A recent survey is reason for concern when it comes to internal auditing because it showed that 49 percent of internal auditors had no involvement in assessing their firm’s culture.
Also, about 25 percent of internal auditors did not assess a company’s corporate governance, the survey revealed. In North America, specifically, 32 percent of internal auditors had no involvement in assessing corporate governance, according to the Thomson Reuters annual State of Internal Audit Survey.
Yet following corporate culture and corporate governance are important for internal auditors.
“That has very significant impact on … financial statements,” Joshua Ronen, an accounting professor at New York University who has also been employed by attorneys as an expert witness on securities, said in an interview with InsideCounsel.
Do not expect that outside auditors will pick up the slack. It would be very difficult for external auditors to follow these factors, because they are not aware of the day-to-day events, he explained.
“Internal auditors are in the best position to undertake that task,” Ronen said.
For instance, internal auditors “blew the whistle” on problems at Enron, an energy company, and WorldCom, a telecom company.
Ronen points out that in the case of WorldCom, which was once the second largest long-distance telephone company in the United States, the culture and corporate governance existed in a way so that the CFO, Scott Sullivan, had full authority over the internal auditing department. Last-minute accounting changes were made by accounting group after the CEO, Bernard Ebbers, and the CFO put pressure on them. In addition, the board’s directors were co-opted by the CEO, who was also the chairman. They approved loans going to the CEO. In the end the company violated GAAP and the company's total assets were wrongly increased by about $11 billion. The company was accused of employing improper accounting methods to keep up the price of WorldCom’s stock.
“It’s mind-boggling what they did,” Ronen said. “There was no monitoring, no checks and balances in the system.”
Corporate governance has been associated with improved company performance, more transparency, less risk for insider trading, and several other benefits.
Recognizing these pluses, the Chartered Institute of Internal Auditors recently recommended, too, that boards make sure corporate culture and behavior are audited.
Michael Cowan, a regulatory intelligence analyst at Thomson Reuters, points out, as well, in a blog post that “this is a particularly urgent issue now, as nearly a quarter (24 percent) of internal auditors expect their personal liability to increase in 2014.”
“The adequacy of internal auditors’ skills, focus and approach is firmly on the radar of regulators worldwide,” he added.