Internal Audit Challenges and Complications
Internal audit it’s a corporate necessity, a regulatory requirement, a business requirement, and a corporate compliance requirement. Internal audit is basically an evaluation of the effectiveness and efficiency of the internal control systems in place to mitigate risks and achieve organizational goals. In order to carry out this assessment, auditors examine the processes and systems from multiple perspectives such as financial reporting risk (reliability of financial statements), process improvement opportunities (efficiency or effectiveness), fraud risk management, information technology governance (IT) policies and procedures (data security) etc. The findings of this assessment are then communicated to the management of an organization who decides on how to take action based on these findings.
The internal audit field is facing several challenges today due to global economic conditions and advancement in the field of technology. Some of the challenges and complications faced by internal audit function are as follows:
Internal Audits can be a Cost Center
For internal auditors, it’s important to remember that the existence of your department is entirely dependent on its value as a cost center. This means that you have to be able to justify your department’s expenses and show how they directly benefit the company’s bottom line. If you can’t do that, then there won’t be an internal audit department because it will cease to exist.
So if internal audit is a cost center, what does that mean for you? You need to prove your worth! Your department needs to be efficient and effective in order to maximize the benefits of internal audits while minimizing the associated costs.
Internal Audits and Online Security
Internal audits are a critical component of an organization’s risk management strategy. They are part of the COSO framework, which is used to assess and mitigate risk in the following ways:
- Compliance with applicable laws and regulations
- Internal controls over financial reporting
- Financial stability or strength of your enterprise
Effective internal audits require complete adherence to established processes. Online security protocols must be in place to ensure that privileged information remains confidential, accessible only to authorized individuals who have been granted permission from appropriate levels of authority within the organization.
Internal Auditing has yet to Prove Itself as an Authoritative Independent Body
Internal auditing should be an independent body, completely free of conflict. An internal auditor should not report to the same person that oversees security operations or even the same person that heads business development. They should also be able to report directly to the board. This creates a check and balance on both the security team and business teams.
There are many things that complicate this process, especially in smaller companies. Is there enough budget and headcount for an internal audit? Is there enough experience in leadership to understand just how important internal audit is? These problems can be solved through education, but it’s a lot easier said than done.
Internal Audits are not Necessarily External Audits
An internal audit is a type of evaluation performed by management to ensure that there has been compliance with rules and regulations. An external audit, on the other hand, is an independent opinion issued by auditors after they have examined and confirmed the company’s financial statements.
Both audits are important but they differ in some ways:
- Internal audits are done for internal purposes; external audits are done for external purposes. For example, an internal audit might be conducted to assess fraud risk or to check whether employees are adhering to certain policies. In contrast, an external audit gets published in a public report as part of financial reporting requirements.
- Internal audits can be conducted by anyone within the company or by a third party internal audit company; external audits must be performed by third-party auditors who are licensed to perform external audits and have no association with the company being audited.
Internal Audit Must Change or Die
Internal audit must change or die.
The profession is in the midst of a perfect storm of challenges that threaten to render it irrelevant. These threats include:
- New technologies that transform business and work
- Changes in regulatory expectations and demands from internal and external stakeholders
- Increased risk assessments from organizations’ boards and third parties such as shareholders, rating agencies, credit analysts, etc.
- Ongoing talent shortages for critical professional skillsets
- The current global economic environment, which has brought about a new type of corporate governance imperative for organizations to be more transparent about their risks.