logo-newlogo-newlogo-newlogo-new
  • Home
  • Blog
  • Audit Trail Academy
  • Advisory Services
  • Books
✕
  • Home
  • Chambers on Internal Audit
  • Uncategorized
  • 5 Future Developments That Could Elevate Internal Audit’s Stature

5 Future Developments That Could Elevate Internal Audit’s Stature

Internal Auditors Must Live in a Shatterproof House
October 29, 2018
When the SEC Speaks About Cybersecurity, We’d All Better Listen
November 12, 2018
November 5, 2018

I have written extensively about the work internal auditors must do to fulfill their own potential and that of the profession in enhancing and protecting the value of the organizations they serve. As the risk landscape changes and the speed of risk increases, internal auditors must expand their skills, update their processes, and embrace a mindset of being flexible, agile, and open to responding quickly to disruptive threats and to​ new and emerging risks.

Of course, internal audit cannot do this on its own. It is, after all, one part of a complex governance process that relies on others, including risk managers, senior management, and the board. Successful governance relies on all components being as effective and efficient as possible. Effective governance requires mutual respect, understanding, and appreciation of the role each component plays.

I am often asked about the future of internal audit, and what I see as keys to its continued ascendency as a vital component in an organization’s risk management and control structure. For too long, internal auditors around the world have been hamstrung by organizational constraints, including independence, access, and resource limitations. It’s time to state clearly and unapologetically what those are, how they hamper internal audit’s effectiveness, and what can be done to remove those impediments.

While these are my own views, and not necessarily official positions of The IIA, I nonetheless believe at least five future developments merit consideration and debate going forward.

A condition of being publicly traded: Have an internal audit function.

Most publicly traded companies likely have an internal audit function. However, many do not – especially small ones, or small companies that are new. The New York Stock Exchange requires its listed companies to have an internal audit function. The Nasdaq does not. What is unfortunate is that investors often cannot tell whether a company even has an internal audit function, because there is not any reporting requirement. 

When publicly traded companies fund and support an independent, healthy, and robust internal audit function, they commit to having a systematic, disciplined approach to evaluating and improving the effectiveness of risk management, control, and governance processes. Without such a commitment, investors are left to wonder how the board and management receive independent and objective assurance and insight regarding how well risks are being managed. 

When any organization, publicly traded or not, operates without an independent and objective assessment of its risk management, its board must rely solely on management for such assurances. On its face, a self-assessment system is vulnerable to manipulation and deceit. Without internal audit, management may try to convince itself and the board that everything is fine.

While the presence of an internal audit function does not guarantee success for a company, the absence of one suggests the organization’s leadership may not see the value in assuring strong, effective risk management, internal control, and governance. This is a self-imposed risk about which potential investors should be aware. In the future, publicly traded companies should be required to have an internal audit function — or, at a minimum, to disclose that they do not.

Internal audit must report to the CEO.

Having the right reporting relationships is vital to internal audit’s success. IIA Standard 1110: Organizational Independence from The IIA’s International Standards for the Professional Practice of Internal Auditingexplains clearly the importance of having a direct reporting line to a level within the organization “that allows the internal audit activity to fulfill its responsibilities.”

This means a functional reporting line to the board and an administrative reporting line to management. For the most part, organizations support and appreciate the value of this effective dual reporting line, though combined CEO/chairman positions render the dual reporting line moot. 

But the biggest threat to an effective dual reporting line is when the chief audit executive (CAE) reports to a positon other than the CEO, such as the chief financial officer (CFO) or chief risk officer (CRO). Over more than four decades of experience in the profession, I have witnessed an undeniable correlation between the level to which internal audit reports in organizations and the stature it enjoys. The U.S. Federal Reserve has taken the right position in mandating that internal audit in large financial institutions over which it has responsibility either report administratively to the CEO or the audit committee must explain why not.

Independence is the cornerstone of internal audit and anything that threatens to introduce bias — or even the appearance of bias — erodes internal audit’s effectiveness and credibility.

The board/audit committee must directly oversee CAE hiring, firing, review, and compensation.

