Where are the auditors?

• Author: Ridley, Anthony J.
• Position: Audit committees and auditing departments

Audit committees traditionally have looked to the internal auditing department to insulate them from `Surprises' -- but the greatest surprise may be what has happened recently in that department.

Internal auditing is a strong, well-established activity in most large organizations -- and one upon which the audit committee places a good deal of reliance. Independence from the units audited and the use of traditional audit standards and approaches have been the underpinnings of that reliance. Now the winds of change blowing through the auditing profession are having a major impact on the nature and results of audit work.

For the most part, these changes are beneficial to all concerned. But audit committee members need to be aware of, and to maintain reasonable control over, that process of change. This article examines relevant trends, the "best practices" emerging from them, and some tools available to audit committee members to use in exercising their oversight role.

Here are some recent trends that are generating major changes in most internal auditing functions:

-- Restructuring (right-sizing/redefining) organizations and strategies;

-- Redefining "internal control" and reassigning responsibility for it;

-- Outsourcing and cosourcing of business activities;

-- Empowering employees, suppliers, and customers with attendant changes in the mechanisms of accountability, and

-- Using self-assessment tools, and partnering with management, in place of traditional audit techniques.

These changes have come about out of economic and competitive necessity and usually represent best practices for both business in general and internal auditing in particular. However, they may have exacted costs in terms of the internal auditors' appearance of independence and perhaps in terms of the reliance senior management and the audit committee should place on them. At the very least, these relationships and the presumptions of independence and reliability need to be re-examined

Weakening of traditional controls

The various forms of restructuring employed in business and not-for-profit organizations have resulted in a weakening of traditional internal controls. This has been done mainly through the combining of responsibilities (reducing segregation of key control functions) and the eliminating of levels of middle management (reducing supervision and review). Many outsourcing and empowerment decisions have disturbed the checks and balances inherent in earlier...