How internal auditing varies in different types of companies


Internal auditing plays a role in organizations of every type. From industry to not-for-profit to government, internal audit functions can be found. Generally speaking, the purpose of having an internal audit function, regardless of type of organization, is to safeguard assets sustain growth through a system of continual review of operations, internal controls, risk management, and governance. What varies between industry, government, and not-for-profit then is not overall purpose but several key points. The ultimate beneficiary of the internal audit function is one of those. Also, the implementation and scope of focus is different for each type of organization.

Internal auditing plays a very important role in industry. First and foremost, all internal auditors in industry are required to follow the mandatory standards put forth by the Institute of Internal Auditors. In terms of scope, unlike governmental auditing, internal auditing at the industry level is chiefly concerned with protecting the organization's assets. This is done by "helping it accomplish its objectives, and improving operations, risk management, internal controls, and governance processes" (IIA). Essentially, industry is concerned with turning a profit quarter after quarter. This can only be accomplished if a firm's operations, risk management, internal controls, and governance processes are continually reviewed and improved if necessary. In lieu of being preoccupied with how well and responsibly a firm is managing its assets, as is the case in government, internal auditors in industry focus on a firm as a going concern. PricewaterhouseCooper's director of Forensic Services, Edward Lam, describes internal audit's role in industry as a function that makes sure the firm has the "right people, prophecy, control and place to help an organization monitor its operations and procedures". In order to grow, a firm must constantly strive for growth. Without an effective internal audit function, a firm's growth would most likely come to a grinding halt. Herein lies a key distinguishing factor for auditing in industry. Unlike the federal government, where auditors are not an integrated component of whichever program or office they are working with, auditors in industry strive to provide value-added services. Instead of presenting management with problems and stopping there - essentially leaving the resolution of said problems in the hands of management - auditors in industry are an integral component of the problem solving process. Auditors find problems in need of resolution, but also through communication and active engagement with management aim to recommend appropriate measures.

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Primary concerns for auditors in industry are quite uniform. Internal auditors in most every firm primarily concern themselves with the activities outlined above. However, depending on which specific industry a firm operates in, an internal auditor's scope may differ. For instance, focus is bound to vary for a retailer and a bank. For retailers, shrinkage (losses and theft associated with inventory) is a major source for concern. Effective internal controls to safeguard these assets are absolutely crucial. As some retailers have developed their internal audit departments, and in turn implemented better controls, incidence of shrinkage has declined dramatically. Lowes, a large hardware and home goods retailer, has managed to reduce its shrinkage by 60% since 1988. In the banking industry, internal auditors are more concerned with governance and compliance than with any physical inventory a bank may carry. Banks are highly regulated relative to other private corporations and therefore require sound controls that maintain compliance with state and federal laws. Essentially, internal audit at the industry level is uniform in its scope and application, save for various deviations of focus depending on the specific industry under consideration.

Internal auditing at the government level is similar to private and not-for-profit auditing by nature. Nevertheless, governmental internal auditing is unique in its purpose, adoption of standards and implementation. The audit work in this sector is meant to protect a far larger stakeholder population, that is, the taxpayers. The standards used to carry out this work are in some parts identical and in others vastly dissimilar.

One crucial distinction is that while the interested parties in the private sector are primarily stockholders and executives, there are no equivalent parties in government auditing. Although taxpayers can be considered "stakeholders", they do not enjoy the same power that corporate stakeholders do. If a corporation is not performing up to par, stockholders have the option of voting with their dollars. It is therefore in the best interest of the corporation to keep its investors happy by housing a competent internal audit function that will help ensure that performance meets investors' expectations. In turn, the government has no such incentive. Budgeting and implementation inefficiencies clearly abound. Furthermore, politicians are even less likely than corporate executives to admit failure. To do so would severely limit their reelection efforts. Clearly, internal auditors working in the government have a special kind of responsibility. They must work through the bureaucracy and make sure that audit objectives are accomplished. The assets they are protecting are in the interest of hundreds of millions of people.

