Evaluating your internal auditor.

• Author: WAGNER, JACQUELINE K.

Do you have the right person in place as the head of the internal audit operation? Here are the principal characteristics that an audit committee needs to look for.

THE BOARD OF DIRECTORS' role in choosing the organization's leader is, and has been for many decades, nothing new to savvy business leaders. Certainly this is and should be at the top of the list of responsibilities for board members. From my perspective, though, just as important, challenging, and critical to the survival of the organization is the audit committee's responsibility for choosing the best candidate to lead the internal audit function.

Because internal auditing's role is to help management achieve its objectives, it must work in close partnership with the organization's leadership. But because it is uniquely accountable to the audit committee of the board (which is responsible for ensuring that risks are monitored, managed, and mitigated), internal auditing must be charged with recommending tighter controls when necessary, even when those controls apply to executive management. And based upon my experience with management, boards, and audit committees, ensuring that these processes are effectively carried through is one of the most significant challenges facing corporate governance entities today. It is vital to the audit committee's ethical and legal responsibility for protecting shareholder investment.

A recent study from the Committee of Sponsoring Organizations (COSO), Fraudulent Financial Reporting 1987-1997, reveals that the most significant white-collar frauds committed in publicly held companies in the U.S. during the 10-year period involved top officials in the organizations. And the majority of these cases centered on losses so significant that they literally brought the companies down. An unfortunate footnote to these alarming statistics points to what was missing at all of the fallen organizations -- a competent internal auditing function.

What, then, could be more important than choosing the very best candidate to set up, manage, and lead your organization's internal auditing process?

I have always believed the best way to find out what you need to know is to ask the right questions. And sometimes constructing and compiling those questions can be quite challenging and time-consuming. You must not only work backwards from the desired answer, but also dissect the entire process along the way, while carefully formulating questions that will ensure all...