Internal audit

NLB's Internal Audit Center (hereinafter: the Center) functions in an independent and objective advisory role, using a systematic and professional approach to assess risk management, control systems and the management of operations. It plays an important role in the implementation of strategic and business objectives and best banking practices.

The Center operates in accordance with the International Standards for the Professional Practice of Internal Auditing, the Banking Act, the Code of Ethics of Internal Auditors and the Code of Internal Auditing Principles. The Center received an external quality assessment of operations in accordance with the rules of the internal auditing profession as adopted by the Institute of Internal Auditors based in the US and the Slovenian Institute of Auditors. The Center's purpose, effectiveness, work methodology, and competencies and responsibilities are defined in the Internal Audit Charter. Guidelines for the Center's work are outlined in the Internal Audit Manual. The Center regularly reports to the Management Board, the Supervisory Board and its Audit Committee, and to external auditors as required.

In accordance with established principles of corporate governance, the Center is also responsible for coordinating the internal auditing activities of the entire NLB Group. The Center is responsible for harmonizing and implementing uniform standards and methodologies for the Group. This is done by involving the management bodies of NLB Group companies and by providing them with professional training. Internal NLB auditors act as consultants to Group companies and work with them by providing additional expert assistance in their internal audits.

The following also contribute to the harmonized functioning of the NLB Group's internal audit departments:

• regular training courses and seminars for all NLB Group auditors;
• sharing of expert opinions and instructions, and expert assistance in everyday work; and
• coordinating and organizing development work in the scope of working groups.

Internal audit activities

The main role of the Internal Audit Center is to provide NLB's Management Board and Supervisory Board objective assurance with respect to the effectiveness of risk management by assessing whether critical risks are managed appropriately and whether the internal control system is functioning effectively. A good internal control system is the key element to effective risk management, which in turn is critical to achieving the Bank's business objectives.

The emphasis of internal auditing is placed on the system of internal controls and risk management, which is also envisaged by international practices in line with guidelines of the COSO (Committee of Sponsoring Organizations of the Treadway Commission): e.g. IC (Internal Control) and ERM (Enterprise Risk Management). Both models represent internal auditing criteria for assessing the control system and risk management. Planning audits is based on an analysis of the inherent and control risks present in different areas of the Bank's operations. In addition to planned audits, audits are also carried out at the request of the regulatory body, as are extraordinary audits and unannounced audits in the branch network for which self-assessment questionnaires (Control Self-Assessment or CSA) are used.

In 2011, the Center's auditors conducted audits in all key areas of the Bank's operations subject to risk, and audited or participated in the audits of other NLB Group companies. The audits were carried out in the areas of credit, operational, market and other risk management, and covered specific business and support functions of the Bank. The Center conducted a total of 50 audits.

The majority of the Center's other activities in 2011 related to coordinating Bank of Slovenia examinations and audits conducted by the external auditor, and to the monitoring of the implementation of recommendations, about which the Center reported regularly to the Bank's Management Board and supervisory bodies of the bank. The Center also carried out other activities related to auditing, such as consulting, training, the transfer of know-how and the supervision of and cooperation with the internal audit departments of NLB Group companies. With regard to the development of the internal audit function, the majority of time was dedicated to the introduction of new information support for monitoring the implementation of issued recommendations, while some time was also dedicated to changes to the methodologies used to plan audits and assess the control system and risk management.

Governance and supervision of NLB Group companies

The Center implements corporate governance and supervision principles within the Group in line with the NLB Group Governance and Supervision Policy and the Harmonization Program. In addition to the Center, other Group companies have 12 internal auditing departments, whose work is based on a standard umbrella act (an Internal Audit Charter for each individual NLB Group company), as well as uniform standards and work methodologies aimed at meeting the highest internal auditing standards across the entire NLB Group.

The principles of corporate governance are carried out:

• by implementing uniform standards and work methodologies at NLB Group companies;
• by transferring work methodologies and know-how to the internal audit departments of NLB Group companies;
• by conducting joint audits with the internal auditors of NLB Group companies;
• by examining the quality of the work of internal audit departments (including the use of CSAs);
• by supervising the work of internal audit departments through regular reporting;
• by providing expert assistance to representatives of the supervisory bodies of NLB Group companies; and
• by reporting on the Center's activities within the NLB Group to the management and supervisory bodies of the parent bank.