Internal audit—connecting the dots

The world of business is constantly changing and globalization has proved to be of paramount importance for this changing world. This globalization has produced widespread dots or operations as the challenge for management to govern in an efficient manner.

Proper establishment and operations of internal audit generate reliance which connects the dots and builds trust and confidence over the widespread operations of an organization.
For an internal audit to be comprehensive and target oriented, it must be planed systematically with a documentary approach.

Analytical procedures as the tool of internal audit further helps in assessment of dot’s position in the galaxy to ascertain fluctuation and smoothness of operations.

This further clarifies the relative performance of a specific operation in financial and operational terms.
This is the key concept for the ascertainment of figures in specific heads of financials and numbers from different departments. This tool is also used to obtain an evidence or assurance during fieldwork. This is thought to have an essential ability to identify potential errors, potential fraud and unusual transactions or events that affect the organization in an adverse manner. Timely identification of potential errors and fraud helps an organization in the eradication of control weaknesses and loopholes from a system.

Global expansion of Multinationals further brings some additional challenges as topics such as local regulation, economies of scale by integration of different regional economies, currency risk, consistency in financial and other reporting across organization and understanding of local norms of stock exchange for listed companies is an additional management challenge.

Internal audit procedures specifically designed for specific risk produces remarkable results to address the vulnerability of risks.
Widespread dots or operations of organizations produce additional risks which can be controlled to bring things in risk appetite of the organization.

In addition to analytical procedures, Corporate Governance is another tool that can be used by internal auditors to control the operations of a company.

The economy of the world is constantly changing which brings new challenges every day to the organization. The governance’s control over an organization’s hierarchy at the strategic level offers the ability to believe segregation of duties and qualified personnel at the top in a hierarchy.

Corporate governance further ensures proper reporting hierarchies with the distribution of related work to equip an organization with strong controls. Another great challenge created by globalization is communication and e-commerce which are key to manage and control the organization in all aspects including normal operations of company and growth perspective. Another trend observed in the current market is decentralization with a large span of control to minimize the cost.

Decentralization exposes an entity to a greater vulnerability for control deficiency and increased risk.
Current trends and in-built risks produced by the globalization of multinationals create enhanced demand for the application of certain control techniques; especially, analytical procedures and Corporate Governance.

In addition to this, designing specific audit procedures for specific risk brings risk to the risk appetite of an entity.

As a matter of fact, control techniques equipped with strong governance structure connects the dots of widespread organizational operations and helps an organization to grow in a safe and sound control environment.

What are your thoughts on this?

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Audit International are privileged to share some recent insights from Dr Rainer Lenz- Head of Corporate Audit at Villeroy & Boch on his thoughts about internal audit and its Independence.

“Recently, I was invited to share some thoughts about independence of internal auditors. I am basically challenging that concept:

The IIA definition positions internal auditing as an …

“ independent , objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.”
To be blunt, in my view, independence is largely theory. It is overrated, I think. So is objectivity. But let’s stay with the subject matter of independence. There is nothing wrong with aspiring independence. But, who cuts the hand feeding him? There are inconsistencies among talk and action. Consequently, academic authors refer to the internal auditor’s “role dilemma” and “role confusion”, acknowledging for example the difficulties of internal auditors to strike the balance between being independent from operations and, at the same time, providing added value and benefit to operations. Being both watchdog and consultant is challenging.

Some authors view internal audit as a schizophrenic management function. On one hand, it needs to be completely integrated and knowledgeable. On the other hand, it needs a measure of independence required of all auditors. Thus, internal audit may have a built in cognitive disconnect. Organizations and Chief Audit Executives (CAEs) may cope at different levels of proficiency with such inconsistent demands. Those who can do that well may live longer. Thus, “organizational hypocrisy” may serve a useful purpose.

When you ask non-executive directors and audit committee chairmen what they think, how independent internal auditors are, what will they say? I recall surveys where those members of oversight bodies state that (some) heads of internal audit are not up to the job, internal audit lacks adequate independence, and internal audit has not properly defined the role that they wish internal audit to fulfill.

That points to the “who’s your boss” question. There is no congruence between what the board wants, what the audit committee wants, and what senior management wants. Aiming at satisfying all customer groups is likely to disappoint one or the other customer in some dimension, as all may expect something different from internal audit, such that no one is fully satisfied. In other words, internal audit may face tension from its attempt to serve – let’s say – its two prime customers: managers and the audit committee. The IIA acknowledges that there may be conflicts when internal audit tries to “serve two masters”. Thus, the “who’s your boss?” issue can present problems in terms of allegiances, independence, and effectiveness.

Academic studies confirm that role ambiguity and role conflict can negatively affect the independence of internal auditors. At the same time, CEOs (often) want the CAE to have no fear or favor. It is crucial that the CAE is able to work with other stakeholders in the organization and is not afraid to voice his or her opinion even in controversial situations. That draws particular attention to the importance of the CAE’s characteristics, possibly more important than the debate around independence.

There are authors who suggest that internal auditors must be independent of senior management, so that the board is to rely on internal audit to provide the assurance it needs; otherwise, the risk is that internal audit’s reports to the board/audit committee will be filtered by senior management in such a way that only what is palatable to senior management is communicated. Investing in these relationships and having a steady and robust dialogue is critical to the internal audit function’s success, given its organizational context.

My 2 cents about independence of internal auditors in a nutshell.”

Guest Article Writer- Dr. Rainer Lenz-Head of Corporate Audit at Villeroy & Boch

Source: Lenz, R. (2016), Insights into the effectiveness of internal audit: a multi-method and multi-perspective study, LAP LAMBERT Academic Publishing, Saarbrücken, ISBN 978-3-659-85241-1