Internal Audit

Introduction

This report aims to investigate the role Internal Auditors (IA) plays in certain aspects of corporate governance. The report also aims to investigate what is considered as good corporate governance.

“Corporate governance is the system by which companies are directed and controlled. It deals largely with the relationship between the constituent parts of a company - the directors, the board (and its sub-committees) and the shareholders”

(Berr, 2008)

Corporate governance is necessary because of the problems caused by the divorce of ownership and control in modern organisations. In order to protect the stakeholders of an organisation, regulators addressed the problem by introducing corporate governance frameworks that managers had to follow. Below are the Principles of corporate governance:

i. “ The corporate governance framework should protect shareholders’ rights

ii. The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.

iii. The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.

iv. The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.

v. The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.”

(Oecd, 2004)

One component of good corporate governance is to create an effective and efficient internal control system. Internal control systems are designed to protect outsider investment and the company’s assets.

“Internal auditing is an appraisal or monitoring activity established within an entity as a service to the entity. It functions by, amongst other things, examining, evaluating and reporting to management and the directors on the adequacy and effectiveness of components of the accounting and internal control systems.”

(Theiia, 2004)

“IA primary role regarding internal control system is dealing with Enterprise Risk Management (ERM). IA’s core role with regard to ERM is to provide objective assurance to the board on the effectiveness of an organization's ERM activities to help ensure key business risks are being managed appropriately and that the system of internal control is operating effectively.”

(Theiia, 2004)

Data and Analysis

Corporate governance was introduced to safeguard the shareholders assets. So good corporate governance will involve the board overseeing all aspects of risk are being thoroughly investigated. A well established risk management system will help the mangers make better informed decisions. ERM also helps with the communication between departments, better manager’s responsibility, compliance with regulations, increased profit margins and can be used as pricing tool. Since the Sarbanes Oxley act was introduced there has been greater emphasis for firms to use ERM. This is because the acts states the Board of Directors should take up more responsibility with regards to managing all of the organisation’s risk.

Table 1 shows all the benefits derived from a well established ERM system. Table 1 is a comparison of firms who fully adopt ERM throughout all aspects of operation and those firms who only use ERM to a small or limited extent. The results are not surprising the firm using advanced ERM finds it more beneficial to their company then the firms who don’t fully implement ERM. The firms using advanced ERM does better in each category then all the other firms. The results shows that 86% percent of the firms using the advanced ERM stated better decisions were made due to their ERM system which is 28% then all the other companies, this is the highest ranked category for both groups of firms. There is a 47% and 45% difference with manager’s responsibility between the two groups of firms. The firms’ using advanced ERM also finds it easier with the regulatory compliances and also has a better pricing tool. The firms using advanced ERM are doing better in all the categories and also by a significant margin.

Table 1

Comparison of ERM Experience

Advanced ERM Companies All Other Companies

Rank Percent Rank Percent

Better informed decisions 1 86 1 58

Greater management consensus 2 83 5 36

Increased management accountability 3 79 7 34

Smoother government practises 3 79 3 39

Ability to meet strategic goals 5 76 5 36

Better communication to board 6 69 2 52

Reduced earnings volatility 7 62 4 37

Increased profitability 8 59 8 33

Use risk as competitive tool 9 56 9 22

Accurate risk adjusted pricing 10 41 10 21

(Gates, 2006)

Table 2

Services Provided by Internal Auditors (multiple answers allowed)

Departments Percentage

Internal/ Operational Audits 97

IT Audits 71

Financial Audits 71

Advice on Risk Management 66

Consulting