##ing upward pressures on inflation. 2. co - operation between the central bank of malta and the ecb the ecb has very much appreciated the fruitful cooperation with the central bank of malta in the preparations for malta ’ s entry in the euro area, be it at the technical level or through the i should like to thank fabrice orlandi and olivier radelet for their input into this speech, as well as martin bijsterbosch, hans - joachim klockers and nick vidalis for their helpful comments. participation of governor bonello in the general council since may 2004, and more recently, as an observer in the governing council since last july. practical preparations of the cash changeover were remarkably well organised and the euro campaign organised by the maltese authorities has very well prepared the maltese population to allow a smooth changeover. 3. how to ensure the sustainability of convergence once the euro has been adopted for the proper functioning of the single monetary policy in the euro area all participating countries are required to exhibit a high degree of convergence and, importantly, to do this on a sustainable basis. for all enlargement decisions for the euro area, we refer to clearly defined convergence criteria and apply them in a strict manner. sustainability is key in this respect. once the euro is adopted, there is no return. sustainability has been key in our past convergence assessments and will remain so in the future. the entry of malta in the euro area implies that the benefits of the single market will be further enhanced by the single currency. the euro offers a credible framework for price stability in an environment characterised by the absence of exchange rate uncertainty within the euro area. malta will also benefit from the stability oriented policy of the ecb, which will help anchor inflation expectations. furthermore, as malta is a small open economy, adopting the euro provides protection against international financial disturbances, which often have a disproportional effect on smaller economies. i should underline, however, that these benefits do not come automatically. they depend to an important degree on the economic policies pursued by euro area countries themselves. for malta, it is particularly important to continue on a sustainable and credible path of fiscal consolidation and to improve its fiscal performance by tangibly reducing its high debt ratio. it will be important, in both the public and the private sector, to maintain moderate labour costs developments that take into account labour productivity growth, labour market conditions and developments in competitor countries. it is particularly crucial for the competitiveness of the maltese

tools in place to ensure that the basics of sound governance are being adhered to. many of the organizations that have seen their reputations tarnished in the past two years have also neglected to consider emerging conflicts of interest when the organization adds new products and lines of business. it is important that if a customer service or control function must be done in an independent, fiduciary, or unbiased manner relative to other activities, appropriate firewalls are in place before the product or activity begins, to ensure that the integrity of the process is not compromised. boards of directors are responsible for ensuring that their organizations have an effective audit process and that internal controls are adequate for the nature and scope of their businesses. the reporting lines of the internal audit function should be such that the information that directors receive is impartial and not unduly influenced by management. internal audit is a key element of management ’ s responsibility to validate the strength of internal controls. internal controls are the responsibility of line management. line managers must determine the acceptable level of risk in their line of business and must assure themselves that the combination of earnings, capital, and internal controls is sufficient to compensate for the risk exposures. supporting functions such as accounting, internal audit, risk management, credit review, compliance, and legal should independently monitor the control processes to ensure that they are effective and that risks are measured appropriately. the results of these independent reviews should be routinely reported to executive management and boards of directors. directors should be sufficiently engaged in the process to determine whether these reviews are in fact independent of the operating areas and whether the auditors conducting the reviews can speak freely. directors must demand that management fix problems promptly and provide appropriate evidence to internal audit confirming this. while we have been focused on mid - sized and larger organizations, internal controls are also important to smaller organizations. many failures of community banks are due to breakdowns in internal controls, thus increasing operational risk. in smaller organizations, the segregation of duties and ability to hire expertise for specialized areas is more difficult. but smaller organizations still must go through the process of assessing risks and controls and ensuring that they are appropriate for the culture and business mix of the organization. a faster growing financial services company in riskier lines of business will need a stronger, more formalized system of internal controls than a wellestablished company engaged broadly in traditional financial services. internal audit the federal reserve is very supportive of independent internal audit functions at financial services companies. earlier this year, along with the