The Auditing profession can be considered one of the most esteemed in the business world, requiring a superior education and a scrupulous work manner. An internal auditor must know the inner-workings of the client’s business to the extent that he or she can perform a quality job. However, what is this extent? The closer an auditor is to the daily operations and personnel, the more knowledge can be gained of the company. Therefore, the work is more thorough. But, what about objectivity and independence? There is a trade-off between familiarity and neutrality. It’s difficult not to blur the line. However, this is a challenge for the accounting profession, and many have crossed the line.
One of the most infamous accounting scandals of the 21st Century involves a breech of ethical standards and fiduciary responsibility. The relationship between Enron Corporation and Arthur Anderson, has earned its place in the accounting profession Hall of Shame. Enron was at one time the leader of the energy industry. Arthur Anderson was both Enron’s external and internal audit organization. This is a conflict of interest from the beginning. Additionally, Enron’s top management and Anderson’s heads of the Audit team violated independence and objectivity by socializing on a regular basis. Enron was one of Arthur Anderson’s largest clients. With fees in excess of 100 million dollars, Anderson had much to lose by dropping Enron as a client. In return, the dubious business practices of Enron were “overlooked” and signed-off on by Anderson’s auditors. This “I’ll scratch your back, you scratch mine” situation had the two parties locked in a symbiotic relationship, which can be hard to escape. Eventually, after litigation and much negative publicity, Enron and Arthur Anderson, once a member of the “Big 5”, had been stripped of their reputations and positions in the business world.
Another example of the abuse of knowledge and power is the WorldCom scandal. Bernie Ebbers, former CEO of WorldCom greatly expanded his company into Fortune 500 status. In the midst of the telecommunication decline in the late 1990’s, while most components of the industry were reporting losses, WorldCom was reporting profits. This was an initial red-flag. Basically, about $2 Billion designated for a liability reserve were transferred to revenue. There were anonymous tips sent to the internal audit team, but the audit committee had no documentation for the questionable $ 2 Billion. In all, $3.85 Billion of expenses had been misallocated. Ultimately, the whistle-blower of this scandal was Cynthia Cooper, head of Internal Audit. She started asking questions and “nosing around”. She was shunted by higher management and external auditors (at that time also Arthur Anderson). She decided to take matters into her own hands. Her role of Chief Audit Executive prepared her to acknowledge when things were askew, due primarily to daily experience with the company’s operations and personnel. Inevitably, she, with a small team of associates, found the $3.85 Billion dollar monster. That being said, Mr. Bernard Ebbers was sentenced to 25 years in prison for fraud and violation of securities laws.
The similarity of these two stories is obviously that that the people in charge who should’ve been trustworthy, were not. The difference lies mostly in the in the strength of the internal audit team. In one case, ambition overcame virtue. In the other, bravery and ethics opposed the status-quo. The latter should be qualities of all business persons, but especially those in the audit profession.
The need for a strong, ethical internal audit organization becomes increasingly important.
October 31, 2004 the NYSE mandated that publically held companies have an internal audit function. This requires an internal audit team that openly communicates with the audit committee and management. Like external auditors, internal auditors must maintain objectivity and independence, both in attitude and appearance. This may seem difficult considering the relationship between the internal audit team, audit committee and management. However, the audit charter provides management’s agreement to support independence, description of audit department’s responsibility, activities and authorization. Also, like external auditors, there must not be any conflicts of interest.
They also must adhere to ethical standards. There are specific steps to follow in order to follow out their duties. First, there is adequate planning involving setting objectives and defining the scope of the audit. Next, the field work includes interviewing management and department personnel, performing tests within a small error rate and document analysis. Lastly, the head of the internal audit department reviews the field work and a feedback meeting is held among the team. A formal draft is distributed to management for response before a report is published. This process differs from an external audit function in that the internal auditors work closely with management, keeping lines of communication open. There is an important component of the internal audit that only recently has the external function utilized, which is the examination of internal controls. The Sarbanes-Oxley Act of 2002 required external auditors to test the efficiency of internal control, put into motion primarily due to the volume of scandals. However, evaluation of internal control, examination and opinion of financial statements in accordance to generally accepted accounting principles is the limit of the external audit’s function. Internal auditors provide preventative assistance to the business on an on-going basis by monitoring all activities such as; operations, risk management and internal control. The internal auditors are focused on future events and may advise management in decisions. The internal function can be considered “the first line of defense” against error and fraudulent activity. Internal and external auditing are complements, they both support each other and provide a system of checks and balances for the business involved.
The primary importance of the internal audit function is that it adds value to the company for which it is employed. This is achieved through assessing operational risks, improving efficiency of operations, ensuring adherence to management’s instruction and representing management. By assessing risk, the internal auditor evaluates fluctuations of the economy, regulations, and the business environment and then advises the company accordingly. However, it is not the external auditor’s responsibility to take such action. One benefit of having an internal audit team is that it is familiar with the business’ daily functions. This makes working with management much more fluid and disables most of the communication barrier. Even if the internal audit organization is outsourced to a CPA firm, they will be much more accustomed to the company’s operations by dealing with them more frequently and consistently. The external audit team may not be as affluent in the functionality of the company, even if they remain its primary auditors over many years. Although internal auditors do not police the various departments, it is an important of their roll to report any material non- compliance that would erode efficiency of operations or increase risk. External auditors must also testify on non-compliance, but only concerning the financial reports and the internal controls that affect them. Internal auditors act as representatives to management because they are physically present more often than senior manager can possibly be, especially if the company has a hierarchical organization. They can serve as the “eyes and ears” of a business if necessary. These four elements of an internal auditor’s duties are certainly not limited, but are most important to literally adding value to a business. This value is measured by the decrease of monetary losses due to inefficiency, company reputation (good-will) and the minimization of lawsuits. An external audit definitely can add value to a company by giving an unqualified report, which can lead to a maintenance or increase in financing activity; however, the internal audit paves the way for the likelihood of an unqualified report.
The utilization of both internal and external audits provides corresponding services for the company at hand. As previously stated, the conjunction of both gives assurance to management that all requirements are met and business is running smoothly. Investors and other stakeholders can be satisfied and motivated to continue their interest in that business. The internal audit function provides an on-going monitor of company performance and can be considered the internal control of the internal controls. The external audit function provides reliability of the company’s financial statements, which is proliferated by its sound obedience to those internal controls.
Ironically, due to all the recent accounting scandals, the demand for accountants will increase. The more detailed and voluminous work required, calls for more from the profession, especially in internal auditing. According to the Bureau of Labor and Statistics, within the next five years, career opportunities will have risen by 22%. Also, enrollment in Accounting is increasing, so competition among accounting students and entry-level graduates will also increase. This, coupled with the gain in workload, implies a mean salary increase as well.
Unfortunately, there seems to be a stigma attached to the accounting/auditing profession currently, although I don’t think there are too many professions that escape a certain level of cynicism. Let us excel in our careers by demonstrating a solid sense of business ethics, competence and respect for the industry.
I am currently an Accounting student at West Chester University, as well as a wife and a mother. I live in a small town in the middle of practically nothing, but I wouldn’t have it any other way. My family and I are hard workers and are pleased with what we have accomplished over the past few years. We recently moved into our new house, and I’ve been able to accelerate my education by attending school full-time. I anticipate to graduate in May 2010 and I am eager to start my career. I am always looking for opportunities to gain knowledge and experience, and I am glad that I participated in this writing assignment.
Article Source:http://www.articlesbase.com/accounting-articles/internal-auditing-new-responsibilities-and-opportunities-845992.html
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