September 8, 2020 | Posted by Michael Berman
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3 Minute Read

Every financial institution needs audit trails, but not all audit trails are equally effective.

It’s the difference between Hansel and Gretel’s trail of breadcrumbs (bad audit trail) and the ball of string Theseus used to retrace his path out of King Minos’ labyrinth (good audit trail). Both tools had the same intended purpose, but only one led to safety (though in fairness to Hansel and Gretel, Theseus does make a hot mess of his mission in the end).

How do you ensure that your FI’s audit trail will perform as needed and isn’t for the birds?

Make sure it has these six elements.

  1. Many processes require collaboration across different individuals and departments. That means there needs to be an easily accessible place to centrally store all policies, procedures, and documentation needed to complete an audit—including actions taken. It’s a lot harder to be audit-ready when it involves hunting down pieces of information from across the institution and attempting to reconstruct an activity log.

  2. An audit trail needs to trace every step and action. You can't just have a checklist that says everything was done. It needs to track all activities and changes, including who did what and the day and time they did it. It’s important your audit program specifically documents who made what changes and when.

  3. Up-to-date. Completing compliance and risk management activities won’t help you demonstrate compliance to examiners and auditors if you can’t show them the most up-to-date version of your policies, procedures, strategic plans, board minutes, risk assessments, activity logs, and other documentation. You know the refrain: If you didn’t document it, it didn’t happen.

    5 Must-Have Elements of an Effective Audit Program

  4. Your audit trail should be easy to follow. Anyone looking at the trail should be able to quickly identify mistakes and show if and when they were corrected. It’s especially helpful if your audit management program makes it easy to generate an automated audit report for internal and external stakeholders.

  5. Clear timeframe for retention. There’s a lot of debate about how long an FI needs to hold onto documentation. While there is no hard and fast rule, your FI needs to make sure that records necessary to your audit trail are safe, secure, and regularly backed up. They won’t do you any good if they are lost or accidentally deleted.

  6. Audit trails aren’t just there for auditors. They are also there to help you uncover issues along the way. Regularly reviewing your audit program helps you accurately identify and reduce risk—everything from noncompliance and fraud to opportunities to improve internal processes. A good audit trail is more than just a record. It’s a warning system.

To learn more about audit trails and how they interplay with findings, download our whitepaper
Best Practices for Tracking Audit & Exam Findings

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Michael Berman

Michael Berman

Michael Berman is the founder and CEO of Ncontracts, a leading provider of risk management solutions. His extensive background in legal and regulatory matters has afforded him unique insights into solving operational risk management challenges and drives Ncontracts’ mission to efficiently and effectively manage operational risk.