CS Professional · Environmental, Social and Governance (ESG) - Principles and Practice · Risk Management
Meghdoot Foods Ltd has a sales team and plant managers who own and manage risks day to day, a separate risk and compliance function that sets policy and monitors, and an internal audit function reporting to the Audit Committee that provides independent assurance. The CEO also asks the risk head to approve the internal audit plan and rate internal auditors' performance. Under the three lines model, what is the problem?
The problem is that internal audit loses independence. The third line must provide objective assurance to the board or Audit Committee, so the second-line risk head should not approve its plan or assess its staff. First-line managers owning risk is correct and consistent with the model.
- AOperational managers should not own risks
- BInternal audit independence is compromised because the second line is directing the third lineCorrect
- CThere should be only two lines, merging risk and audit
- DInternal audit must report to plant managers for objectivity
Explanation
In the three lines model, operational management owns risk (first line), risk and compliance oversee (second line), and internal audit gives independent assurance (third line). If the second line approves the audit plan and appraises auditors, the independence of the third line is undermined. Managers owning risk is correct, and audit reporting to managers would worsen independence.
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