• Integrated Risk Management
• Corporate Governance
• Annual Report of the Board of Directors on the Affairs of the Bank
• Report of the Audit Committee
• Report of the Human Resources and Remuneration Committee
• Report of the Nomination and Governance Committee
• Report of the Board Integrated Risk Management Committee
• Report of the Credit Approval Committee
• Report of the Related Party Transactions Review Committee
• Directors’ Statement on Internal Control
• Independent Assurance Report

Report of the Audit Committee

The Board Audit Committee comprises of three Independent Non-Executive Directors and one Non-Executive Director. The Committee is chaired by Mr P M B Fernando who is a Fellow of The Institute of Chartered Accountants of Sri Lanka and possesses considerable experience in the field of Finance and Auditing.

The members of the Board appointed Audit Committee are as follows:

P M B Fernando – Chairman

T Dharmarajah

L K A H Fernando

Brief profiles of the members are given in the section on Board of Directors in the chapter on Profiles.

The following changes took place during the year in the Board Audit Committee. L N de S Wijeyeratne retired and K D N R Asoka resigned from the Board in October 2017 and Ms L K A H Fernando was appointed to the Audit Committee with effect from 1 November 2017.

Meetings

The Head of Group Internal Audit, functioned as the Secretary to the Committee for the year ended 31 December 2017. During the year, 15 Audit Committee meetings were held and proceedings of the Audit Committee meetings were reported regularly to the Board.

Attendance by the Committee members at the meetings is given in the section on Corporate Governance in the chapter on Stewardship.

The Chief Executive Officer, Chief Financial Officer and Chief Operating Officer attend meetings by invitation. Senior Management also attend the meetings on invitation in order to brief the Audit Committee on specific matters. The Committee held two meetings with the External Auditor; KPMG independently, without the presence of executive management, to discuss the progress and conclusion of the Audit.

Mandate and Role

The Terms of Reference of the Committee, which is subject to review periodically by the Board of Directors, clearly defines the mandate and role of the Committee. The Committee is responsible to the Board of Directors and reports on its activities regularly. The Committee assists the Board of Directors in fulfilling its general oversight of financial reporting, internal controls, internal and external audits.

The Committee has discharged the responsibilities assigned by Rule No. 3(6) (ii) of the Corporate Governance Direction No.11 of 2007, issued by the Central Bank of Sri Lanka. Where appropriate, more details are provided under separate headings in this report.

Financial Reporting

The Committee reviews effectiveness of the financial reporting system in place, to ensure reliability of information provided to the stakeholders. The Committee reviews that to the best of its knowledge and belief, the Financial Statements issued for external purposes by DFCC Bank PLC (Bank), complied with generally accepted principles of accounting as enunciated in Sri Lanka Accounting Standards, and complies with the statutory provisions of Companies Act No. 07 of 2007 and Banking Act No. 30 of 1988 and subsequent amendments thereto.

The Committee assists the Board of Directors to discharge their responsibility for the preparation of true and fair Financial Statements in accordance with the books of accounts and Sri Lanka Accounting Standards. The Committee reviews the adequacy and effectiveness of the internal control system and procedures to provide reasonable assurance that all transactions are accurately and completely recorded in the books of accounts. In accordance with the mandate, the Committee reviewed and discussed with the management and Internal/External Auditors on the critical accounting policies, practices, related changes thereto, alternative accounting treatments, major judgement areas, material audit adjustments, compliance with accounting standards, going concern assumptions, financial reporting controls and compliance with applicable laws and regulations that could impact the Bank’s Financial Statements, its annual report and its quarterly Financial Statements prepared for publication.

The Committee reviewed all quarterly non-audited interim Financial Statements and Financial Statements for the year ended 31 December 2017, together with supporting information that included significant assumptions and judgments made in the preparation of Financial Statements. The Committee also took into consideration the Internal Audit reports, management letter issued by the External Auditor and the responsibility statements in relation to the Financial Statements issued by the Chief Financial Officer and Chief Executive Officer in making an overall assessment on the integrity of the financial reporting system.

The Committee also discussed the operations, future prospects and sustainability indicators of the Bank with management regularly and is satisfied that all relevant matters have been taken into account in the preparation of the Financial Statements and that the 2017 Financial Statements are reliable and presents a true and fair view of the state of affairs of the Bank.

