REPORT OF THE BOARD AUDIT COMMITTEE

COMPOSITION OF THE BOARD AUDIT COMMITTEE (BAC)

The Board Audit Committee appointed by and responsible to the Board of Directors ("the Board") comprises three (03) Independent, Non-Executive Directors and one (01) Non- Independent, Non- Executive Director.

The following members serve in the Board Audit Committee (BAC):

  • Mr. Chaaminda Kumarasiri – Chairman (BAC), Independent, Non-Executive Director
  • Prof. Sampath Amaratunge – Independent, Non-Executive Director
  • Mr. Naveendra Sooriyarachchi – Non- Independent, Non- Executive Director
  • Mr. Prasanna Premaratna – Independent, Non- Executive Director (Appointed to BAC w.e.f 25.08.2023)

The Chairman of the BAC, Mr. Chaaminda Kumarasiri is an Independent Non- Executive Director. Brief profile of Mr. Chaaminda Kumarasiri and other members of the BAC are given on pages 40 to 43 in the Annual Report.

The Chief Internal Auditor functions as the Secretary to the BAC.

TERMS OF REFERENCE

The BAC was functioned as per the Terms of Reference approved by the Board of Directors. The Board reviews the Terms of Reference once a year and/or when necessary and it ensures that new developments are adequately addressed. The Committee is responsible to the Board of Directors and reports on its activities regularly. The BAC also assists the Board in its general oversight of financial reporting, internal controls and functions relating to internal and external audits.

REGULATORY COMPLIANCE

The roles and functions of the BAC are regulated by the Banking Act Direction No. 12 of 2007, the mandatory Code of Corporate Governance for Licensed Specialised Banks in Sri Lanka, issued by the Central Bank of Sri Lanka, the Rules on Corporate Governance as per the Section 7.10 of listing rules issued by the Colombo Stock Exchange and the Code of Best Practice on Corporate Governance 2017 issued by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka).

DUTIES AND ROLE OF THE BOARD AUDIT COMMITTEE

The BAC is responsible for:

  • Reviewing financial information of the Bank in order to monitor the integrity of the Financial Statements, its Annual Report, accounts and quarterly reports prepared for disclosure.
  • Reporting to the Board on the quality and acceptability of the Bank's accounting policies and practices.
  • Assessing the reasonableness of the underlying assumptions for estimates and judgements made in preparing the Financial Statements.
  • Reviewing of the accounting and financial reporting, risk management processes and regulatory compliance.
  • Reviewing of the Financial Statements (including interim financial statements) prior to publication to ensure compliance with statutory provisions, accounting standards and accounting policies.
  • Reviewing of the internal audit reports and liaising with Corporate Management in taking precautionary measures to minimise control weaknesses, procedure violations and frauds.
  • Assessing the independence and reviewing the adequacy of the scope, functions and resources of the Internal Audit Department, including the appointment of the Chief Internal Auditor (CIA) and the performance of the CIA and senior staff members of the Internal Audit Department.
  • Overseeing the appointment, re-appointment, compensation, resignation, dismissal of the External Auditor, including review of the external audit, its scope, cost and effectiveness and monitoring of the External Auditor's independence.
  • Reviewing of the adequacy and effectiveness of the Bank's systems of internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Financial Statements for external purposes has been done in accordance with the applicable accounting standards and the regulatory requirements.
  • Reviewing of the Terms of Reference (TOR) of the Committee periodically and ensuring that it reflects the best practices of the industry at all times.
  • Ensure that the Bank adopts and adheres to high standards of Corporate Governance Practices.
  • Engaging independent advisors on specialised functions where it is deemed necessary.

MEETINGS

For the purpose of discharging its duties, the BAC met twenty four (24) times during the year. Attendance of the Committee members of each of these meetings is given in the table in page 145 of the Annual Report. The minutes of the meetings have been regularly reported to the Board of Directors. Chief Internal Auditor and Chief Financial Officer have normally attended meetings on invitation and Chief Executive Officer and the relevant Senior Management/ Officers in other grades are also participated in the meetings on invitation. On the invitation of the Committee, the Engagement Partner and or the Senior Officers of the Bank's External Auditors, Messrs Ernst & Young attended for three (03) Committee meetings during the year. In seven (07) Out of twenty four (24) meetings, it has been discussed and recommended the Quarterly and Annual Financial Statements for the Board approval.

