management — the CEO and CFO — and
the internal audit function.
The board is responsible for setting corporate strategy, and management designs
internal systems and control processes
to implement that strategy. Internal auditors are charged with assessing how well
these wide-ranging processes function.
To this end — through reviews and
focused studies, formal reports, recommendations, and follow-up — the internal auditor examines and appraises the
reliability and integrity of information
ity, loyalties, and relationships outside
Audit committee conflict-of-interest
updates and educational/informational
sessions should become routine, as
should a self-assessment process.
The audit committee chairmanship,
which is at great risk of developing a
governance “blind spot,” should be a
Management should accept the fact
that the rules of corporate governance
have changed markedly and that it can
Management should accept the fact that the rules of
corporate governance have changed markedly and that
it can be dangerous to manipulate or attempt to
influence internal auditing or the audit committee.
available for management decisions; verifies the existence and safeguarding of
assets; ensures compliance with policies,
procedures, laws, and regulations; and
evaluates the efficient use of resources.
Good corporate governance principles
state that the internal audit function must
have a stronger reporting relationship to
the board than to management. This
arrangement is intended to give the internal auditor independence, objectivity, and
the capability of evaluating — without
interference — the organization’s system
of internal control and risk management
processes. The goal is to guarantee that
both board and management are kept
aware of important issues identified for
management to correct, and to ensure that
the board knows about any failure by
management to take corrective action.
As these principles become accepted —
even regulated — on an international
basis, boards must allow internal auditing to function fully and effectively without pressure to see things in a particular
way. In short, to ensure that the balancing act among the internal auditor,
management, and the audit committee
The consistency of ethical behavior
among all parties should be ascertained
Audit committee members should be
screened for expertise, credibility, humil-
be dangerous to manipulate or attempt
to influence the internal audit function
or the audit committee.
The internal auditor should be perceived
as a valuable strategic partner and an
integral part of corporate governance.
The chief audit executive (CAE), in
particular, and the internal auditing
function, in general, should be
reviewed and assessed according to
The IIA’s International Standards for
the Professional Practice of Internal
An independent/objective advisor
should be retained to ensure each player’s
role is clear and to recommend ways to
foster better working relationships and
maintain a good balance. The advisor’s
activities could include:
Examining the relevance of the charter and the actual functioning of the
audit committee in light of prevailing
legislation or corporate governance
Advising management and the audit
committee on whether, and to what
extent, risk issues are clarified and
raised to the right level, including ethical issues.
Obtaining assurance that clear reporting lines are established and accountability is assured.
Evaluating the interrelationships to
ensure that the organization is not at
any risk specifically due to any conflicts of interest, strained relationships,
Reviewing the mission and effectiveness of the internal audit function in
line with the Standards and best governance practices.
Effective corporate governance has
long been dismissed as an intriguing,
laudable, but largely cosmetic concept.
However, times are changing. Although
a recent Financial Times report of a survey of CEOs stated that, “Only one chief
executive in five strongly believes new
corporate governance rules enacted following U.S. business scandals will
improve ethical behavior,” more than
80 percent of respondents said they
believe that “the new emphasis on better corporate governance will be a permanent fixture in business rather than a
Internal auditors must get to work. We
should be past talking about the challenges and wringing our hands as we hear
of more examples of ineffective corporate
governance. Action is needed:
By The IIA — to continue to speak
boldly and loudly not only in the United
States, but globally, to keep the profession in the global spotlight for the right
By the CAE — to pressure the other
players to do their part to redress real
governance imbalances that occur either
alone or through the careful use of competent independent advisers who add to
the credibility of the CAE’s opinion.
By academics — to find creative ways to
interpret today’s realities and incorporate them in curricula rather than teach
the “old order.” This will better prepare
our new generation of CAEs and internal auditors.
We all need to act. So far, our efforts
have been commendable. But, if we are to
prove that we can be the credible counterbalance that is needed, we must show
that our efforts will be sustained — both
globally and as individual professionals.
J. GRAHAM JOSCELYNE is the former auditor
general of World Bank and current director
of international services at UHY Advisers
Inc., which is based in Washington, D.C.
To comment on this article, e-mail the author
INTERNAL AUDITOR FEBRUARY 2004