14/04/2009 - 11:08

Companies neglect internal auditors

14/04/2009 - 11:08

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Many Australian listed companies are neglecting fundamental governance standards by failing to establish an independent internal audit function, according to a joint survey conducted by Protiviti and the Institute of Internal Auditors Australia.

Many Australian listed companies are neglecting fundamental governance standards by failing to establish an independent internal audit function, according to a joint survey conducted by Protiviti and the Institute of Internal Auditors Australia.

The 2009 Internal Audit Benchmarking Study found that many internal auditors ultimately answered to management rather than the board, with 15 per cent of listed company respondents revealing that the final decision to hire or fire the Head of Internal Audit lay with the chief financial officer rather than with the Audit Committee Chair (62 per cent) or board (10 per cent).

"These results are alarming with nearly two in every 10 decisions being made by the CFO," managing director of Protiviti Gary Anderson said.

"In the wake of the financial crisis, it is more important than ever that internal auditors are able to provide management and the board with objective assurance on how effectively organisational risks are understood and managed.

"At times, internal auditors will be called upon to expose sensitive issues which executives may have a vested interest in not disclosing. It is critical in these cases, that auditors do not appear compromised or hamstrung in any way by senior management. They should not be in the position of having to bite the hand that feeds them to do their job."

Other survey findings reinforced a picture of significant undesirable management influence with almost one quarter of listed company respondents stating that internal audit scope and budget was determined by the chief financial offer (23 per cent).

Conversely, good practice was demonstrated by two thirds of listed companies with the Audit Committee Chair or the board determining scope and budget.

In a further blow to good governance practice and auditor independence, the survey also highlighted that communication channels between internal auditors and audit committees were poor with 27 per cent of listed company respondents stating that their internal auditors did not meet privately with the audit committee in the absence of management.

"Access to the audit committee without the potential for management interference is crucial if boards are to have full and frank information about the state of the organisation. Senior management can become prone to conflicts of interest at times where the need for transparency is greatest such as where the company is being poorly or dishonestly managed," Institute of Internal Auditors Australia technical and policy director Todd Davies said.

"Without a direct reporting line to the board, internal auditors will simply not be able to do their fundamental job of advising boards without fear or favour, free of coercion from management.".

The survey also canvassed the emerging priorities for Australian internal audit teams over the next three years.

Listed company respondents saw their top three priority areas as fraud investigations (64 per cent), risk management attestation in accordance with the updated ASX Corporate Governance Principles (58 per cent) and major project implementations (54 per cent).

"In recent years, there has been a big jump in corporate fraud that has had a powerful impact on company profits, investor confidence and corporate reputations. We expect this risk to grow as bleaker economic times intensify financial pressures for corporates and the general community. It is therefore reassuring to see that listed companies are stepping up their vigilance in this area to ensure they do not become the next big casualty," Mr Davies said

The survey also highlighted that emissions reporting and carbon pollution reduction were seen by 44 per cent of listed entities as a rapidly emerging priority.

"The focus on climate change risk despite the current policy uncertainty is an encouraging sign that many businesses have recognised this issue will have an enduring impact on the way they operate and compete and are already positioning themselves for major marketplace changes," said Mr Anderson.

Other highlights of the survey included:

- 33 per cent of listed companies, 38 per cent of unlisted companies and 52 per cent of government respondents reported that their internal audit function fully complied with the International Standards for the Professional Practice of Internal Auditing ('IA Standards');

- 47 per cent of listed companies, 57 per cent of unlisted companies and 31 per cent of government respondents reported that they have never completed a formal external quality assessment of their internal audit function as required every 5 years, in accordance with the IA Standards.

The 2009 Internal Audit Benchmarking Study surveyed 156 organisations across the public, private and not for profit sectors. Conducted annually, the survey is designed to provide an insight into trends and developments in the internal audit profession in Australia.

 

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