What are the Key Roles of Internal Audit Function in Corporate Governance

What is Corporate Governance?

Corporate governance is characterized as the oversight of an enterprise’s practices, policies and processes.

At its most basic level, the term “governance” represents a collection of procedures and structures meant to assist an enterprise in achieving its goals. Risks that impact an enterprise’s capacity to fulfill objectives and the enterprise’s attempts to reduce known risks and uncover unknown risks influence these procedures and structures.

Corporate governance is usually in place to help ensure transparency, which enables robust and balanced economic development. It also ensures that the enterprise is run in its own and its shareholders’ (both majority and minority) best interests. It allows all shareholders to fully exercise their rights and make sure the company is fully aware of those rights.

A board of directors is often responsible for overseeing company governance in the enterprise and they may hire a team of internal auditors to monitor and test the internal controls.

Internal Audit in Corporate Governance

The purpose of an internal audit is to ensure effective corporate governance. Hence its role in corporate governance is critical. It offers objective assurance and insight into the efficacy and efficiency of internal control, governance procedures, and risk management.

Internal audit assists in maintaining timely and accurate financial reporting and data gathering and ensuring compliance with laws and regulations. Internal audits also give management the tools to improve operational efficiency by detecting problems and addressing breaches before an external audit finds them.

Different types of internal audits can be carried out at any time during the year. Financial controls, information technology controls, and operational controls are some areas they may concentrate on. A board of directors may choose to test all of these areas or focus on just one of them.

See also  What are the Advantages of Internal Control and How Does It Affect Your Organisation?

In most enterprises, internal auditing is an all-year-round procedure carried out by in-house employees. An audit manager is in charge of preparing an annual audit plan, which is then approved by the board of directors. The majority of internal audits are targeted and planned based on the amount of risk. To guarantee that corporate governance objectives are met, the internal audit function frequently focuses on higher-level risk areas.

Roles of Internal Audits

An agile and active internal audit department may be an important resource supporting strong corporate governance as enterprises manage the expanding array of risks.

This is because internal audit plays a crucial role as the “Third Line of Defence” in this situation. It offers assurance by evaluating and reporting on the efficacy of governance, control procedures, and risk management that aid the company in achieving financial, operational, strategic, and compliance goals.

Internal audit may provide value by conducting assessments of the company’s processes and procedures in areas such as:

  • Culture in the workplace
  • Geopolitical risk
  • Sustainability
  • Cybersecurity
  • Business’s plan
  • How the enterprise recognizes risks and handles them

An internal audit helps improve corporate governance by conducting risk-based audits that give insights and confidence into the procedures and structures that help the enterprise succeed. Its role is anticipated to grow in the areas mentioned above as risks develop and become more complicated.

It is conducted by experts who have a profound awareness of the need for good governance, an in-depth grasp of business systems and procedures, a basic desire to help their companies thrive, and work autonomously within the organization.

See also  What is Control Deficiency and How Can the Company Minimize It

When the competency, resource level, and internal audit structure are aligned with corporate strategies, it is best positioned to give assurance. It is also important that it is free of excessive influence to perform at its best.

Internal audits may undertake objective evaluations to give the management and the board an educated and unbiased critique of internal control, governance procedures, and risk management.

Such insights on control, governance, and risks can lead to good transformation and innovation inside the enterprise. It instills trust in the enterprise and allows for competent and well-informed decision-making.

Furthermore, effective internal auditing may grow to give foresight to the enterprise by spotting patterns and bringing potential issues to the enterprise’s notice before they become catastrophes.

That being said, an internal audit may still provide value by offering advice and consultancy services aimed at improving risk management, governance, and control procedures, as long as an internal audit does not take on management responsibilities. This is critical for preserving the impartiality of internal audits and preventing conflicts of interest. The sort of audits or services to be carried out should be determined by the needs and issues of the enterprise, the audit activity’s maturity, purpose, and authority.

As a result, the audit committee usually relies heavily on the work of the internal auditors to provide an impartial and objective assessment of how successfully (or not) the organization is managing significant business risks.

Therefore, internal audit must be provided appropriate monitoring and support by the audit committee for it to add value to the organization in fast-paced times that are likely to introduce new hazards. This necessitates:

  • Internal audit being heavily involved in risk conversations within the enterprise.
  • An independent evaluation of the internal audit function’s adequacy by outside specialists every two or three years.
  • The audit committee, the head of internal audit, and the external audit partner meeting regularly throughout the year.
  • An internal audit function that is appropriately resourced and manned.
  • The head of internal audits feels comfortable raising any serious concerns about risk or internal controls with the audit committee chair informally and promptly.
  • The audit committee keeps track of and protects the internal audit function’s independence in operational management and internal politics.
See also  How Do You Assess Significant Deficiencies of Internal Control of the Company

On the other hand, identifying fraud is one of the essential duties of an internal auditor. If left unchecked, fraud may cost an enterprise millions of dollars and hurt its public image. Many boards of directors rely entirely on the internal audit staff to uncover instances of fraud and abuse.