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To complicate matters further, governmental auditors sometimes have wide discretion on which professional standards to apply to their work. In the private and not-for-profit sectors (???), auditors apply the International Internal Audit (IIA) Standards. This much is mandated. When working within the government, different practices exist between federal and state governments. At the federal level, standards put forth by the Government Accountability Office (GAO) are required in audits. However, unlike the private sector, management input is not solicited. Instead, management is presented with findings and expected to develop resolutions on its own. As defined by the standard setting body for the internal audit profession, such an activity cannot be considered part of an internal audit function. This is because the audit is not conducted from within the organization nor does the audit team support the organization in its efforts. Moving on to state and local governments, internal audit work begins to resemble its private sector counterpart. In fact, state and local government auditors who are members of the IIA or are Certified Internal Auditors (CIA) must follow IIA Standards. Unlike federal auditors, state and local government auditors solicit input from management and work together with management to reduce or eliminate outlined risks.

In the private and not-for-profit (???) sectors, the focus is balanced between protecting company assets and improving operations. Government auditors' focus on the other is balanced in favor of protecting taxpayer assets. After all, the government exists primarily for the benefit of its "stakeholders", not to turn a profit. In turn, federal government auditors carry out financial and performance audits. With financial-related audits, auditors measure the government's prudency and legality in resource allocation. Essentially, instead of ensuring accurate financial statements, auditors focus on ensuring effective financial resource management. With performance audits, the objective is to examine the extent to which the programs that receive taxpayer money are successful. Auditors seek to measure the effectiveness and efficiency of programs put into place to reduce waste or redundancy. Also, performance audits are meant to discover and report to appropriate agencies any illegal activity that may be occurring.

Internal auditing at the not-for-profit level is quite unique. Generally speaking, not-for-profit organizations are relatively small in size when compared to their industry and government counterparts. Not-for-profit revenues and assets under charge are by and large a fraction of what many corporations and government agencies earn and manage. Therefore, numerous factors relating to internal audit are a function of these organizations' relatively small size. In this day and age, most successful corporations house an internal audit department. Unfortunately, many not-for-profit organizations lack the required capital necessary to run an entire internal audit function. Therefore, many not-for-profit's must outsource internal audit activities to an outside firm. In this regard, not-for-profit auditing is similar to governmental auditing. As previously discussed, federal programs and offices do not house internal audit functions. The only difference here is that not-for-profits do so solely due to monetary constraints. Also important to note is that the board of directors of not-for-profit organizations are commonly appointed on the basis of ability to raise funds or public reputation, instead of market or business savvy, as is common in industry. This compromises the effectiveness of the audit committee, if one even exists. Internal auditors working at a not-for-profit should be aware of this shortcoming.

As is the case with internal auditing in industry, internal auditors strive to help not-for-profit organizations accomplish their objectives, and improve their operations, risk management, internal controls, and governance processes. Unlike industry auditing and similar to governmental auditing however, is the focus of protecting the organizations' assets for the benefit of its end beneficiary instead of for its own sake. In the end, charitable organizations, just like the government, exist for the benefit of outside members. On the other hand, one of the main goals of a not-for-profit is not so different from industry - that is, to make money. Although the reason for earning revenue obviously differs (industry is concerned with stockholder satisfaction and paying dividends while not-for-profits continually need to raise money to fund their charitable goals), both types of organizations can benefit greatly to that end by maintaining an effective internal audit function. However, several challenges arise in achieving this goal that are unique to a not-for-profit. By its nature, a not-for-profit commonly employs a large number of volunteers. Since these employees are not compensated or necessarily technically or business savvy, proper care may not go into maintaining proper controls or following prescribed procedures. It is therefore essential that the internal audit function closely focus on the organizations human resource processes. Due to the nature of this type of employment, an employee may not feel the same incentives to "do the right thing" as a salaried employee would. Further, high turnover rates, as is common in non-salaried positions, could lead to inefficiencies of cost. For example, constantly retraining new volunteers would prove too costly. More importantly, vital processes that are essential to the accomplishment of the organization's mission may be jeopardized. With this in mind, it is crucial for the internal audit function to design unique controls that help safeguard a not-for-profits' assets.

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In summary, internal auditing is crucial to the continued success of many organizations; be they industry, government, or not-for-profit. The methods by which internal audit is implemented and carried out naturally varies from one type of organization to another. The end beneficiaries also invariably differ. The overarching theme however is that internal auditing is meant to enable the continued success of an organization in its pursuit of whatever goals it establishes. Whether it's turning a profit, managing government projects, or bettering society, internal audit is a crucial tool in at endeavor.