Internal auditors are very important for healthy operations of companies. This function increases in significance with the size of the corporation. However, the functions that internal auditors perform are significant enough for every company, no matter how small, to have an expression of internal audit.
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There is debate on the best governance structure to use to derive the best value from an internal audit unit. Corporate governance structures include all stakeholders such as the shareholders, company staff and management, board of directors and regulators.
There two options are having the internal auditors report to senior management or directly to the organizations board. Boards have the role of ensuring that internal controls work, which makes it very important for them to have the services of the internal audit team. “An effective internal audit function plays a key role in assisting the board to discharge its governance responsibilities” . The following are the key functions of an internal auditor.
The first role that internal auditors play in corporate governance is risk evaluation. It involves the identification of processes that carry significant risks for the company.
While many of these risks are financial in nature, the process cuts across all operations that have an influence on the financial standing of the company. For instance, internal auditors care about information systems because of the financial risks that a security lapse in information systems may cause.
Tracking Fraud and Irregularities
The second role that internal auditors play is that they help the organisation to track fraudulent activities and other financial irregularities. Fraud comes about when an individual or group of people try to get dishonest gain. Such individuals can be insiders or outsiders.
Irregularities refer to financial processes that do not conform to proper policies. The internal audit office acts like the first line of defence against these schemes.
Analysis of Efficacy of Corporate Governance Processes
The next role that an internal auditor plays is that of policing the efficacy of the corporate governance processes. Corporate governance manifests most clearly in the financial management systems. As the auditor polices the entire financial system in the organization, he makes it possible for the organization to tell just how strong its corporate governance processes.
Tracking the Value of Assets
Another important role that the internal auditor plays for an organization is tracking the value of assets for the company. As the person who keeps the asset register, an internal auditor adjusts the value of the assets to reflect the impact of inflation, depreciation and appreciation of the value of assets.
These changes come because of the changes in both the internal and external environment. This information is important because it affects the values on the balance sheet, which in turn affects the shareholder relations.
The structure and value of assets forms an important part of the decisions executives take in as far as the goals of the organization. This impact makes an internal auditor a very significant player in the corporate governance process.
Review of Corporate Performance in Operations and Financial Issues
The internal auditor provides a global view of the corporate performance and its financial issues. This role is very critical when conducting analysis to determine whether the organization made profits or losses. These reviews reflect the effectiveness of the corporate governance processes such as business planning and implementation.
The advantage an internal auditor has over an external auditor is the capacity to trace small changes in the company’s financial deals that may point towards future profits or losses.
Recommendation of Policy Actions
Another important role that an internal auditor plays is that he develops policy recommendations for the organization to enable it to improve its corporate governance processes.
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Since the internal auditor spends a lot time investigating the lapses in the corporate governance process, he tends to become an internal consultant on the things that the company can improve. The execution of this function improves in organizational structures where internal auditors report to board.
One of the new frontiers that internal auditors must deal with comes from the impact of businesses trading online. It is now possible to cause a lot of damage to a company’s reputation from any location in the world. There is an increasing rate of fraud from online sources.
Cases of identity theft are also increasing including impersonation and hacking of servers. Internal auditors are gaining prominence as the first line of defence against these emerging issues in the online environment because of their unique place in detecting suspicious activity.
In conclusion, the role that an internal auditor plays in the corporate governance process depends on the organizational structure of the particular organization. An internal auditor has the responsibility of raising the red flags and providing the alternative courses for their parent companies.
They act as sentinels for the company providing early warning and ensuring that the company’s decision making organs have the best information to make sound decisions in the corporate governance process.
KPMG, 2003. Internal Audit’s Role in Modern Corporate Governance. Hong Kong: KPMG KPMG.
Schartmann, B., 2007. The Role of Internal Auditing in Corporate Governance in Europe: Current Status, Necessary Improvements, Future Tasks. Berlin: Verlag.