Unleashing the potential of internal audit: as executives and directors rethink their corporate governance procedures, the authors offer a four-step approach to strengthening corporate assurance.

• Author: Rittenberg, Larry
• Position: Audit

Enron's collapse and the serious corporate control implications that accompanied it are having a profound impact on how organizations view their corporate governance and control environments. Directors and senior executives are rethinking governance processes with heightened zeal, spurred by massive pressure from lawmakers, regulators, the investment community and legions of unhappy investors.

Within audit circles, external auditors have borne the most heat from the post-Enron backlash. But major changes are occurring in risk assurance, corporate governance and internal audit practices, as well -- changes with significant import for audit committee members and senior management alike. Indeed, many boards and senior management groups are just beginning to get their arms around the ramifications of the recently enacted Sarbanes-Oxley Act, as well as a series of far-reaching proposals from the New York Stock Exchange that are awaiting approval from the Securities and Exchange Commission (see box on next page).

What is clear is the following:

* Audit committees will need to expand their oversight of audit processes, including internal audit.

* Ineffective risk assurance and corporate governance efforts can produce catastrophic results.

* New governance procedures will evolve, reflecting stepped-up legislative and stock exchange activity

* Assurance is the primary value driver for audit functions.

Responding to these forces, top management and directors must work together to ensure that their organizations have the risk management and control resources they need to meet heightened scrutiny of their risk assurance procedures. To this end, the four steps outlined below can lay the groundwork to more fully leverage the potential of their internal audit functions to strengthen corporate assurance:

Step 1: Elevate Ownership of Internal Audit at the Board and Senior Management Level. Serving as a director or top executive is a high-risk activity these days. It is important that organizations fully utilize all available resources to fulfill their assurance responsibilities. Within many organizations, internal audit represents an untapped resource.

Key managers need to understand the objectives of internal audit and how they relate to its performance. A November 2001 survey by FEI and PricewaterhouseCoopers of participants in a Web teleconference found that more than 68 percent of respondents said their internal audit departments failed to inform senior...