‘Status, scope and skills of internal audit’ must be increased says Chartered IIA

‘Status, scope and skills of internal audit’ must be increased says Chartered IIA

Major accountancy bodies support new code after string of audit-related business collapses in recent years.

The Chartered Institute of Internal Auditors (IIA) has launched a new internal audit code that aims to increase the effectiveness of internal audit functions so that major risks to businesses can be better identified and potential collapses prevented.

Following the failures of external auditors to properly identify major risks at Carillion in 2018 and Patisserie Valerie in 2019, the Chartered IIA has called for internal auditors to play a more integral role in the overall audit process.

“High-profile corporate collapses linked to governance deficiencies have led to a wide-ranging review of the audit and corporate governance framework,” said Internal Audit Code of Practice Steering Committee Chair, Brendan Nelson. “Strong, effective and well-resourced internal audit functions have a central role to play in supporting boards to better manage and mitigate the risks they face.

“The Code makes 38 important recommendations, including the right for internal audit to attend executive committee meetings, unrestricted access for internal audit to all parts of the business and a direct line for internal audit to the Chief Executive. I urge boards, and in particular Audit Committees, to apply appropriately the Internal Audit Code of Practice to increase the effectiveness of their internal audit functions, in the pursuit of stronger corporate governance and risk management.”

New Recommendations

The new code makes a total of 38 recommendations for businesses including:

• Unrestricted access for internal audit so that no part of the organisation is off limits and grants access to management information
• The right for internal auditors to attend and observe committee meetings
• Direct contact with the CEO and a direct report to the Audit Committee Chair
• The direct employment of Chief Internal Auditors in every business even when the internal audit function is outsourced. This will make sure that Chief Internal Auditors have access to key management information and decisions.
• Regular communication and sharing of information by the Chief Internal Auditor and the partner responsible for external audit to ensure both assurance functions carry out their duties effectively.

Code of practice welcomed

Leading accountancy firms have been overwhelmingly in favour of the changes, with Sir Donald Brydon and Sir Jon Thompson of the Financial Reporting Council (FRC) among those that have publicly supported the new code.

“Internal audit is a vital part of the overall assurance that companies provide their investors and stakeholders, which helps to build trust in a new business,” said Sir Jon Thompson, CEO of the FRC.

“This is a significant time in the evolution of audit in the UK in the light of the Kingman, Brydon and CMA reviews. I commend the IIA for developing and introducing this new Code of Practice which sets a high standard of best practice and should be considered an important part of the overall risk management and assurance framework,” he added.

Director General of the Institute of Directors Jonathan Geldart was also supportive of the new code. “The Institute of Directors very much welcomes the introduction of the Internal Audit Code of Practice by the Chartered Institute of Internal Auditors which serves to codify the essential elements of internal controls required as the basis for any good business,” he said.

Leading bodies such as the ICAEW, FRC, ACCA, and CIMA all welcomed the increased focus on internal controls too, acknowledging the need for change following the failures of external auditors in recent years.

ACCA Chief Executive Helen Brand said that she was “pleased” about the launch describing it as “an essential resource for audit practitioners”.

“We believe that the code will further strengthen the quality and application of internal audit practices in the UK and Ireland through its principles-based recommendations,” she said.

What impact will the Internal Audit Code of Practice have?

The inquiry into the collapse of Carillion in 2018 found that audits were signed off “complacently” and that some of the figures were “fantastical.”

The big question will be whether the increased scope of internal auditors outlined in the new code will provide sufficient changes to prevent similar collapses in future.

Sir Donald Brydon’s review, published in December last year, recommended that the government take additional measures and introduce internal controls statements, which would require CEOs and CFOs to declare that they had evaluated internal controls.

Although the code stopped short of introducing controls statements, Brydon approved of the changes it introduces but without endorsing it as a complete solution, describing it as “an important step to improving the quality and delivery of internal audit services.”

A spokesperson for the Chartered IIA also acknowledged that there is more to be done to prevent the collapse of businesses through auditing errors.

“We believe audit reform is vital. The publication of the new Code does not negate the need for audit reforms. It is intended to compliment the proposals put forward by the Kingman, Brydon and the CMA reviews to strengthen the UK’s corporate governance and audit framework. We would like to see the Government accelerate audit reform – particularly by replacing the FRC with the proposed Audit, Reporting and Governance Authority,” they said.

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