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Internal Control System
Internal Control System
Internal control system
FLAR’s internal control system is integrated into the daily operations and seeks to provide a reasonable degree of security regarding the achievement of its objectives, through operational effectiveness and efficiency, reliability of material error-free financial information, and compliance with good practices.
FLAR follows the guidelines set forth in the internal “Integrated Control Framework” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.
FLAR acknowledges that it needs effective structures and processes to achieve its objectives, while supporting strong governance and sound risk management. That is why FLAR follows the three-line model recommended by the COSO, considering the following key fundamentals.
Front line
The front line at FLAR are the areas that own the processes and risks, and their main responsibility is to manage process risks, evaluating them and determining the controls needed to mitigate these risks.
Second line
The second line at FLAR is the Risk Directorate whose function is to monitor risk management and internal control, thus providing assistance to the front line. The Risk Directorate is supported by the teams that ensure compliance with legal, information security and technology aspects.
Third line
The third line at FLAR is the Internal Audit, which provides independent and objective assurance on the adequacy and efficacy of the governance and risk management. This is achieved by the competent review of systematic processes, experience and perceptions, informing everything identified along with recommendations for continuous improvement.
Furthermore, FLAR has external assurance providers such as the External Auditor, who gains the necessary understanding of internal controls to provide reasonable assurance regarding FLAR’s Financial Statements submitted in compliance with International Financial Reporting Standards.
Third parties perform internal and external audit functions, to ensure objectivity and transparency. Currently, KPMG provides internal audit services, and Deloitte & Touche Ltda. is FLAR’s External Auditor.
The main elements that FLAR has to help maintain a sound internal control system include the following:
Controls for the prevention and detection of money laundering, prevention of fraud risks, among others.
Team dedicated to monitor non-financial risks by providing assistance to process managers for the evaluation of risks and setting controls.
Internal control team that evaluates the controls’ effectiveness and efficacy.
Risk management
FLAR has set clear objectives for a comprehensive risk management, and the strategy to meet them.
1.
Loan operations or other financial support provided by FLAR to its members are subject to the assessment of the applicant’s repayment capacity by the Board of Directors or the Executive Presidency, depending on the modality of the loan. The risk of these operations is mitigated due to the de facto preferential creditor treatment that members have given to FLAR throughout its history, and to the measures implemented by FLAR, such as the determination of the admissible loan amounts, the collection of credit risk commissions, and the setoff against profits whenever loans are in arrears.
2.
The objectives of FLAR’s investment portfolios are to preserve the nominal capital over a three-year horizon, and produce a positive intermediation margin, assuming moderate credit risks and maintaining a high liquidity to provide financing to its members and meet its obligations. Eligible investments and risk preferences are determined by the Board of Directors in the Investment Guidelines.
3.
FLAR follows the guidelines of “Enterprise Risk Management – Integrating Strategy and Performance” (ERM Framework) issued by COSO.
4.
Processes are regularly reviewed to provide support to the areas in risk identification, in setting controls, and in maintaining FLAR’s risk profile updated. Strategic, fraud, money laundering and terrorist financing risks, as well as information security and business continuity are analyzed.
5.
Materialized operational risk events are monitored, analyzing their causes and associated risks, and setting action plans to implement new control activities and strengthen existing controls.
Internal audit
The internal audit function is to provide reasonable assurance in an independent and objective manner regarding the controls and the institution’s performance, to contribute to the achievement of FLAR’s objectives. The audit process is designed to add value and improve operations, providing a systematic and disciplined approach to evaluate and improve risk management, internal control and governance processes. The internal audit service is hired with an external firm for a three-year period, renewable only once for the same period.
The internal audit function must adhere to the Code of Ethics of the Institute of Internal Auditors and the International Standards for the Professional Practice of Internal Auditing.
La función de auditoría interna debe adherirse al Código de Ética del Instituto de Auditores Internos y las Normas Internacionales para el Ejercicio Profesional de la Auditoría Interna.
External audit
The external auditor examines FLAR’s financial statements in accordance with International Financial Reporting Standards (IFRS). Audit results regarding FLAR’s financial statements are included in the external auditor’s report as part of FLAR’s annual report.
Pursuant to the Constitutive Agreement, independent external auditors are appointed by the Assembly of Representatives for a three-year period, renewable for a further three years, among audit firms with a good international reputation. External auditors will be mandatorily rotated every six years.
Furthermore, external auditors are not eligible to provide consulting services to FLAR other than those related to the audit.
De conformidad con el Convenio constitutivo, los auditores externos independientes son designados por la asamblea de representantes por un período de tres años, renovables tres más, entre firmas de auditoría de buena reputación internacional. Habrá una rotación obligatoria de los auditores externos cada seis años.
Además, los auditores externos no son elegibles para prestar servicios de consultoría al FLAR que no estén relacionados con la auditoría.