Broader expertise needed to beef up internal audit

BROADER EXPERTISE is needed to beef up internal audit departments, according to the chief of the Chartered Institute of Internal Auditors (IIA).

Dr Ian Peters, speaking yesterday at the House of Lords Economic Affairs Committee hearing into the audit market, said that internal audit departments should hire different skillsets to broaden their expertise and better manage risk.

“Internal audit should not come from external auditors, but [they need] external expertise,” said Peters.

Lord Colin Sharman, former chairman of KPMG, said that audit committees should consider replacing their auditors every five years, and provide an explanation if they stick with the incumbent firm.

He also said that that external auditors should not offer internal audit services to clients, a view echoed by Peters and IIA immediate past president Sarah Blackburn.

“I don’t believe there’s a strong case for external auditors providing internal audit – I’d agree you need more levels of assurance,” said Lord Sharman.

The issue was first raised last year when KPMG offered joint services to Rentokil.

Blackburn said: “Internal audit should not come from external auditors, and we must make sure they do not muddle up the assurance lines.”

IIA chief Peters accepted that internal audit was “part of the structure that went wrong” during the banking crisis. Internal auditors and audit committees had focused on internal controls rather than the wider picture of the risks taken within banks’ business models.

Internal audit should take a much more significant role in corporate governance, Peters added, and stronger recognition of its role should be included with the Corporate Governance Code – formerly the Combined Code. However, Peters does not want businesses to be forced to operate internal audit departments, as mandatory inclusion would just increase red tape and bring a box-ticking approach to the issue.

On the opening up competition to the Big Four auditors, Lord Sharman said it was regrettable that Andersen, or just its audit department, was not absorbed by one of the next tier of firms.

“I would have liked Andersen to have been absorbed in to the second tier. We’ve got to encourage the second tier of firms to invest in their international networks. There is not a quick solution,” said Lord Sharman.

When asked whether international accounting standards had an adverse impact upon the crisis, Lord Sharman said that “too much has been made” of their role. Rather than accounting, capital requirements were more important in managing the financial services sector’s risk.

“If society wants financial services to be more prudential, then the way to achieve this is through capital and liquidity requirements, not the backdoor through accounts. It’s for shareholders and regulators to decide if a [bank] is prudential,” said Lord Sharman.

Auditors’ role should be pointed towards looking at forward-looking statements, rather than historical financial data, said Lord Sharman.

“It will be more useful to corporate Britain if the assurance is forward-looking,” he said.

He also suggested that complex businesses should separate risk out of the audit committee’s remit.

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