The creation of an Internal Audit function is often viewed as a luxury by many companies, and one they cannot afford. But the truth is that an internal audit is actually a function most companies cannot afford not to have.
Here are three reasons why:
- Independent assessment. An internal audit function provides independent assessments for key processes and systems (and transactions) within a company. Since IA functions typically report to the audit committee of the board of directors, this helps to ensure that the audit committee and board as a whole has the information necessary to perform their roles effectively. It is often difficult for the audit committee to have its “feet on the ground” within a company. IA is often the eyes and ears for the audit committee on a day-to-day basis.
- Improved controls environment. With an effective IA function participating in the monitoring of financial, operational and compliance areas of a company, the overall control environment will be improved. If process owners don’t believe their activities will be reviewed by IA, they may be less motivated to ensure that all related internal control activities are performed in accordance with senior management and Board directives. Furthermore, an IA function is often a deterrent for fraudulent activities.
- Source of talent. Finally, internal auditors typically review all key processes on a frequent basis and nonkey processes on a less frequent basis. As such, auditors develop detailed knowledge on how key processes and systems operate. Based on that alone, an IA function typically serves as an excellent talent pool from which key positions within the company may be filled. What’s more, internal auditors typically develop a “process” mindset. This enables them to see the big picture of how processes and systems work together, allowing them to see how what they do benefits the company as a whole. This should make them more valuable to the company in roles after they leave the IA function.
These are just a few of the benefits of utilizing an experienced, well equipped IA function. Most successful companies have IA functions. In fact, the New York Stock Exchange requires listed companies to have an IA function, and the NASDAQ has recently discussed the idea of adding a similar requirement.
There are a variety of ways to create an internal audit function — staffed entirely with internal resources, staffed with a mix of internal and external processionals, or fully outsourced to a professional services firm. Regardless of how you create it, your company will reap the benefits.