Accounting Critique
Career paths for audit professionals
Internal audit differs from statutory audit in more sense than one. For one thing, as corroborated by the aforesaid article, statutory auditors comment and report to the shareholders of the company regarding the financial statements provided to them. On the other hand, internal auditors report to the audit committee who is the actual body to whom internal auditors owe allegiance and commitment, and not really to the Board of Directors. But more often than not, it is seen that these Audit Committees sub serve the interests of the Board of Directors and thus their autonomy and independence remains compromised, or even threatened.
Another aspect that this article stresses on is that internal audit is seen as career paths for audit professionals, and it is quite possible that over time, they may reach positions which outgrow aspects of internal audit, and take up broader and wider management responsibilities. At those levels, perhaps internal auditing may not be of critical importance. However, what needs to be borne in mind is that internal audit is a wide ranging function and cannot stay confined to financial statements and record keeping alone.
In large organizations, even non-financial systems can be evaluated through their specific internal audit systems. The fact remains that internal audit often transgresses routine accounting and financial transactions and assumes roles of total corporate accountability that may involve exercising domain concerns in other aspects not really relating to accounting. Internal audit, in its broadest terms also embraces and encompasses installation of norms and procedures in major areas of accountability and also ensure that those accountable align themselves with these predetermined and pre-assessed norms and procedures. Internal audit seeks conformance and adherence to these norms and attempts redressals, whenever digression or violations take place. Therefore, the contention by the authors that internal audit is just a stepping stone to future career growth of ambitious professionals does not seem to be a valid hypothesis. This is especially so when one considers the fact that in all major career cross-roads it is important that internal audit allegiance is rendered, especially in large organizations, where the distinction between ownership and management is distinct and cogent. However, the article holds a valid point when it purports that the sustenance of divergence between ownership and management is best served by robust internal audit systems. Under such circumstances, it becomes necessary even for the board members and directors, or senior management officials of the company to adhere and be a part of the rules and regulations of the business.
CFOs decide about internal audit budgets and not audit committees
Coming to the next aspect, regarding internal audit budgets, it can be said that the budgets have to be presented by the internal auditors to the Audit Committee. The article under evaluation claims that in the Australian context, the budgets are usually seen and approved by the Chief Finance Officers or an official of that ranking who finally decides about internal audit budgets thus undermining the role of internal audit and even audit committees. However, it needs to be appreciated that the CFO may have to consider the opinion of IAEs and also the AC while recommending the budget and instituting changes in it. Unless this is done, the very exercise of internal audit systems and procedures will be a futile exercise that fails to serve the purpose for which it is conceived. Moreover, one also needs to consider the fact that perhaps the CEO or CFO, especially in a large multiproduct unit, will not have the kind of exposure to the minute details of the business and its workings, while it is possible that the members of internal audit team possess the same. Thus, to a very large extent, top management needs to rely on the recommendations and advice provided by audit committee manned by IECs. Therefore, it becomes apparent that internal auditor and the members of the audit committee, as the article suggests, should be given the leeway of participation while framing financial policies of the company.
Thus, it will better serve the interests of the company if the top management considers the opinion and recommendations of the IAE and the AC before approving, disapproving or instituting changes in internal audit budgets. According to the writers, it is believed that internal auditor needs to be seen as partners. (Christopher, Sarens Leung 2009, p.6). Coming to the third aspect, it is believed that for a proper functioning of internal audit, IAs needs to be seen as partners. While on a broader plane this appears as a constructive approach, since partnerships ingrain a strong affinity and rapport with the corporate unit, a possibility also exists that this may vitiate the independence and autonomy aspect of the internal audit team. Perhaps, as corroborated by the writers, one of the sustaining factors of the internal audit function is its independent, unbiased and free attitude, and this is feared to be compromised, or undermined if the aspect of partnership within corporate governance is sought to be established. The main aspect of objectivity is feared to be reduced, in the event a kind of understanding or partnership with the top management is established, which could reallocate priorities in favour of the management instead of the shareholders. However, it is necessary to seek a deeper understanding under which the use of partnership is sought to be established. In this context, the use of the work partnerships is not considered in its literal sense, but perhaps to convey a sense of affinity and bonding with the organisation. It is meant that by partnering, the internal audit would seek to align itself completely with corporate goals and policies and work together for achieving stakeholders prosperity besides realising the goals and objectives of the corporate. Moreover, it also serves as a platform for working together for strengthening the overall performance of the business unit in all major areas of public and shareholder accountability. It is for achieving common corporate good the article holds, that what matters is The perception of people within the organisation regarding internal auditors as partners (Christopher, Sarens Leung 2009, p.6).
