By Mark Harrison
Managing Director, Protiviti Australia
Editor’s note: This post was published originally on Work Life, a website and blog from Robert Half Australia. We thought this news about new internal audit requirements for publicly listed companies in Australia would resonate with companies in other countries, including the United States. (The NYSE has a similar requirement for its listed companies.)
Stronger Corporate Governance
From July 1, 2014, listed entities will disclose if they have an internal audit function, how it is structured and what role it performs, as per Recommendation 7.3 of the 3rd edition of the ASX Corporate Governance Principles and Recommendations.
The Recommendation further states that if the entity does not have an internal audit function, it should disclose that fact and the alternative processes employed for evaluating and continually improving the effectiveness of its risk management and internal control processes.
These new disclosures will deliver a long-overdue boost to the governance standards of approximately 1,800 Australian companies who have yet to embrace the assurance that internal audit provides.
The New York, UK, Hong Kong, Singapore and Malaysian stock exchanges have for many years either obliged listed companies to have an internal audit function or required a relevant disclosure in their annual report. Market regulators insist on this for the simple reason that internal audit enhances shareholder protections and is a fair quid pro quo for the privilege of raising capital from the public.
Internal Audit Is an Indicator of Corporate Health
Many institutional and other sophisticated investors view the existence of an internal audit function as an indicator of the health and stability of the company.
Why? Because internal auditing is an essential element of good corporate governance. It’s an independent assurance process that helps companies improve their operations by ensuring there are effective risk management and controls in place to identify and mitigate problems before they escalate and to take advantage of new opportunities. Companies that disclose a solid internal audit function will therefore inspire greater market confidence and enhance their attractiveness to investors.
Most well-resourced companies at the ‘big end of town’ already have an internal audit function because quite apart from being good for governance, it adds value to the business. However, for the remaining 1,800 or so companies below the ASX 300, internal audit is still practically non-existent.
Implementing an Internal Audit Function
In many cases, it would not be cost-effective for a smaller company to establish a dedicated internal audit function. Fortunately, other competitive options are available.
Smaller companies could embrace a shared service model where two or three companies split the cost of an internal auditor, an approach which is common in the government sector. Another option is to outsource to an internal audit consulting firm.
Importantly, to safeguard the quality and integrity of its internal audit reviews, companies engaging an internal audit service provider should always insist their internal auditor apply The Institute of Internal Auditors’ (IIA) International Standards for the Professional Practice of Internal Auditing. These are the only globally accepted standards for internal audit work and represent professional best practices.
Companies should be wary of service providers who use accounting standards or their own internal manuals to perform internal audit work. These references are simply not appropriate for internal audits and risk compromising the quality of the audit.
Applying the IIA’s internal audit standards guarantees that the work will be robust and that company directors and executives will receive reliable and objective information to improve their business processes.
Stand Out From the Crowd
There are many benefits in adopting an internal audit function and in making a quality internal audit disclosure. For smart operators in the small-to-medium company sector this is an excellent opportunity to positively differentiate themselves and to make an impression on investors seeking a more stable, sustainable investment.