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The Institute of Internal Auditors has updated the three lines of defence to embrace a principles-based approach in its 2020 publication The Three Lines Model. Here we take a look at the key changes and how to strengthen your existing model.
Originally published in 2013, the Institute of Internal Auditors formalised pre-existing best practice in its three lines of defence model. It has since been widely adopted, with a 2020 update to reflect a change in the operational outlook and regulatory expectations. The biggest update is a move to a principles-based approach, which puts the focus on the role of the individual rather than the operational line. Other key changes emphasise the importance of good coordination and communication between each line of defence, and the need for a direct relationship between the governing body and management in in the first and second lines,as well as reinforcing the direct relationship between the governing body and internal audit in the third line.
The revised model is driven by six principles, as outlined below.
Collectively, these principles aim to improve personal accountability and shift the focus to the role of the individual within the three lines. This provides greater alignment to the Senior Managers and Certification Regime (SM&CR), introduced in 2015, and reduces ambiguity.
This is not a fundamental rethink of the three lines, it is a series of enhancements to strengthen it. While key processes may not need updating, reporting lines may change as accountabilities are clarified. Key considerations include:
As with the previous iteration of the model, risk takers cannot also offer assurance so independent challenge may be necessary. Thoroughly checking accountability, potential impediments and any incompatibility with existing structures will support a smooth transition to the updated three lines model.
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Sandy Kumar, Global Head of Financial Services and Business Risk Services, Grant Thornton
Mark Carawan, Senior Advisor, Financial Services, Grant Thornton