Counting on internal auditors to be the conscience of organisations

By James Jong
Board Member and Advocacy Committee Chair
Institute of Internal Auditors New Zealand

The Institute of Internal Auditors NZ is proud to partner with Transparency International New Zealand to raise awareness of, and demand for, effective internal audit functions in New Zealand as a means of maintaining strong integrity systems.

We share the view that internal audit is a key pillar of organisational governance. In turn, effective governance is a critical component of transparency and accountability, which are integral for maintaining trust and confidence. Organisational leaders and stakeholders should ask whether they are making the most of their internal audit functions.

Why is this important?

Organisational integrity is often dictated by the tone at the top. It doesn’t matter whether it is a small family business, large multinational conglomerate, state service agency or political movement. Leaders tend to exemplify acceptable behaviour – good, bad or indifferent. In first-world jurisdictions such as New Zealand, the public can rely to a large extent on the checks and balances of regulatory bodies and law enforcement authorities. But these are often activated after something has gone wrong. It might take a public complaint, a whistleblower on the inside, or a leaked document. Mostly, the damage is already done.

Transparency and accountability are rarely absolute. For some, it may be more about window-dressing and passing the buck. When that happens, whose job is it to call that out? Governors and board directors certainly have a key role in this responsibility. But they are generally not in the business to get close enough to see what’s really going on. Managers are in the business but they are often constrained by reporting hierarchy. Unless they risk breaking the law, many managers will find it easier to do as they are directed by their bosses. Who is left as the voice of organisational conscience?

A clear option is the internal audit function. Those established under the professional standards of the Institute of Internal Auditors will recognise the imperative to enhance and protect organisation value by providing risk-based and objective assurance, advice and insight. It sounds very promising. But like your own conscience, how much consideration you give the internal auditor depends on a few key factors.

• First, it’s about audibility. An internal auditor could also be mired by bureaucratic hierarchy. If they cannot access the executive or governors, they are unlikely to be heard by those who can act on their advice. It is paramount for the head of internal audit to be empowered to “speak the truth to power”. Anything less won’t make the difference promised by the internal audit imperative.
• Second, it’s about holding a mirror for the benefit of strong organisation governance. New Zealanders expect the highest levels of integrity in business conduct and public services. An effective internal audit function not only provides functional independence and professional objectivity to assure integrity, its presence alone can reinforce high expectations. They just need the backing of executives and board members who appreciate scrutiny and understand its value for effective governance.
• Third, it’s about the demand for, and supply of, high impact assurance and advice. Internal audit functions risk relegation to low value compliance activities if they cannot operate consistently to a high standard or identify strategic relevance for their senior stakeholders. Internal audit’s effectiveness cannot be simply measured by their productivity, output or resource efficiency, but by what their work does to enhance or protect their organisation. Similarly, organisational leaders owe it to themselves to expect more from their internal auditors. Internal auditors are uniquely positioned to gain an enterprise view like no other function. But their value is markedly diminished if internal auditors are confined to the rear-guard rather than offered a post on the stewardship bridge.

Do you demand voice for organisational conscience and how do you value the scrutiny and frank advice of the internal auditor?