March 11, 2024

What’s The Perceived Value of Internal Audit?

By James Low, Partner-in-Charge, New England Internal Audit Services

What’s The Perceived Value of Internal Audit? Internal Audit Services

Many companies might ask, “Why do I need an internal audit department or even to worry about internal controls at all?” “Isn’t this is just a burden on management, distracting us from real business?” “Is the cost justifiable?” We would counter those questions with, “Have you, or a business you know, ever been in a situation where:

  • The company grew very fast, but the infrastructure did not keep up?
  • A systems conversation occurred, but the right controls around the project management didn’t exist?
  • A transaction occurred (e.g., an acquisition or divestiture) and internal controls were not considered with respect to the financial and operational implications?
  • Employees were not hired to ensure the appropriate segregation of duties were enforced, for example, surrounding the handling of cash?
  • The understanding of the functionality of your new ERP system did not exist and, as result, no one was able to facilitate access management?

And what if these issues, either individually or in combination, occurred over many years? Or resulted in errors in your financial statements, a material weakness, or even fraud – that you would then have to report to the public?

Internal audits can help businesses maintain a functional system of internal controls. They contribute to the identification, validation, and testing of the control environment, helping to ensure it is appropriate, the right size for your company, and working effectively. Yes, there is a cost associated with these benefits, however, what is the true value of an investment in good governance compared to the potential for:

  • Loss of revenue;
  • Loss of reputation; and
  • Loss of employment…maybe yours for allowing the issue(s) to happen?

A good internal audit can pay for itself over time, while continually adding value by identifying inefficiencies like duplicative processes, which can help to optimize operations and reduce unnecessary costs.

In addition, the value proposition of an internal audit department is multifaceted, it includes:

  1. Risk Management: Internal audits can help organizations identify and address risks, both operational and financial. This proactive approach to risk management assists in preventing losses, fraud, and inefficiencies and helps ensure that the organization is prepared to deal with potential issues effectively.
  2. Objective Assurance: Internal auditors provide an independent and objective assessment of the organization’s processes and controls. They offer assurance to senior management and the board of directors that the organization’s risk management, governance, and control processes are functioning effectively.
  3. Control Enhancement: Through their evaluations, internal auditors recommend improvements to internal controls. Effective internal controls are vital for the accuracy and reliability of financial and operational reporting, compliance with laws and regulations, and to help prevent fraud.
  4. Compliance: Internal audits assess compliance with laws, regulations, policies, and procedures. This helps organizations avoid penalties, fines, and reputational damage that can arise from non-compliance.
  5. Operational Efficiency: Internal auditors examine the efficiency and effectiveness of operations, suggesting improvements that can lead to cost savings and better resource utilization.
  6. Protecting Assets: Internal audits evaluate the systems in place to safeguard assets and verify the existence of such assets, thereby protecting them from various types of losses.
  7. Fraud Detection and Prevention: Internal audits can play a significant role in fraud detection and prevention through regular audits and by fostering an environment of accountability and integrity.
  8. Quality Improvement: Internal audits can generate feedback that can be used to improve business processes and performance, leading to a higher quality of products and services offered by the organization.
  9. Knowledge and Best Practices: Internal auditors often have a wide range of expertise and can serve as internal resources advising on best practices and industry trends, among other issues.
  10. Stakeholder Confidence: By providing assurance on the effectiveness of governance, risk management, and control processes, internal audits can increase the confidence of stakeholders, including investors, regulators, and the general public.

Internal audits can play a crucial role in enhancing and protecting organizational value by providing risk-based and objective assurance, advice, and insight. They also support an organization’s accountability and transparency and can help prepare an organization to respond to future challenges by proactively identifying areas for potential improvement.

For many companies, there is undeniable value in ensuring that you can achieve your objectives, manage risks, streamline operations, and maintain reliable financial reporting and compliance standards.

Want an assessment of your organization? Ask Marcum today!