Abstract:
Faulty or improper usage of models has contributed significantly to financial and banking institutions’
experience of damage to their reputations and profitability. Since the global financial crisis of 2008, regulators
have become increasingly concerned about the soundness of decision-making processes underpinned by,
and capital requirements derived from models. Additionally, banking institutions have now recognised that
flawed models are a source of significant operational risk and reliance on them can have negative
consequences. Based on the importance of and increased use of models, internal audit functions should be
equipped to provide assurance and auditing services to such areas within financial institutions.
This research study investigates the broadening of the internal audit function’s ambit to include robust
coverage of model risk within banking institutions. A brief literature review on model risk within banking
institutions is followed by an investigation into internal auditing expectations and requirements regarding the
coverage of model risk. The quantitative research which was performed is described, and conclusions drawn
as to the state of risk management, internal audit’s coverage and the skills needed to effectively assess model
risk. In addition, the degree to which these have become embedded in these organisations is assessed. The
research paper concludes with a set of recommendations on how internal
