Annual report 2006 - Dexia.com

CORPORATE GOVERNANCE
MANAGEMENT REPORT
COMPTES CONSOLIDÉS
COMPTES SOCIAUX
DEXIA GROUP CONTROL
INTERNAL CONTROL
Internal audit
Dexia has a homogenous internal audit function that meets
the highest standards. The mission of this function is to promote
internal control within the Group and to ensure continuous
performance and effective application of the control
system in force.
This requirement is consistent with the Group’s desire to
ensure that the protection of its reputation and the efficiency
and integrity of its structures are priority values.
In this context, the internal audit team evaluates whether the
risks incurred by Dexia in its activities and in all its entities
are identified, analyzed and adequately covered. The internal
audit team must also ensure continuous improvement in the
operations of the Group.
Organization
The internal audit organization is based on three fundamental
principles:
• the strategy, requirement level and operating rules for the
internal audit are set by the Management Board in a framework
approved by the Audit Committee of Dexia SA;
• the internal audit mission is performed by a network of
audit departments that perform their mission under the direction
of the Group’s General Auditor, who reports directly to
the Chief Executive Officer, and Chairman of the Management
Board. The General Auditor has direct access to the
Audit Committee, to which he regularly reports on the internal
audit operations within the Group. At the same time, the
Audit Committee and the Chairman of the Board of Directors
may assign certain missions or request some information from
the General Auditor;
• each audit department in the subsidiaries is responsible for
the performance of its mission towards the Chairman of the
Management Board of the entity in question and also reports
functionally to the Group General Auditor.
In 2006, a reorganization of the internal audit team was
decided in order to meet the needs of the new organization
of the Dexia Group. Since January 1, 2006, the strategic direction
of the businesses has been conducted transversally by
business/support functions.
In terms of organization, five segment managers were named
(the deputy auditors of Dexia SA and of the Group’s three
operating entities) in order to strengthen the global visions of
risks by business/support function throughout the Group. Risk
control for each entity continues to be provided by the Chief
Auditors of the entities.
A “planning, tools and reporting“ function was also identified
within Dexia SA and the operating entities, and is now
organized as a unit.
Risk assessment, back testing and the development of the
2007-2009 audit plan covered the entire scope of Dexia SA,
the operating entities and their subsidiaries. This effort ensured
the development of a single audit plan, with an increased
number of synchronized and transversal missions throughout
the entities concerned, which results in an improved transversal
and global vision of the risks within the Dexia Group.
2006 Missions
As is the case every year, a portion of the audit plan of Dexia
SA and the entities was conducted in the form of “horizontal
mission“, i.e. missions conducted simultaneously at
Dexia SA and in the Group’s principal entities: Dexia Crédit
Local, Dexia Bank Belgium and Dexia Banque Internationale
à Luxembourg.
A major component of those missions was dedicated to various
issues related to the Basel II project: the framework of all internal
credit models for the default probability axis was audited,
and transversal audits were also conducted on the credit risk
information system constructed around the Fermat application;
the implementation of the loss axis in the event of default (Loss
given default-LGD) in the internal rating systems, and the use
of credit risk mitigation (CRM) instruments.
Other horizontal missions looked at the organization, risk
management and control mechanisms that frame the activity
lines of the principal businesses. Thus, the “Money Market
and liquidity management“ line or Wealth Management were
audited as part of the 2006 horizontal missions.
The support functions (accounting, management control, IT,
human resources) are also regularly audited within the context
of the multi-year audit plan. Finally, Dexia’s audit department
conducted “joint“ missions with the audit departments of certain
subsidiaries, including Financial Security Assurance in the
United States, RBC Dexia Investor Services, the joint venture
formed in 2006 with Royal Bank of Canada, and Dexia Bank
Nederland.
The audits completed in 2006 gave rise to the establishment
of various action plans to correct weaknesses detected in the
internal control system. Each action plan was approved by the
Management Board of the entity concerned and is monitored
on a regular basis in order to ensure that the recommendations
made are effectively implemented.
Methods
The global approach to the risk universe, the joint audit methodology,
the conducting of “horizontal“ missions and “joint“
missions, and the procedures for reporting and tracking at the
very top of the Group’s structure give Dexia an effective internal
control system.
Beginning in 2007, the objectives of the “planning, tools and
reporting“ unit within the audit department are to strengthen
the tools and methods used and to produce performance indicators
in conducting its missions, and risk indicators.
In addition, the audit tool intended to promote harmonization
and improved quality in the work within the operating entities
was deployed in 2006.
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Dexia / Annual Report 2006