What Should Fintech Companies Know About Internal Audits?

Maintaining accurate and timely financial reports is no longer optional following a new policy by the Bank of Lithuania. In January 2021, the bank announced that all licensed companies had to hire internal auditors. These changes followed the adoption of amendments passed by the Board of the Bank back in July 2020. They fall in line with the need for transparency and stability in the financial market. Of course, this puts Electronic Money Institutions (EMIs) and Payment Institutions (PIs) in the spotlight. Any errors they make could come up in the audits, costing them considerably, which has sparked debates on what these organizations must do to stay afloat.

The key options currently lie in hiring internal auditors or relying on outsourced auditing services. Both options have their upsides and downsides and have companies on the fence unsure of what course of action lays ahead. As they grapple with this tough decision, Ieva Bakutienė, the Licensing Services Manager at Lewben, sheds more light on this concept.

What’s New?

Laws on financial markets have existed since time immemorial. Take the Law on Payment Institutions as an example. Organizations have adhered to the stipulations to ensure accountability remains key in their transactions. So, what makes the recent policy so different? In the past, the policies were declaratory, and organizations could make do with simply ensuring that they had internal audits covered. If they performed the audits, they were in line with the requirements. Of course, this was not a complicated procedure.

If anything, institutions were left to their means on whether they would carry out internal audits at all. Some did so to ensure the safety of their clients’ funds, while others did so to cater to anti-money laundering procedures. Organizations were free to choose the frequency and procedures of the audits and had a lot of control over the processes. As a result, most institutions did not prioritize the audits or dedicate a chunk of resources to these procedures. An organization could launch its operations in the market without fully catering to internal controls.

With institutions operating ad hoc, the financial markets' safety, reliability, and stability were at stake. The Bank of Lithuania had to develop policies that could put an end to these haphazard operations. It stepped up to the plate in 2021 with its new announcement that sent ripples in the financial market.

Per the new audit policies, the institutions must inform the bank of all newly concluded agreements. They must also ensure that the contracts align with the customer fund protection requirements and adhere to the customer fund protection measures. Moreover, they detail how internal audits should be carried out and when the organizations should provide financial reports.

It seems simple enough, but for most fintech companies, the new rules have not been a walk in the park. To start with, most of the companies are foreign-owned. Thus, their in-house auditors have foreign experience. While they understand how PIs and EMIs generally work, they do not understand the ins and outs of Lithuanian financial market rules. Drafting reports that meet the Bank of Lithuania’s stringent requirements does not come easy, and they can miss out on important details.

Organizations must, therefore, evaluate their current internal auditing services. Are they up for the task? Can the team handle the new policies? Do they understand how to draft reports in line with the latest recommendations? It might be time for a change to help organizations keep up with the new requirements.

Consultancy companies are at the forefront of this new change, having effected positive changes for their clients over the years. Lewben, for example, has handled all matters accounting and wealth management and understands how to get companies on the right track. You can read more about their services on the Lewben website. By understanding how to implement internal controls for all company sizes, consultancy companies are best positioned to guide institutions on this new journey.

Are Internal Audits Important?

Internal auditors follow standard processes in evaluating organizations. They first understand the current operations in an organization by liaising with the staff on their responsibilities. They then assess the present risks faced by the organization and the controls in place to deal with such risks. More importantly, they investigate whether a company has complied with the policies and laws set out by the governing authorities. For Electronic Money Institutions (EMIs) and Payment Institutions (PIs), the auditors must now focus on policies set out by the Bank of Lithuania. Internal auditors do not only rely on the information provided to them. Instead, they work separately from the organization and check if they have accurate details. They can then make recommendations on areas where the organization must improve to compete in the industry. Moreover, they touch on how the organization can implement the recommendations, and as a bonus, they follow up on the company’s progress.

All internal audits positively gear at seeking actionable ways to better organizations’ performance and policy compliance. To get the best out of such audits, companies should involve their employees at all levels. It reduces pushback and spreads the message that the audits do not aim at placing blame on anyone. Instead, they are the only way for companies to adhere to the highest standards in the market, ensure data security and policy compliance.

Internal audits are not only essential to meet the bank’s requirements. Instead, they also touch on an organization’s financial health. These vital processes can help organizations pinpoint specific areas which require more attention. The earlier an organization can implement preventative measures, the easier it is to avoid stability and reliability risks.

As a result, the financial market has witnessed an increase in internal audit services. Institutions now realize that they must factor control processes from the infancy stage. Ernestas Švoba emphasizes hiring consultancy companies, speaking from his experience with UAB Nordgain, a part of the Lewben Group. Companies can no longer wait to act once the worst has happened. Instead, they must remain ahead of the curve, and what better way to do so than by mastering their internal controls?

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