Three lines in harmony: a centralized testing model can enable the lines of defense to rely on each other's work and make audits more efficient.

Author:Burch, Susan
Position:THREE LINES OF DEFENSE - Report
 
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Many organizations have implemented a three lines of defense model with each line performing risk monitoring and testing activities. As described in The OA's Position Paper: The Three Lines of Defense in Effective Risk Management and Control, front-line unit management is the first line of defense, risk and compliance functions are the second line of defense, and internal audit is the third line of defense. In many cases those monitoring and testing activities overlap, which can cause audit fatigue within the business units. It also takes time away from serving customers. Or in some cases, there could be gaps in coverage that expose the organization to unnecessary risks.

Each line of defense has its own monitoring and oversight responsibilities, but in many cases there are areas where the testing activities to achieve these responsibilities overlap. In these instances, organizations can benefit from ensuring each line of defense coordinates with the others to avoid performing duplicate testing or monitoring activities. Coordinating the three lines of defense can minimize audit fatigue and maximize efficiency.

MUTUAL RELIANCE

If the testing or monitoring activities performed by the first line are well-designed and executed, the second and third lines can validate and rely on what the first line does. Similarly, if the testing performed by the second line is well-designed and executed, the third line can validate and rely on the second-line testing. Benefits an organization can realize from ensuring its three lines of defense are well-coordinated include greater efficiency, cost savings, alignment with best practices, enhanced productivity, improved consistency and quality, standardized testing methodologies, and leveraging the "right" skills for specific products or lines of business. Moreover, all three lines can use software to automate the monitoring and testing of key controls and risks.

Organizations also need to be aware of challenges they may encounter when coordinating testing across the three lines. Bringing together people with the right skills, providing necessary training, and identifying technical solutions are challenges, as is ensuring the process has appropriate quality controls. Another challenge is ensuring the appropriate service-level agreements are in place so each group is clear about its roles and responsibilities, particularly with respect to a centralized testing unit.

CENTRALIZED TESTING

Coordination among the three...

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