The Committee met Chief Internal Auditor without the presence of Management in an occasion to assess the independence and other confidential matters. The BAC met the External Auditors in three (03) occasions during the year and in which two (02) occasions were without the presence of the CEO and the Management to ensure that there were no limitations of scope in relation to the External Audit and to allow for full disclosure of any incident which could have had a negative impact on the effectiveness on the external audits.

FINANCIAL REPORTING

The Committee, as part of its responsibility to oversee the Bank's financial reporting process on behalf of the Board of Directors, has reviewed and discussed with the Management and the External Auditors with regard to the interim and the Annual Financial Statements prior to their release for publication. The review included the quality and acceptability of accounting policies and practices, the clarity of the disclosures and the extent of compliance with Sri Lanka Accounting Standards (SLFRS and LKAS), the Companies Act No. 07 of 2007, the Banking Act No. 30 of 1988 and amendments thereto and other relevant financial and governance reporting requirements. The Committee continuously reviewed the extent to which the Bank complies with the CBSL Directives No. 13 of 2021 and No. 14 of 2021 on Classification, Recognition and Measurement of Credit Facilities & Other Financial Assets in Licensed Banks, that came into effect from 1st January 2022 and the implementation of Sri Lanka Accounting Standards – SLFRS 9 "Financial Instruments" issued by The Institute of Chartered Accountants of Sri Lanka which became effective from 1st January 2018.To facilitate their review, the BAC considered reports from the Chief Financial Officer and also reports from the External Auditors on the outcome of their review of the annual audit.

The Committee also assessed the prevailing macro-economic challenges and their collective impact on SDB Bank's financial reporting process. Accordingly, the Committee reviewed the key assumptions used for the 'expected credit loss' impairment computations as at the end of each quarter, prior to the publication of the Quarterly Financial Statements. Further the Committee considered the management overlay against the Bank's lending portfolio and the adequacy of disclosures made by the management.

As part of the BAC's responsibilities, notably its review of financial results, reports from Internal and External audits, the Bank's Accounting Policies, as well as the Annual Financial Statements; the BAC took cognisance of the Key Audit Matters as reported in the Independent Auditors' Report.

In addition, the Committee reviewed Management's judgements on significant Accounting and External reporting requirements and obtained External auditor's agreement with the treatment thereof.

INTERNAL CONTROL OVER FINANCIAL REPORTING (ICOFR)

The Bank is required to comply with Section 3 (8) (ii) (b) of the Banking Act Direction No. 12 of 2007 on Corporate Governance for Licensed Specialised Banks issued by the Central Bank of Sri Lanka and assessed the adequacy and effectiveness of internal control over financial reporting as of 31st December 2023.

The above was conducted based on the criteria set out in the Guidance for Directors of Banks on "The Directors' Statement of Internal Control", issued by The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) in 2010.

The Bank's assessment was concentrated on processes documented by the respective process owners with the guidance of the Bank's Internal Audit and External Auditors. Based on Internal Auditors' and External Auditors' assessments, the Board has concluded that, as of 31st December 2023, the Bank's internal control over financial reporting is effective. Directors' Report on the Bank's Internal Control over Financial Reporting is provided on pages 149 and 150 in the Annual Report. The Bank's External Auditors have reviewed the effectiveness of the Bank's internal control over financial reporting and have reported to the Board that nothing has come to their attention that causes them to believe that the statement is inconsistent with their understanding of the process adopted by the Board in the review of the design and effectiveness of the internal control over financial reporting of the Bank. External Auditor's Report on the Bank's Internal Control over Financial Reporting is provided on page 151 of the Annual Report.

ANNUAL CORPORATE GOVERNANCE REPORT

As required by Section 3 (8) (ii) (g) of the Banking Act Direction No. 12 of 2007, on Corporate Governance for Licensed Specialised Banks issued by the Central Bank of Sri Lanka, the Annual Corporate Governance Report for 2023 is provided on pages 86 to 125 in the Annual Report. The External Auditors of the Bank have performed procedures set-out in Sri Lanka Related Services Practice Statement (SLRSPS) 4750 issued by The Institute of Chartered Accountants of Sri Lanka, to meet the compliance requirement of the Corporate Governance directive. Their findings presented in their report addressed to the Board are consistent with the matters disclosed above and did not identify any inconsistencies to those reported by the Board on page 149.

