ESM management comments on
the Board of Auditors’ Annual Report
to the Board of Governors
for the period ended 31 December 2018

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E U R O P E A N

S TA B I L I T Y

M E C H A N I S M

Dear Chairperson,
I would like to thank you for the Board of Auditors’
Annual Report to the Board of Governors for the
period ended on 31 December 2018. The ESM
management highly appreciates the independent
oversight provided by the Board of Auditors and

welcomes the report and its recommendations
and conclusions.
I would like to use this opportunity to provide
management comments as well as an overview of
the audit oversight the ESM was subject to in 2018.

Overview of the dialogue with
the Board of Auditors
During the past year, the ESM management met
on a regular basis with the Board of Auditors,
which held 10 meetings at the ESM. Additionally,
the Chairperson of the Board of Auditors met with
the Board of Directors on 8 June 2018. The Board
of Auditors also maintained an exchange with the
Board Risk Committee and was kept informed
about its activities. The Chairperson of the Board of
Auditors also met with the Chairperson of the Board
of Governors and attended the annual meeting of
the Board of Governors on 21 June 2018.
During these meetings, the Board of Auditors
was regularly updated on ESM activities, the
decisions of the ESM governing bodies, and any
other relevant issues and developments. Key
members of ESM staff and management devoted
considerable time and effort to discussing relevant
topics, submitting presentations, and providing
any other cooperation and assistance needed
for the successful discharge of the mandate of
the Board of Auditors. Furthermore, dedicated
introductory sessions were organised for the
new Board of Auditors’ members appointed by
the Board of Governors for non-renewable terms
of three years: Irena Petruškevičienė, appointed
upon proposal of the Chairperson of the Board of
Governors as of 8 October 2018; Noel Camilleri,
appointed upon nomination by the Supreme Audit
Institution of Malta as of 8 October 2018; and, most
recently, Tommaso Fabi, appointed upon proposal
of the Chairperson of the Board of Governors as of
1 April 2019.

The Board of Auditors also met regularly with
the internal audit function in closed sessions and
monitored and reviewed the work and independence
of the external auditor.
As part of its mandate, the Board of Auditors
also reviewed the ESM financial statements as at
31 December 2018 (the “financial statements”)
as well as the working papers of the external
auditor related to the statutory audit of the
financial statements. Subsequently, the Board of
Auditors issued a report in respect of the financial
statements, which will be included in the ESM 2018
Annual Report along with the financial statements
and the external auditor’s report in respect of these
financial statements.

Independent audits conducted
by the Board of Auditors
In addition to the annual statutory audit by the
external auditor and the internal audits performed
by the internal audit function, in 2018 the Board
of Auditors carried out two audits of the ESM in
accordance with Article 30 (3) of the ESM Treaty.
The Board of Auditors conducted these audits with
the assistance of subject matter experts designated
in line with Article 24 (5) of the ESM By-Laws.
As such, an audit of the external consultancy services
used by the ESM was completed in April 2018 with
the assistance of two subject matter experts from
the French Supreme Audit Institution. Secondly, the

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Board of Auditors carried out an audit of the ESM
internal control framework with the assistance of
six subject matter experts from the European Court
of Auditors. It was finalised in July 2018.
The ESM management has already initiated
actions to address the recommendations from
the Board of Auditors’ 2018 audit of external
consultancy services. Specifically, by the end of
2019 the ESM plans to complete the enhancement
of the documentation linked to the sourcing and
monitoring of external consultancy services and
establish reports providing further detail and
classification of external consultancy expenditures.
Furthermore, in line with the Board of Auditors’
recommendations on the ESM internal control
framework, we will review the organisational
aspects of the framework in the context of the
three lines of defence governance model, which
was established by the Board of Directors in the
High Level Principles for Risk Management of the
ESM. A review in this regard will be conducted by
the internal audit function during the course of this
year. We will also benchmark the ESM’s approach to
internal controls, based on the Basel Committee’s
Framework for Internal Control Systems in Banking
Organisations, against other international best
practice standards. In parallel, we will continue
documenting and reviewing operating processes
and procedures as well as the related internal
controls across all areas of the organisation.

