Organisations that have embraced internal audit, employ competent internal auditors and give internal audit the freedom to execute its duty in accordance with the international standards find that it’s not the unwelcome watchdog for which it's sometimes mistaken. In fact, internal audit can confer a competitive advantage, suggests Dr Claudelle von Eck, CEO of the Institute of Internal Auditors South Africa (IIA SA).
- Claudelle is on the panel of judges at this year's CFO Awards (Click here to register for the CFO Awards 2016). This article also appeared in the third edition of CFO Magazine (Click here to read the online version or to advertise in this quarterly publication).
A CFO must embrace an assurance process that is designed to give some peace of mind as he or she continuously navigates the high delivery tightrope. How then does the CFO know that internal controls are always adhered to and that best practice is followed? If the discipline in an organisation is not optimal, the ripple effect into finance could be dire. A key partner in providing assurance is internal audit.
Not only are internal auditors trained to do valid evaluations, but their independence and objectivity lend credibility to the process. They offer an independent, objective assurance and consulting service designed to add value and improve an organisation's operations - and ultimately its bottom line.
As the complexity of the context in which organisations operate increases, their leaderships' ability to navigate the challenges, while still creating value, is constantly tested. This is amplified by the degree and velocity of changes in the market and broader environment. As the term value creation is increasingly bandied about, it is no wonder leaders are finding it increasingly difficult to stay on top of their game and ahead of the pack.
Internal audit helps an organisation accomplish this by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. Thus, in the context of finance, internal audit's role would be to provide assurance (in other words, peace of mind) and act as a consultant on best practice. The CFO should embrace the process of internal auditing as an activity that is designed to assist the organisation to function optimally.
Unwelcome watchdog or valued partner?
Many organisations see internal auditors as unwelcome watchdogs instead of assurance and consultative partners. Often, internal audit is resisted in the process as "those people who are only out to scratch through our stuff and expose our mistakes". An excuse that may from time to time be put on the table is that "we cannot allow 'outsiders' access to confidential information".
Such resistance causes a combative atmosphere that can be destructive, as it counteracts the objective of the internal audit. Internal audit should be seen as the extra eyes and ears that assist the leadership in ensuring that their internal controls are not only adequate but are also adhered to. If people stop resisting the process, then leadership can find enormous benefit in it.
In fact, the forward-thinking CFO should seize the opportunity to allow the internal audit department to advise on best practice principles. Part of the internal auditor's job is to look at processes objectively and advise on better ways of doing things. In a world where managers have to deal with a flurry of information on a daily basis, it is becoming increasingly difficult to keep an eye on everything and ensure that the best methods are applied at all times. Opening the doors to those objective assessors may therefore save the leadership a lot of rands and cents - and even some embarrassing moments.
A conduit for change
The one area where internal audit can become absolutely invaluable to the CFO is by becoming an ambassador for the finance department. Internal auditors have to audit all aspects of the business and may come across areas in the organisation where managers are not adhering to finance-related policies. In these situations, they have an opportunity to become a conduit for the changes the CFO would like to see. This makes internal audit a potentially powerful ally. A word of caution here, however, too many organisations confuse internal audit with external audit and confine it to only focusing on financial matters. Although finance is a crucial focus area for internal audit, it is not primarily a financial discipline. As a risk-based, multi-dimensional discipline, its scope stretches over every aspect of the organisation. It is therefore important that internal audit strongly focuses on the non-financial areas of a business too. At the end of day, these have financial implications and by the time the effects are seen in finance, it may already be too late.
The right people for the job
Internal audit's ability to be a powerful ally is, however, highly dependent on the level of competence of the internal auditors in the organisation. Internal auditors should not only be technically skilled auditors, but must have a deep understanding of the strategy, the organisation's processes as well as what best practices exist in the industry and beyond. Training internal auditors for such an intimidating role is not easy, as you cannot produce instant competent internal auditors. Developing the necessary depth needed to deliver the right level of value takes time. It is therefore important that organisations employ and train internal auditors in accordance with the career path standards set by the Institute of Internal Auditors South Africa (IIA SA).
In the same vein, the independence of internal audit must be jealously guarded. The minute internal audit's independence is compromised, its effectiveness is compromised.
A crucial aspect of independence is the reporting lines. Internal audit should functionally report to the audit committee and administratively, to the CEO. Its independence is hampered if it reports to a function that it also has to audit.
Organisations that have embraced internal audit have ensured that competent internal auditors are employed and have provided internal audit with the freedom to executive its duty in accordance with the international standards, find that internal audit confers a competitive advantage.
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