EXTERNAL AUDIT

With regard to the external audit function of the Bank, the role played by the BAC was as follows:

  • Conducting the annual evaluation of the independence and objectivity of the External Auditor and the effectiveness of the audit process. To ensure that the Auditors had the independence to discuss and express their opinions on any matter, they were granted a further opportunity to meet the Audit Committee separately, without the presence of Management.
  • Further BAC reviewed the Independent Confirmation issued by the External Auditor as required by the Companies Act No. 07 of 2007, confirming that they do not have any relationship or interest in the Company, which may have a bearing on their independence within the meaning of the Code of Conduct and Ethics of the Institute of Chartered Accountants of Sri Lanka.
  • The Committee discussed with the External Auditors on their audit plan, scope and the methodology they propose to adopt in conducting the annual audit, prior to commencement of the audit for financial year 2023. There was no limitation of scope and the Management has fully provided all information and explanations requested by the Auditors.
  • The Committee ensured that the engagement of the Audit Partner does not exceed five years and that the particular Audit Partner is not re-engaged for the audit before the expiry of three years from the date of the completion of the previous term.
  • Reviewed the Audited Financial Statements with the External Auditor who is responsible for expressing an opinion on its conformity with the Sri Lanka Accounting Standards.
  • Reviewed the Key Audit Matters (KAM) Report and Management Letters issued by the External Auditor together with Management responses thereto.
  • Reviewed the non-audit services provided by the External Auditor and was of the view that such services were not within the category of services identified as prohibited under

    1. The guidelines issued by the Central Bank of Sri Lanka, for External Auditors, relating to their statutory duties in terms of Section 39 of the Banking Act No. 30 of 1988 and amendments thereto.

    2. The Guideline for Listed Companies on Audit and Audit Committees issued by the Securities and Exchange Commission of Sri Lanka.

The BAC has recommended to the Board of Directors that Messrs Ernst & Young, Chartered Accountants, be reappointed for the financial year ending 31st December 2024 subject to the approval of shareholders at the Annual General Meeting.

INTERNAL AUDIT

The BAC monitored and reviewed the scope, extent and effectiveness of the activities of the Bank's Internal Audit Department.

This included reviewing of updates on audit activities and achievements against the Internal Audit Plan, advising Corporate Management to take precautionary measures on significant audit findings and assessment of resource requirements including succession planning of the Internal Audit Department. The BAC had necessary interactions with the Chief Internal Auditor throughout the year.

During the year, BAC reviewed the Internal Audit Plan and monitored the progress of same on regular basis. The Committee reviewed all major findings revealed through audit investigations and potential fraud monitoring activities carried out during the year.

Audit findings presented in the reports are prioritised based on the level of risks. The Committee followed up on internal audit recommendations with the Corporate Management regularly. Internal audit reports were made available to examiners of the Central Bank of Sri Lanka and External Auditors, when requested by them.

Along with the significant findings, the Internal Audit Department has engaged in sharing and providing knowledge through audit exit meetings to the Bank's staff for better control awareness and identifying early warning signals. In keeping with BAC recommendations, the internal audit has also provided inputs to the Corporate Management for effective control and prevention of frauds. Further the Internal Audit Department conducted awareness sessions on the Whistleblowing Policy of the bank during 2023. The Committee reviewed the performance appraisal of the Chief Internal Auditor and other Senior Staff members of the Internal Audit Department.

INTERNAL AUDIT CHARTER AND INTERNAL AUDIT MANUAL

The internal Audit function is governed by the Internal Audit Charter which defines the Vision, Scope, Independence and the Authority. The Internal Audit Manual and the Internal Audit Charter were reviewed/ revised and approved by the BAC and the Board respectively.

WHISTLEBLOWING

SANASA Development Bank's Whistleblowing Policy is intended to serve as a channel of fraud risk management. The policy allows any member who has a legitimate concern on an existing or potential "wrong doing", by any person within the Bank, to come forward voluntarily, and bring such concerns to the notice of an independent / designated authority. Concerns raised are investigated and the identity of the person raising the concern is kept confidential, even anonymous complaints are looked at. A process has been established to track such whistleblowing and take necessary actions. This procedure is being monitored by the BAC.

REPORTING TO THE BOARD

The Minutes of the BAC meetings were tabled at Board meetings thereby providing Board members with access to the deliberations of the Committee.

PROFESSIONAL ADVICE

The BAC has the authority to seek external professional advice from time to time on matters within its purview.

BOARD AUDIT COMMITTEE EVALUATION

The annual evaluation of the BAC was conducted by the Board of Directors during the year and concluded that its performance was effective. Also a self- assessment review of the BAC was done by the BAC directors annually following the good governance practices of the industry.

On behalf of the Board Audit Committee (BAC),





Chaaminda Kumarasiri

Chairman

Board Audit Committee (BAC)

30th April 2024

Colombo, Sri Lanka