Thursday, September 02, 2021

The Profession Finally Recognises The Value of Internal Audit

Accountancy Age states that a more collaborative relationship between internal and external audit will be a critical step as the profession strives to increase quality and bolster its standing in the public eye, according to industry voices.

“I think it would produce much stronger assurance,” says Liz Sandwith, chief professional practices advisor at the Chartered Institute for Internal Auditors (CIIA). 

“Each side knowing and understanding that control environment and what new and emerging risks are being mitigated, would help them both do their job that much better.”

Though fundamentally similar, several disparities exist between the two functions. Internal audit will examine issues related to business practices, while their external counterparts issue opinions regarding financial statements and records.

The purpose of the two sides is also key. Internal audit reports act as a tool for the organisation’s management, whereas external audit caters to key stakeholders such as lenders, investors and creditors.

“Internal audit are there 365 days a year and, therefore, have a much greater understanding of the organisation, and a much broader remit. There is a real opportunity for external audit to build on this knowledge rather than repeating it.”

Sandwith’s view largely resembles that of Sir Tony Redmond, who was commissioned by the UK government in 2020 to conduct a review into the effectiveness of external audit and transparency of financial reporting in local authorities. While focusing on the external side of audit, the review makes several references to its relationship with internal auditing.

“There is a question as to whether external audit could make more use of the knowledge and expertise of internal audit in developing sufficient understanding of the local authority,” it said.

“Internal auditors are likely to be much closer to the business than external audit and, in many authorities, a proportion of their work focuses on governance and service delivery matters. This could make internal audit a rich source of knowledge, should the external audit team wish to use it.”

I find it more than a little ironic that the usefulness of internal audit, and the need for collaborating with it, is only now being discussed when in 2002 I wrote about the Added Value of Internal Audit here is a brief extract:

"Internal audit provides independent objective assurance to the Board as to the adequacy of the business controls, and the effectiveness of the risk management and risk identification process.

In other words, the internal audit department should tell the Board when the company is being poorly managed, where risks are not being identified or mitigated and when the business objectives are not likely to be met.

In addition to this very wide ranging remit, a well run internal audit department adds value in the following ways:

 It acts as a training ground for future line managers, by exposing fast track members of the department to a variety of situations, activities and functions within the organisation.

 It provides a “one stop shop” for best practice advice.

 It provides an independent, objective opinion as to the quality of the business controls.

 It stimulates risk awareness throughout the organisation.

 It is a source of qualified, experienced talent that can aid management in business improvement programmes.

 It provides specialist professional independent opinions on a variety of situations; such as due diligence exercises.

 It reports on fraudulent activity within the organisation, with a view to understanding how it happened and how to prevent it occurring again.

 It ensures that the company wide initiatives, such as a code of conduct, are being adhered to.

In 2003 I went on to list the Attributes of a World Class Internal Audit Department  based on my experience as Head of Internal Audit and International Forensic Co-ordinator, in both Philips and De Beers.

It is more than a pity that it has taken almost 20 years for people to realise the worth of a well run internal audit department!

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