Audit procedures conducted by
the internal audit function
During the past year, the internal audit function
performed seven audits and one consulting activity
and reported that the 2018 audit plan was achieved.
The audit plan prioritised the main risks faced by the
institution while providing coverage of all areas of
activity over time.
For each audit performed, the internal audit function
also tested the design and operating effectiveness
of the internal controls for the activities in scope. In
addition, the internal audit function also performed
its annual review of the ESM entity-level controls.
As in prior years, ESM management will continue
its sustained efforts to ensure the timely closure of

internal audit recommendations, particularly those
relating to high risk matters.
The internal audit function had full, unrestricted
and confidential access to the Board of Auditors and
confirmed that there were no impairments to the
function’s independence and objectivity throughout
the year. The internal audit function reported to the
Board of Auditors on the results of the internal audits,
the progress in implementing the 2018 Audit Plan,
and, on a quarterly basis, the implementation status
of the recommendations issued by the internal audit
function and the Board of Auditors.

Audit procedures conducted
by the independent external
auditor
On 15 June 2017, the Board of Governors appointed
Ernst & Young Société anonyme, Luxembourg (“Ernst
& Young”) as an independent external auditor of the
ESM for a term of three years, renewable once for an
additional three years.
During 2018, Ernst & Young carried out the
annual statutory audit and issued an audit report
confirming that the financial statements gave a
true and fair view of the financial position of the
ESM as of 31 December 2018 and of the results of
its operations and its cash flows. This audit opinion
is also consistent with the additional report issued
by the external auditor to the Board of Auditors.
Furthermore, Ernst & Young confirmed that no
matters came to its attention that would require
comment in a Management Letter and therefore no
such letter would be issued in 2018.
The statutory audit was conducted in accordance
with the requirements of Regulation No 537/2014
of the European Parliament and of the Council of
16 April 2014 on specific requirements regarding
statutory audit of public-interest entities, the
Luxembourg Law of 23 July 2016 concerning the
audit profession, and the International Standards
on Auditing as adopted for Luxembourg by the
Commission de Surveillance du Secteur Financier.
As part of the annual statutory audit, Ernst & Young
also reviewed the internal control procedures in place
to ensure the accuracy and reliability of the ESM
accounting records and the safekeeping of assets.

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E U R O P E A N

S TA B I L I T Y

M E C H A N I S M

In addition to the statutory audit of the financial
statements, the ESM accounts were also subject to
limited review procedures required for the issuance of
comfort letters by the external auditor in connection
with the issuance of US-dollar denominated bonds.

internal controls, which are embedded in the daily
operations of the ESM. Such internal controls
comprise entity-level, process-level, and information
technology controls, consistent with the nature,
complexity and risks inherent in ESM activities.

The Board of Auditors met with Ernst & Young
representatives on three occasions in 2018. During
these meetings, the Board of Auditors extensively
discussed with Ernst & Young the ongoing audit
processes and their results. Furthermore, the Board
of Auditors reviewed the audit working papers of the
external auditor related to the statutory audit of the
financial statements with the assistance of a subject
matter expert from the European Court of Auditors.

Internal controls are subject to scrutiny by
management and periodic independent review by the
internal audit function, the external auditor, and the
Board of Auditors. In addition, the Board of Directors,
directly and through the Board Risk Committee, holds
periodic discussions with the ESM management on
the status of the ESM internal controls.

On 26 March 2019, the external auditor presented to
the Board of Directors the external auditors’ report
in respect of the financial statements. The external
auditors’ report will also be presented to the Board
of Governors at its annual meeting on 13 June 2019.

ESM
management
is
highly
appreciative
of the constructive feedback, reports, and
recommendations that the Board of Auditors has
provided in 2018 and in previous years. We will
continue to support the mutually constructive, yet
appropriately independent, relationship between
the ESM and the Board of Auditors.

Ernst & Young confirmed, to both the Board of
Auditors and the ESM management, compliance
with the relevant ethical requirements regarding its
independence. Ernst & Young also confirmed that
unlimited access to documents and staff had been
granted and noted good cooperation by the ESM
management.
The extensive audit oversight of the ESM is
complemented by a comprehensive system of

In closing

I look forward to continuing our good working
relationship in the future.
Klaus Regling
Managing Director

DW-06-18-287-EN-C

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