The role of the internal auditors has changed significantly within decades. There are some people try to find and understand what has caused the current economic turmoil, and they have pointed to a range of elements that are suspect, such as ineffective external auditors, deficient risk management systems, and so on. However, to date, no one in the world can announce that there is a problem of internal auditors. Whether internal auditors are innocent or guilty. To some extent, they have avoided the blame for the current economic downturn. Is that good for inernal audit profession for not being blamed in the economic situation? Unfortunately, I do not think so. I think the internal audit can assess and report on the effectiveness of their client's risk management systems, it will help prevent catastrophic risk and control governance failures. Therefore, I advocate that internal auditors should take some of the responsibility for the current financial downturn.
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First of all, it is important to understand the definition of internal auditing. Here is the definition issued by the Institute of Internal Auditors: "Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's 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" (Gray and Manson, 2008:582). The definition of internal auditing provides the basic understanding of the roles and responsibilities of internal audit function. The internal auditing department is an integral part of an organisation. Internal auditing is an independent appraisal function established within an organisation to examine and evaluate its activities as a service to the organisation.the objective of internal auditing is to assist members of the organisation in the effective discharge of their responsibilities. At last, internal auditing provides them with analyses, appraisals, recommendations, counsel, and information concerning the activities reviewed.
Here is an example of the risk of corporate governance which cause a failure of the organisation. World com scandal is because of the abuse of knowledge and power. World com was in Fortune 500 status. The danger signal commenced in the late 1990's, World com was reporting a profit in its financial statement in the midst of the telecommunication decline, even though most components of the organisation were reporting losses. Basically, there are about $2 billion liability reserve were transferred to revenue. However, no documentation had been reported about the questionable $2 billion profit by the audit committee. Accordingly, there are $3.85 billion expenses had been misallocated in total. Cynthia Cooper, the head of internal audit of World com, who found the report is questionable. She took this matter into her own hands, ignore higher management and external auditors. Inevitably, by using her experience with the organisation's operations and personnel, she found and exposed the scandal. Eventually, the counterfeiter was pleaded guilty to fraud. In this example, the internal auditor dared to doubt about the reality, and was able to use knowledge to find evidences to prove her opinion.
Another example is the most infamous accounting scandals in the world, which involves a breech of ethical standards and fiduciary responsibility. The internal auditors of this example played completely different roles in the organisation by comparing with the first one. Enron Corporation and Arthur Anderson. Enron was an energy industry. Arthur Anderson was both Enron's internal and external audit organisation. However, Enron's top management and Anderson's heads of the audit team violated independence and objectivity by socializing on a regular basis. Although Anderson had much to lose by dropping Enron with fees in excess of $100 million, Enron overlooked and signed-off on by Anderson's auditors. The relationship between those two parties has led to an irreparable situation. At last, Enron's formerC FO, Andrew Fastow, was pleaded guilty to fraud, money laundering, and conspiracy, which tried to conceal the company's massive losses.
Combining with these two examples above, it is obviously to know that the people in charge who should have been trustworthy, were not, and it seems that the need for a strong, ethical internal audit organisation becomes more and more important. However, whether internal audit is truly innocent for the current economic turmoil or not.
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According to the Institute of Internal Auditors issued new global professional standards in 2000, it intended to govern the conduct of the profession of internal auditing. Section 2110. A1 of the Standards stated: "the internal audit activity should monitor and evaluate the effectiveness of the organization's risk management systems." Hence, it is clear that internal auditors should review the risk management system as part of their assurance activities for the board and senior management. Moreover, there are some organisations have established processess for assuring the adequacy and effectiveness of risk management procedures. Nevertheless, the standards have been improved in January 2009. the newes Institute of Internal Auditors International Professional Practices Framework was modified in few important ways. Section 2120 of the Standards stated:"the internal audit activity must evaluate the effectiveness and contribute to the improvement of risk management process." The improvements includes the change of word "should" to "must", "monitor" to "evaluate" and the term of "risk management systems" to "risk management processes". Based on my understanding of the Standards, the responsibility of internal audit, such as monitoring, evaluating, and reporting on the effectiveness of risk management systems, has been further amplified.
Turning to the question listed in the title at the beginning. My opinion is internal audit profession plays an important role in organisations, internal auditors can help organisations reduce their corporate governance risk if they pay more attention to assess and report on risk management system and make sure they are competently and reliably. Therefore, my conclusion is that internal auditors should shoulder some of the responsibility for the current economic turmoil