W A Wijewardena: The internal auditor in banking institutions – challenges and his new role Keynote address by Mr W A Wijewardena, Deputy Governor of the Central Bank of Sri Lanka, at a seminar by the Institute of Internal Auditors, Colombo, 30 November 2007. *  *  *  The precise role which an auditor should play in an organization has always been subject to much debate. Different schools of thought had held different views on the subject based on their personal feelings and ideologies. When we were studying auditing at the university some four decades ago, an adage which was firmly planted in our heads was that “an auditor was a watch dog and not a blood hound”. This principle which had ruled the sphere of auditing for decades had been established in many legal cases that had been judged in the United Kingdom and elsewhere by reference to the common practice of auditing. This simple expression amply described what role an auditor was expected to play in an organization. He was simply to keep a watchful eye on the operations of a business and alert his masters of any irregularity that was happening. Once this was done, it was the responsibility of the masters to take necessary corrective action. An ambitious audit officer may be tempted to go beyond the bound of this adage and take upon himself the responsibility of passing penal judgments on those whom he finds as miscreants of financial responsibility.
Yet despite their attraction, no more than a handful of countries internationally have so far issued GDP-linked debt instruments. Contingent convertible (“CoCo”) bonds are a second, potentially useful, debt instrument. These have been popular recently among banks. For countries, they could be designed with a duration which is automatically extended if a country breaches certain pre-set stress conditions – for example, if it is the subject of an IMF lending programme (Brooke et al (2012)). This would then deliver some automatic alleviation of short-term liquidity pressures. So far, no country has issued such instruments. There has been somewhat greater progress towards the inclusion of contractual clauses which assist in the restructuring of sovereign debts once these become unsustainable. In particular, following the Asian crisis there was a push by the international community to include Collective Action Clauses (CACs) in international bond contracts. Yet as recent Argentine experience illustrates, this has not closed the book on sovereign debt restructuring problems. Existing CACs tend only to cover one particular class of bonds. This gives rise to a potential aggregation problem if other classes of bond vote against – or hold-out from – a restructuring agreement. “Aggregation” CACs include the option for bonds to be restructured on the basis of a single vote across all affected bonds. A recent IMF paper proposed that these clauses be included in foreign law bonds, a proposal which appears to have the support of the international community (IMF (2014)). Kazakhstan recently incorporated these clauses into its bond programme.