That being said, it is now necessary to provide further critique of this study, especially with regard to the method of research that has been followed. This study has delved on various research methods for carrying out the research. The main tool is the online questionnaire method. This research study has sought recourse to online questionnaire to a select number of respondents. While a sample size 206 have been considered, the actual number of responses received is only 34, which represents just 16.50 of the total sample. Perhaps one of the major disadvantages of online questionnaire system is that there is no guarantee of response, and the positive benefits of personal interaction is often lacking. Moreover, the mindset of respondents who answer these online questions are not really known, which could have been known in the event of personal interaction. Non-response bias is also increased when different levels of technical ability are present among the respondents and it becomes a particular problem when response rates are low (Advantages and disadvantages of online questionnaires 2009). Sometimes it is also possible that the respondents may fail to understand the idea behind such online questioning and thus desist from responding. Further, another concern remains that online responses may be poor in quality, contain significant errors and could thus not form part of the survey.
As validated by the writers, this online survey has been confined only to just a select members of IIA, and not to a wider segment. In the Australian context, it can be said that membership into the IIA is neither legally required nor mandatory under auditing laws, and it is quite possible that a large number of trained and competent IA practitioners may be outside the ambit of the IIA. This raises pertinent questions as to the validity and scope of this research study, especially when it is quite possible that a significant portion of the IA professionals in Australia may have been omitted in this study. Thus, to this extent, it may not present the correct state of affairs regarding the independence of IA and how it impinges upon this study.
The next major aspect that needs to be considered is that the respondents are never directly asked whether they are functioning independently or not. The modus operandi that is adopted in this study is to consider the measurements of certain trends examined in these questions that sought to review the independence of internal auditors vis--vis other parties. Thus, it would have been more appropriate if the independence and autonomy aspect of internal audit functions are gleaned through direct questions asked and answers received. Another major drawback of a research of this kind has been that the different levels of threats have been given equal significance which may not be possible under empirical observation. For instance, it is quite possible that in certain organisations, the influence of CEOs or CFOs in approving internal audit budgets may be lower than in other corporates. The aspect of partnering audit functions will receive greater emphasis in some organisations as compared to others. Besides, in some companies, career growth of IAE may be stifled due to organisational structures and may move along audit lines only. Thus, the aspect of taking internal audit as a career vehicle and not as an end to itself may not be either plausible or tenable.
Impact of legislation on internal auditing
Most organisations in Australia and Europe do pay a great deal of significance to internal audit because of its multifaceted impact on business, and the need for fiscal and accounting discipline advocated by internal audit mechanism. It is also necessary that the dangers of following an inflexible and straightjacket policy needs to be eschewed, and internal audit needs to be progressive minded and development oriented, especially in the changing facets of globalised commerce and business environment. Moreover, it is also necessary that business follow best accounting and auditing practices and also enforce Sarbanes Oxley Laws (wherever applicable) and the implementation of CLERP Act 2004 in the Australian context. CLERP is the acronym for The Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 Under Part 13, a member of the Financial Reporting Panel may issue written summons requiring specified persons to appear before the Panel to give evidence andor produce documents and to attend Panel proceedings unless or until they are excused or released from attendance (Australian securities and investments commission amendment regulation 2004 (no.3) 2004 no.397 2004).
However, in all fairness, it can be said that the concept of internal auditors independence which is the key aspect of this study, needs to be seen in a wider context, especially with regard to career paths of aspiring audit professionals, and also how a strong fundamental knowledge of internal audit can consolidate and improve ones career path in a competitive business environment. It is interesting to learn whether outcomes of the study of perceived threats to internal audit functions is restricted to this Australian study alone, or has a wider impact in other parts of the globe also, it is also necessary to consider that more research needs to be done in order to clearly establish these facts, perhaps on a more globalised scale.
Further research could validate whether results achieved in this study shall be applied in a large framework also.
Moreover, a wider sample population, perhaps not restricted to IAA, but encompassing other professional bodies, is also necessary to be included in order to make studies of this kind more in tune with current realities in this critical field of professional accounting. Although the ethical guidelines of the professional bodies are updated periodically there have been no radical changes and with the exception of audit committees few of the above recommendations have been implemented (Byrne 2001).
Conclusion
According to the authors of the research paper under critique, the principal objective of the study is to analyse critically the freedom of internal audit professionals vis--vis its relationships with management and audit committees. The results of this survey can be viewed from two perspectives from the viewpoint of freedom of independent auditors vis--vis management and also from autonomy from the perspective of audit committees. The results of the study are suggestive of the fact that while there are trends for internal auditors to be organisationally placed to maintain independence stature. However, quite often, the management are in a position to assume threatening postures to these assertions. For one thing, independent auditors may need managements assistance for career growth plans and this may have a bearing on their conduct of audit and its results. For another, CEOs and CFO are in a position to influence preparation and approval of budgets, which once again, undermines the status and freedom of internal auditors.
Top management indirectly influences the functioning of IES and viewing them as partners can also be threatening. Coming to audit committees, IAEs could participate in deliberations in such committees and air their views. These AC offer better leeway and response than what the management has propounded. The results of the study conducted by these writers confide that management threats are indeed present and this has been validated by appropriate research. It comes as a matter of hope that the threats posed by management can, to a certain degree, be offset by audit committees. These threats seem to be neutralised by the fact that AC can wield influence and negate management threats. Thus finally, it transpires that this study has, indeed, been able to meet its objectives to a reasonable extent.
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