The interpretation of Standard 1110 explains the importance of the board’s role in protecting internal audit’s impartiality and objectivity. This includes, among other things, approving an internal audit charter, approving a risk-based internal audit plan, and approving the internal audit budget and resource plan.

It also addresses the board’s role in the appointment, removal, and compensation of the CAE. However, this responsibility is too often overlooked or delegated to management by busy boards and audit committees. This practice may be the single biggest threat to internal audit independence.

The dual reporting line is designed to protect internal audit independence by providing a check to any inappropriate limitations to internal audit’s scope or resources. It recognizes that management can influence internal audit’s effectiveness and independence by manipulating how the CAE is hired, fired, and compensated. When the board or audit committee allows management to take on those responsibilities and simply rubber stamps management’s recommendation for a new CAE, internal audit’s independence is threatened. Even more disappointing is how often audit committees are absent from the CAE’s performance assessment process and the determination of compensation — including incentive compensation such as performance bonuses.

Audit committees must step up to their responsibilities when it comes to CAEs. After all, as the old expression goes, “you work for those who pay you!”

Internal audit should assist the audit committee with oversight of the external auditors.

OK, I know that this one will raise a lot of eyebrows. I am not suggesting that the internal auditors audit the external auditors. After all, their independence is paramount to trust in the capital markets. However, audit committees have an oversight obligation when it comes to the external auditors. Internal auditors can and often do assist in this process — particularly when it comes to assessing whether the external auditors are conforming to the terms of their engagements and whether engagement fees are appropriately calculated and billed. If these responsibilities are delegated by the audit committee to management, the appearance of the external auditors’ independence could be compromised.

Internal audit should have a permanent seat at the table.

Most areas of the organization have their champions in the boardroom. The finance function has the CFO, information technology has the CIO, and risk management has the CRO. But there is often no seat for internal audit.

Over nearly a century of modern internal auditing, the profession has progressed from providing simple assurance on financial reporting to becoming an integral contributor to organizational success. Yet, the CAE is rarely considered a “true” member of the C-suite.

In my book, Trusted Advisors: Key Attributes of Outstanding Internal Auditors, I​ define trust as “the firm belief in the reliability, truth, ability, or strength of someone or something.” When properly resourced and allowed to operate independently, internal audit is all those things: reliable, truthful, able, and strong.

Strong and effective internal audit functions led by a seasoned CAE should be recognized as a respected and vital player in good governance. And it should enjoy the stature that comes with it. This includes a permanent seat at the management table.

As always, I look forward to your comments.

Share

Related posts

January 24, 2023

Do Performance Bonuses Impair Internal Auditors’ Independence and Objectivity?


Read more
January 16, 2023

Are Internal Auditors to Blame When Boards Are in the Dark?


Read more
January 9, 2023

Follow the Leaders in 2023


Read more

1 Comment

  1. Alaba says:
    April 15, 2021 at 9:58 pm

    Thanks so much for this insightful contributions to our profession.

    Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

What’s Trending

01-24-23

Do Performance Bonuses Impair Internal Auditors’ Independence and Objectivity?


01-16-23

Are Internal Auditors to Blame When Boards Are in the Dark?


01-09-23

Follow the Leaders in 2023


Read More

Archive

  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • October 2010
  • September 2010
  • August 2010
  • July 2010
  • June 2010
  • May 2010
  • April 2010
  • March 2010
  • February 2010
  • January 2010
  • December 2009
  • November 2009
  • October 2009
  • September 2009
  • August 2009
  • July 2009
  • June 2009
  • May 2009
  • April 2009
  • March 2009
  • February 2009

Contact Us

PO Box 1441
New Smyrna Beach, FL 32170

+1-407-463-9389
rchambers@richardchambers.com

About AuditBeacon.com

AuditBeacon.com is a resource center for internal auditors and risk professionals from around the world. In addition to more than 500 blogs authored by Richard Chambers, the site includes links to news and insights on internal audit and other information that illuminates the value of this important profession. AuditBeacon.com is provided as a service by Richard F. Chambers and Associates, LLC.

Copyright © 2023 Richard F. Chambers & Associates. All Rights Reserved.
  • Home
  • Blog
  • Audit Trail Academy
  • Advisory Services
  • Books