by Steven Chiaberta

An Eye on the Future

Internal Audit and the ‘New Reality’

The Institute of Internal Auditors South Africa
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While the global financial crisis ushered in fundamental and on-going changes to the local and international economic and political landscapes, less defined is the still-emerging capability and positioning of businesses and governments to deal with this ‘new reality’, and it is here that the role of internal audit has been launched into the foreground.
“What an audit committee expected in 2005 is dramatically different to what that same audit committee expects in 2012,” said Judy Grobler, Trainer and former Board Member of the Institute of Internal Auditors South Africa (IIA SA), speaking at the recently held 15th Southern African Internal Audit Conference, in Sandton, Johannesburg.
This is because there have been major shifts in global economic and political power, resource constraints, changes to South Africa’s economic growth, governance and social fabric, as well as numerous changes in technology.
These changes are occurring rapidly, and consequently the number, degree and complexity of risks to both business and government are expanding at a similarly rapid rate.
“Given that the role of internal audit is to evaluate and improve the effectiveness of risk management, control, and governance processes, it is now absolutely vital that internal auditors are not only capable, but that they also keep abreast of where the world is going and where new risks are coming from,” says IIA SA CEO, Dr Claudelle von Eck.
By way of example, von Eck points to the burgeoning realm of social media.
“For instance, social media offers a number of competitive advantages, but it also carries substantial risk. Therefore, internal auditors must understand the risks inherent to social media in order to put the correct controls in place. The same applies to reputational risk, such as that recently experienced by the financial services sector and to myriad other risks that are emerging.”
However, she points out that before internal auditors can fulfil this critical function, it is imperative for companies to sit down and determine their appetite for risk.
“Internal auditors may advise management, but it is management’s duty to determine the organisation’s risk appetite. Only once they have done so can internal auditors provide assurance on whether risk policy is carried out effectively.”
This means that internal auditors must audit the risk management process itself: determine if all risks have been identified and whether or not the controls are adequate.
“That is why internal auditors must keep an eye on the future. They need to be forward thinking,” she says.
According to Public Protector, Advocate Thuli Madonesela, the upshot is that internal audit now has the same critical role in South Africa as primary health care.
Speaking at the conference, Madonsela said that, like primary health care, the leadership of organs of state do not give internal audit the place it deserves, to the country’s immense detriment.
“Internal auditing is under-appreciated and undervalued by organisations, particularly those within the state. If internal audit functions optimally, it should be possible to pick up and arrest many of the risks that lead to the problems uncovered by the auditor-general’s report. The same applies to other anomalies my office and other enforcement mechanisms pick up when we step in at the point where there is already an allegation of governance failure.”
She emphasised that, properly appreciated, auditors play a pivotal role in the prevention and early detection of countless potential risks, including corruption and fraud.
However, the Committee of Sponsoring Organisations of the Treadway Commission (COSO)’s 2010 Report on Enterprise Risk Management (ERM) found that the state of ERM in South Africa “appears to be relatively immature … with a notable level of dissatisfaction with how organisations are currently overseeing enterprise-wide risks.”
Among a number of recommendations, the report goes on to state that “support from the top is a necessity.”
Von Eck concurs, and concludes that should support from management be forthcoming, the new reality in fact provides an opportunity for positive change and reinvention.
“If both management and staff understand the factors that are shaping the new reality, and act accordingly, there is the potential to initiate a new wave of growth, one in which internal auditors have an enormous part to play.”
Steven Chiaberta
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Issue 72