My journey through financial crisis

In the last four weeks, I discussed the first month of my journey through visits to regulators, an investment bank, a standard setting board and a state that was affected by the crisis. In the second month, I visited different states and institutions to discuss the financial crisis. From the meetings held, there were prevalent themes on the financial crisis with solutions as discussed over the last four weeks. There are various lessons that can be learnt from the financial crisis by different stakeholders. For bank regulators, there is need to use a combination of supervision tools including warning systems, onsite and offsite reviews and use of external audits. The reviews should cover capital adequacy, asset management, management structures, earnings, liquidity and risk management processes. There is also need to reform prudential regulation and supervision in order to eliminate coverage gaps and weaknesses, address systemic risk issues, strengthen leverage ratios and assess adequacy of capital and liquidity buffers, reduce pro cyclical effects of accounting and reserves, promote greater market transparency, align incentives and compensation and enhance consumer protection oversight. For internal auditors, the main lessons learnt include ensuring independence and objectivity in review of control processes, regular review of the effectiveness of internal audits (in terms of coverage and frequency) by the audit committee, ensuring internal audits are properly structured to identify areas of weaknesses and sufficient follow up of internal audit issues. The internal audit function should also be appropriate for the size of the institution and the nature and scope of its activities. For external auditors, there is need to conduct quality audits, ensure effective interpretation and application of fair value accounting and disclosure of off balance sheet items. For accountants working within organisations such as banks, it is important to ensure transparent accounting practices, adequate interpretation of accounting standards and proper disclosure of financial transactions. For credit rating agencies, it was noted that the rating model for credit was based on historical factors and the traditional borrower. Hence, there is a need to revisit the model and factors for rating financial instruments. For banks, there is need to improve balance sheet transparency, have less structured credit product complexity, enhance capital and liquidity, ensure adequate disclosure and improve governance and risk management processes. Investment banks too must ensure there are adequate risk management structures to monitor financial innovations. For capital markets regulators, there is a need to ensure adequate transparency and regulation of the capital market. However, the level of regulation should not stifle the growth of the capital market and there must be a strong enforcement program. Florence Gatome is Senior Manager, PwC Rwanda Limited.florence.w.gatome@rw.pwc.com