization.
• Timely implement or enhance controls to ensure compliance. You wouldn't wait for a ticket to learn a new speed limit, so you shouldn't wait for an examination to implement a new regulation.
• Provide training and communication on new or updated regulations to ensure employees understand their responsibilities and are equipped to perform their jobs in a compliant manner.

---

3. Monitoring & Testing: The Dashboard Alert

Before a seatbelt ever hits the market, it's tested to ensure it works. Modern cars also have a dashboard alert that reminds you to buckle up. These alerts are designed to pester you until you buckle up. In the control arena, monitoring and testing are your alerts. They provide assurance that controls are operating as they should.

Failure to properly plan testing and monitoring can give you a false sense of security. Pitfalls include:

• Incomplete testing scopes and inaccurate results, which can be as dangerous as a faulty seatbelt.
• Over-reliance on first-line testing, which can create a breeding ground for bias and conflicts of interest.
• A lack of clear direction for employees on what to do when an issue is identified, leaving a “check engine” light on with no way to fix the problem.

Even with the best intentions, these failure modes happen. To circumvent them, organizations should:

• Plan properly with specific, measurable, and achievable objectives and realistic timelines.
• Involve second and third lines of defense to ensure objectivity and independence, creating checks and balances throughout the organization.
• Empower front-line employees and establish clear channels for reporting issues so that no alert goes unnoticed or is ignored.
• Implement continuous monitoring to proactively identify issues before they become significant problems.

---

4. Leadership Buy-In: Leading by Example

When a driver buckles up, it influences passengers to do the same. Leadership buy-in in a bank is no different. When leaders are committed to a strong control environment, they set the tone from the top and demonstrate that the "rules of the road" are non-negotiable.

If leaders operate in "loopholes" or allow management overrides to circumvent controls, employees will follow suit. This can lead to confusion and inconsistent execution, much like a driver weaving in and out of lanes, showing passengers that the rules don't matter.

A good leader establishes expectations and demonstrates their commitment to controls by:

• Establishing a clear code of conduct.
• Defining roles and responsibilities.
• Enforcing accountability and integrity throughout the organization.

When employees have a clear understanding of their role, and integrity is a core value, they thrive.

---

5. Automation: The Evolution of Safety

In 1959, the 3-point lap and shoulder seatbelt was introduced by Volvo, improving upon the existing 2-point lap belt. This innovation dramatically improved safety by distributing crash forces across the entire upper body. It's estimated that the 3-point seatbelt has saved over 400,000 lives in the United States since its introduction.

In the control environment, automation is that evolution. Many financial institutions still rely on manual controls like checklists, data entry, and sample-based testing. While these measures mitigate some risk (most of the time), they are susceptible to human error and don’t provide real-time results.

Automation can:

• Reduce human error and provide real-time results.
• Expand data reviews and improve compliance.
• Enhance reporting and provide a clear audit trail.

However, automation is not a silver bullet. It must be properly vetted and tested to ensure it aligns with the corresponding controls. Otherwise, it's just a new, more complicated way to be unsafe.

---

The Gold Standard for Your Bank

When companies face sanctions, penalties, or even closure, it serves as a powerful deterrent. It’s time to change the narrative and make your bank a gold standard for effective controls.

When internal controls are in place, the fatalities of fraud and misreporting are diminished, employees are productive, and customers are satisfied.

Everyone wins.

---

Why Partner With Spinnaker

We’re a boutique team of seasoned banking professionals, each with over a decade of hands-on experience in regulatory compliance, risk management, and analytics. As former operators, risk leaders, and strategists, we’ve led through recessions, regulatory shifts, and digital transformations. We know what works because we've done the work. Our approach is FAST, FLEXIBLE, and TAILORED TO YOUR NEEDS.

We partner with banks across the U.S. to:

• Assess and enhance internal control structures
• Map controls to Risk, Processes, Regulatory Requirements, and Testing
• Conduct independent control reviews and risk- based walkthroughs
• Identify automation opportunities
• Facilitate training in internal controls
• Support internal audit and exam preparation
• Provide fractional risk and compliance leadership
• Provide staff augmentation to perform control activities

Whether you’re looking for a one-time assessment or a long-term partner. We help you take control of what matters most. Let’s shore up your internal controls together.