With the planned cessation of London Interbank Offered Rate (LIBOR) only 25 months away, financial institutions across the globe are dedicating significant resources to building out their LIBOR Transition Program. Because this transition will have a significant impact across a firm’s products, operations, and business lines, the Internal Audit department should be prepared to provide an independent assessment of the LIBOR Transition program and its affected businesses.
Here are several key considerations for their role when incorporating LIBOR Transition into the Internal Audit plan:
1. Governance
The first step for Internal Audit is to be involved at the inception of a firm’s LIBOR Transition Program.Internal Auditors need to obtain a comprehensive understanding of regulatory requirements, industry developments, and impact of LIBOR transition on the organization. Additionally, they should consult the Alternative Reference Rates Committee (ARRC) Practical Checklist and perform a Governance Audit of the LIBOR Transition Steering Committee, LIBOR Transition PMO, and working groups in order to ensure adequate representation, appropriate governance structure, and management reporting is in place. Lastly, Internal Audit should consider having an honorary (non-voting, no decision-making authority) seat at the LIBOR Steering Committee to receive real-time information throughout the strategic initiative.
2. Transition Plan Timeline & Deliverables
Internal Audit should perform a review of the LIBOR Transition Plan against regulatory expectations and industry standards and ensure that the firm’s LIBOR Transition milestones and timelines are aligned with the ARRC Paced Transition Plan. Furthermore, they ought to develop an assurance plan to review LIBOR Transition deliverables / milestones in real time. As deliverables are completed, Internal Audit can add value by reviewing them and identifying risks and gaps so that they can be addressed immediately, such that the transition plan remains on target and on time.
3. Impact on Business Lines & Products
A firm undergoing LIBOR Transition will have a significant impact across multiple business lines. Internal Audit will need to consider this impact on the risk profiles of affected businesses and products and update their risk-based audit plan accordingly. Internal audits of the impacted business lines during the transition period will also need to consider ongoing changes due to LIBOR Transition, including reviewing changes to existing practices (for example, renegotiating and repapering existing contracts previously tied to LIBOR – and new business practices – i.e., ensuring new products & contracts to SOFR and other alternative reference rates). The review should also consider the risks arising from LIBOR Transition, as well as an assessment of the internal control environment, which includes testing of key controls for design and operating effectiveness.
4. Post-Transition Implementation Review
Lastly, upon completion of the LIBOR Transition, Internal Audit should plan for a post-implementation review against planned transition program deliverables and assess any remaining gaps. They should also ensure continuous monitoring is in place and continue to be aware of further industry developments and residual impacts arising from transitioning away from LIBOR.
With LIBOR Transition already underway, Internal Audit has a vital role to play and should begin preparing accordingly.