A Central Role In Corporate Governance Accounting Essay

Category: Accounting

Internal auditing is defined by the Institute of Internal Auditing as: an independent, objective assurance and consulting activity designed to add value and improve an organizations operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.

From this definition it is evident that internal auditing plays a vital role in enhancing effectiveness and corporate governance within the entity. However, an important element of developing sound corporate governance is the interaction between the internal auditors and the audit committee (Bishop et al., 2000). The relationship between the internal auditors and the audit committee is significant, with a reciprocal strengthening of each other's role (Goodwin and Yeo, 2001) and internal audit can provide the information needed for audit committees to meet their governance mandate (Bishop et al., 2000).

The EU Directive on Statutory Audit (European Parliament and Council of the European Union, 2006 : 6) states that: ''Audit committees and an effective internal control system help to minimise financial, operational and compliance risks, and enhance the quality of financial reporting.'' Moreover, it establishes that the audit committee should monitor the financial reporting process, the effectiveness of the company's internal controls, its internal audits, and its risk management systems.

When listening to the children one should make sure that when listening to be attentively to the children emotion and words they use. If possible the kinder-garden assistant should take the child aside in a quiet area to be able to communicate. One should give the child full attention. (Children's Aid Society of Toronto, Unknown Date) The kinder-garden assistant should make sure to keep her feels of anger and frustration aside when talks to the children. Let the children tell you what happen to them in their own words and make the quiet moments comfortable for you and the children. (Family Support Line, 2013) The kinder-garden assistant should make sure not to be interviewing the children and be aware of the child verbal and non-verbal. When talking to the children one should use paraphrasing to show the children understanding.

The expanding monitoring role of audit committees implies that non-executive members are often faced with an information asymmetry problem (Raghunandan et al., 2001). Thus the audit committee lacks information on matters such as risk management and internal control resulting in uncertainty to fulfill their own functions. Everaert et al. (2009) argued that such lack of knowledge answers why the audit committee influence on the agenda and work plan of the internal audit function tend to be limited. It is often argued that companies form an audit committee simply to fulfill the requirements set out by law without giving any concern about its responsibilities and effectiveness. This problem is more likely to be reduced when effective communication exist between the audit committee and the internal audit function (Scarbrough et al., 1998).

Bishop et al. (2000) highlights a number of way through which the internal auditor may support the audit committee. These include:

general assistance by facilitating how the information flow to the audit committee and by undertaking such investigations, as instructed by the audit committee

financial reporting assistance by supporting the audit committee in determining whether or not the company has fulfilled its reporting objectives and in assessing the quality of financial reporting. In addition, the internal audit function may give an insight on the strength of controls over the financial reports and give comfort to the audit committee that reports are relevant and based on timely business performance measures

risk and control assistance by supporting the audit committee determining whether the company has fulfilled its control objectives. Moreover, it shall make available information that will assist the audit committee in monitoring the company's control environment, and key financial and business risks faced by the company.

According to the Institute of Internal Auditors, a successful relationship between the audit committee and internal audit would involve regular communication with the audit committee and management on the risk faced by the company. At the same time the internal auditor should ensure that its roles are clearly defined and that it responds to the needs of the audit committee and the board effectively. Moreover, the internal auditor should maintain an open and effective communication with the audit committee and provide members with training on risk and internal controls (Tate, 2008). Training can help can help audit committees to understand how internal auditors test the system of internal control and its effectiveness (Rezaee and Zabihollah, 1993).

There are various aspects one should consider when considering what affects the interaction between the internal auditor and the audit committee including the frequency of meetings between the audit committee and the internal audit function and the audit committee involvement in the dismissal or appointment of the chief internal auditor.

An effective audit committee is perceived as vital in strengthening the role of the internal audit by acting as an independent body for internal auditors to raise sensitive matters affecting the management (Goodwin and Yeo, 2011). A counter argument was made by Subramaniam and Zain (2007), where one of the chief internal auditors interviewed felt that he could trust the audit committee since they tend to play it safe when sensitive issues are raised because they are not willing to risk their position.

Moreover, the appointment or termination of the chief internal auditor is likely to be influenced by the executive member if it is not fully independent. However, while having an independent audit committee is regarded to be more objective, on the other end they are perceived to be lacking organisational know-how. (Subramaniam and Zain, 2007)

Audit committees made up solely of independent directors tend to have more regular meetings with the chief internal auditor in contrast with those that are not fully independent (Goodwin and Yeo, 2001). The frequency of meetings is a potential indicator of its effectiveness by ensuring that the audit committee is kept updated on issues than concern them (Menon and Williams, 1994). Best practice recommends up to three or four meeting per year (Cadbury committee, 1992). According to Marx and Voogt (2010), audit committee should determine whether internal audit has unrestricted access to the audit committee, and to the board.

Audit committees base their decisions upon the information they receive from the internal auditors. Thus, the audit committee cannot function on its own but needs full cooperation from the internal audit function. Therefore for the audit committee to operate effectively it depends on the effectiveness of the internal audit. This highlights the need to encourage the interaction between the internal auditor function and the audit committee to strengthen their position and in turn add value to the company.

According to Sarens and Beelde (2006), non-executive members within the audit committees would like internal auditors to act as a link between the operational and monitoring areas of the company to make up for their lack of knowledge by knowing what is happening throughout the company.

The objectives are:

How do internal auditors perceive their interaction with the audit committee, and what areas of involvement of the audit committee are perceived to sustain the internal auditor status and independence?

What facilitates and hinders communication between the audit committee and the internal auditor?

What aspects do internal auditors perceive as important for the audit committee to enhance the internal auditor effectiveness?