IIA: Internal audit must be held to higher standards

Carillion’s collapse led to an inevitable grilling at the hands of MPs in February, with a number of key figures who are involved with the firm facing a UK committee hearing into why the business went under.


Auditors – both internal and external – were among those who were forced to defend themselves as reports emerged the company owed billions of pounds to creditors and its own pension fund.


Carillion is just one of a number of high-profile corporate failures in recent years, causing the Chartered Institute of Internal Auditors (IIA) to admit the profession needs to do better in the future. But how can the function improve?

Internal audit needs more accountability

Dr Ian Peters, chief executive of the IIA, believes the upcoming revisions to the UK Corporate Governance Code provides a crucial opportunity to enshrine the role of internal audit as part of an official regulatory framework.


“It has become clear that, in the context of very public corporate failures like Carillion, the role of internal audit needs to be scrutinised and held to the highest standards,” Dr Peters stated on the IIA website.


However, in an article for the Financial Times (FT), he went further still and admitted the function had “failed to focus on the bigger picture” by spending too much time on the minutiae of low-level risks.


His comments appear to hold water. Deloitte handled Carillion’s internal audit activities, but partner Michael Jones claimed the Big Four firm was not involved in management decisions or company strategy.


“Reports we would look at would range from whether a driver in Alberta had the right insurance, to the state of labour camps in Qatar where they house their people,” he told MPs. “We don’t do substantive work around the numbers.”



What changes have the IIA suggested? 

The IIA submitted a response to the Financial Reporting Council’s (FRC’s) consultation for the UK Corporate Governance Code revisions.


According to the IIA, the code should explicitly require regular monitoring and reviewing of internal audit’s independence and objectivity to ensure it remains within professional and regulatory boundaries.


This includes adherence to the IIA’s own global standards for internal auditors, as well as the Guide on Effective Internal Audit in the Financial Services Sector (Finance Services Code).


Only time will tell if the FRC takes the revisions on board, but the council has already expressed concern over how the audit industry currently operates.


The watchdog’s chief executive, Stephen Haddrill, confirmed to MPs that he would ask the Competition and Markets Authority to examine the major accounting and audit firms’ relationships with clients.


Frank Field, chair of the Work and Pensions Committee, even questioned the integrity of the Big Four firms with regards to their practices.


“There’s a little gang of you that competes for these [audit] contracts,” he stated. “Should we recommend that the government seriously thinks about breaking you up?”


Are changes on the horizon for internal audit?


The final version of the UK Corporate Governance Code should be published by this summer, with organisations expected to comply for accounting periods beginning on or after January 1st 2019.


What changes the code will bring for internal audit departments is not yet known, but professionals will no doubt feel expectations on their teams will increase given the current climate.


If your organisation is looking to review its internal audit recruitment needs, or you’re a candidate hoping to take the next step in their career, please contact me on 0207 936 2601 or via email at sd@barclaysimpson.com.


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