Internal Controls

The Audit Committee assessed the effectiveness of internal control over financial reporting as at 31 December 2017 as required to comply with Section 3 (8) (ii) (b) of the Banking Act Direction No. 11 of 2007 on Corporate Governance for Licensed Commercial Banks, issued by the Central Bank of Sri Lanka. This process assesses the adequacy and effectiveness of the internal controls and the processes for controlling business risks to ensure compliance with laws and regulations. The Committee ensures that appropriate action is taken by the management on the recommendations of the Internal Auditors to improve the effectiveness of the internal control system of the Bank. The Board of Directors performs its responsibilities on the basis of the internal control framework, which enables the Board to pursue its functions and take necessary measures. The Board’s statement on effectiveness of the Bank’s internal control mechanism is published in the section on Directors’ Statement on Internal Control in the chapter on Stewardship.

Internal Audit

The Audit Committee ensures that the Internal Audit function is independent of the activities it audits and that it is performed with impartiality, proficiency and due professional care. The Audit Charter authorises and guides the Head of Group Internal Audit (HGIA) in carrying out the independent audit function of the Bank and its subsidiaries. The HGIA enjoys operational independence in conducting duties and has the authority to initiate, carry out and report on any action, which is considered necessary. For the performance of duties, the HGIA and audit staff shall have unrestricted, unlimited, direct and prompt access to all records of the Bank and subsidiaries, officials or personnel holding any contractual status of the Bank and subsidiaries, and to all the premises of the Bank and subsidiaries. The Audit Committee monitored and reviewed the scope, resources, extent and effectiveness of the activities of the Bank’s Internal Audit Department.

With the concurrence of the Board of Directors, the Audit Committee engaged the services of two firms of Chartered Accountants to supplement the Bank’s Internal Audit function in carrying out periodic audits at certain branches and few other assignments for the period ended 31 December 2017. The outsourced Internal Audit function is supervised by the HGIA of the Bank.

The Committee reviewed the progress of the risk based audits carried out in accordance with the Internal Audit plan approved by the Committee for the year 2017. During the year, the Internal Audit Department has reviewed business lines, critical operational processes, risk and compliance functions, branches and subsidiary operations. Further, the Department has conducted thematic audits focusing on particular audit objective across the audited units/branches. The Potential Fraud Monitoring Unit under Internal Audit carries out testing and data analytics related to potential fraud risk areas on a continuous basis.

The Internal Audit Department suggested simplified and efficient business processes where it was deemed necessary. In 2017, the Board Audit Committee reviewed audit reports of branches and departments, IS Audits, Thematic Audits and special investigations of the Bank. The Committee reviewed the Internal Audit reports of the Bank’s subsidiaries as well.

The Committee had necessary interactions with the HGIA throughout the year. The Board Audit Committee advised Corporate Management to take precautionary measures on significant audit findings. The Committee reviewed the structure, resources and performance of the Bank’s Internal Audit Department at the year end.

External Audit

The Committee reviewed and monitored the External Auditors’ independence and objectivity and the effectiveness of the audit process, taking into consideration relevant professional and regulatory requirements. The Committee approved the policy in place on non-audit services provided by the External Auditors.

The Committee discussed with the Auditors their audit plan, scope and the methodology they propose to adopt in conducting the annual audit prior to its commencement. The Auditors were also provided with opportunities to meet the Audit Committee separately, without the presence of executive management, to ensure that the Auditors had the independence to discuss and express their opinions on any matter. There was no limitation of scope and the management has fully provided all information and explanations requested by the Auditors. The Committee also met the Auditors to review the management letter with the responses from the management.

The Audit Committee has recommended to the Board of Directors that, KPMG Chartered Accountants, be reappointed for the financial year ending 31 December 2018 subject to the approval of shareholders at the next Annual General Meeting.

Whistleblowing Policy

The Whistleblowing Policy of the Bank and its subsidiaries was reviewed and recommended by the Audit Committee during the year 2017 in order to further strengthen the policy as a communication channel to raise any genuine concerns. The Committee continuously emphasised on sustaining ethical conduct amongst staff members. In this regard, a Code of Ethics and Whistleblowing Policy was put in place and all members of staff were educated and encouraged to practice whistle blowing if they suspect any wrong doing. All appropriate procedures and techniques are in place to conduct independent investigations into incidents reported through whistle blowing or identified through other channels. The Whistleblowing Policy guarantees the maintenance of strict confidentiality of the identity of the whistle blowers. The Policy is subject to annual review in order to further improve its effectiveness.

Evaluation

The effectiveness of the Committee is self-evaluated annually by its members. An independent evaluation of the effectiveness of the Committee was carried out by the other members of the Board and the Committee has been found to be effective.

P M B Fernando

Chairman – Audit Committee

19 February 2018