DIVIDED BOARD LOYALTIES: Internal audit independence can suffer when board directors' priorities are split in two.

Author:Shamsi, Aysha Al

An organization's board of directors is essential to good governance. It can provide an independent, authoritative voice on key decision-making, help guide strategic thinking, and contribute to organizational integrity. But lack of true independence can dampen that support. Board priorities may teeter between what's good for the organization and what executive management or shareholders would prefer, which often may be at odds. Divided board loyalties can be detrimental to organizational governance, and particularly to the internal audit function.

In a worst-case scenario, the board of directors may try to influence internal auditors' activity indirectly or steer policies to best match shareholders' interests, resulting in a loss or weakening of internal audit value and independence. Moreover, because the organization's top management answers to the board, internal audit's independence could be further impaired in situations where the CEO also serves as a board member. It also introduces the possibility of ethical lapses and other wrongdoing.

Of course, effective oversight--and internal audit--requires a qualified audit committee. In part, the committee should help ensure that internal auditing is not influenced by top management. And according to IIA Standard 1110, internal audit achieves organizational independence effectively "when the chief audit executive reports functionally to the board." But given its positioning as a sub-unit of the board, and the board's responsibility for appointing audit committee members, the committee may still show allegiance to executive priorities--even when they conflict with effective governance practices. If the board's support of internal auditing is weak, the audit...

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