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IIANZ Board member and Chair of its Advocacy Committee
regular Transparency Times contributor
by James Jong
Board Member and Advocacy Committee Chair
Institute of Internal Auditors New Zealand
Last month we discussed the role of internal auditors as the conscience of organisations. They can play a pivotal part in shaping accountability, integrity and trust. In this brief article, we explore how that is given effect through strong alliances with boards and management.
It is not difficult to imagine a utopian organisation. Its directors are visionary, knowledgeable and govern with a clear and common purpose. Managers and staff are competent, responsible and motivated to achieve organisational goals. The internal audit function is trusted as objective and independent providers of assurance and improvement advice. The unfortunate reality is most organisations are flawed to some degree in these respects. How does internal audit begin to make a difference?
First, internal audit should instinctively recognise that boards and management value different things that may be diametrically opposed. Governors and directors want to know the organisation is managed effectively. They demand straight answers and are generally intolerant of surprises. But if there are issues, management could be inclined to mask or divert attention from them, particularly if the boardroom response is punitive. They could prefer taking their chances to stage a remarkable recovery than risk board scrutiny. This stance does no favours to the organisation or its stakeholders in the longer term.
Second, internal audit should focus on activities that matter to the purpose of and outcomes sought by the organisation. They must commit significant resources to engage with senior management on their strategic business priorities; actively seeking to advise, consult, improve or assure. But if management simply sees internal audit as the inspectorate of the board, they are less likely to engage authentically. Sadly, this is often the reality for internal auditors, despite their genuine intentions to help.
Third, internal audit must deftly juggle the duality of its role to assure governors and to advise management, and do so without surprising either. This balancing act is arguably the most difficult aspect of their work but undeniably also the most rewarding. It requires high trust built from delivering credible, quality work with management that prepares them for scrutiny. At the same time, internal audit – in discharging their assurance role – can provide the board with independent perspectives that mirror their observations and recommendations, which they agree beforehand with their management clients. Distinguishing the fine line between defending management responses and explaining their context with impassionate objectivity is critical if internal audit is to retain the confidence of the board (or its audit committee).
Fourth, internal auditors should reinforce accountability through follow-up. They ensure commitments made by management to address risks and issues are honoured. In a fast-paced business environment, sometimes urgent matters take priority over the important. Internal audit has a key role in overseeing the completion of outstanding and invariably important matters in a collegial manner. It is only a matter of last resort that inaction is brought to the attention of the board, thereby closing the loop on management accountability.
Every organisation will have different challenges between its board, management and internal audit function. In this article, we outlined how different objectives and motivations could be bridged by internal audit. They could be the vital link to help boards to discharge their stewardship responsibility and management to meet board expectations of performance and, if necessary, improvement. The discussion above demonstrates that when internal auditors are given voice, they can enhance governance, integrity and accountability.