How Does Internal Audit Contribute to Good Corporate Governance?

Corporate governance is often perceived primarily as the responsibility of boards of directors and legal compliance officers, leading to a narrow perspective that can hinder enhancements to the governance process. Effective governance is a journey that commences with a broad, organizational outlook. Sustaining progress necessitates dedicated senior leadership, cohesive planning, synchronized execution, and ongoing monitoring.

Governance involves the integration of processes and structures designed to facilitate the achievement of an organization's objectives. Shaped by risks influencing the organization's ability to meet these objectives, internal audits play a pivotal role in offering unbiased assurance and insights regarding the effectiveness and efficiency of risk management, internal control, and governance processes. Internal audit responsibilities are expanding due to heightened regulatory scrutiny and executive directives to fortify controls and enhance risk management.

Business leaders increasingly anticipate that internal audit will assume a more strategic role in the governance process, moving beyond a purely tactical function. Similar to how data privacy has become a fundamental aspect of modern business, internal audits have proven to be pivotal elements of governance. However, despite these developments, internal audit remains relegated to a minor role in numerous organizations.

This article discusses the significance of internal audits as a cornerstone of corporate governance, emphasizing their potential to strengthen and contribute to the governance framework.

Internal Audit's Role in Governance

Internal evaluates and reports on the efficacy of processes geared towards achieving strategic, operational, financial, and compliance objectives. Its effectiveness is maximized when it aligns with organizational strategies, remains uninfluenced, and operates independently. Balancing the imperative of independence with integration into the organization poses a perpetual challenge for internal audit. Upholding independence enables internal audits to provide an informed and impartial critique, suggesting improvements to processes and ensuring their implementation.
In an era marked by heightened scrutiny of business motives and ethics, a passive internal audit function is detrimental.

However, organizations also do not desire an internal auditor group that merely seeks to eliminate risks entirely. Operating independently, internal auditors possess a profound understanding of robust governance, intricate knowledge of business systems, and a drive to contribute to organizational success. 

The primary challenge faced by companies and their internal auditors lies in the absence of a one-size-fits-all method to enhance corporate governance. Each organization therefore must devise a tailored solution that considers factors such as industry, maturity, business strategy, capabilities, corporate culture, and competitive position. Given the absence of a quick-fix solution for this challenge, maintaining a long-term focus on good governance becomes a paramount objective for most organizations. It is therefore imperative to seek the service of specialized firms to conduct such audits. 

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Insights and Value Addition by Internal Audit

Internal audit serves not only as a provider of assurance but also as a catalyst, fostering a deeper comprehension of governance processes and structures for management and the board. The insights it offers into governance, risk, and control contribute significantly to instigating positive change and innovation within the organization, instilling confidence, and facilitating informed decision-making.

The agility and dynamism inherent in the internal audit function render it an essential resource that supports robust corporate governance. Broadly, corporate governance comprises seven interconnected components: the board of directors and committees, legal and regulatory aspects, disclosure and transparency, business practices and ethics, enterprise risk management, monitoring, and communication.

Internal audit plays critical roles across all these facets of corporate governance by:

•    Assisting the audit committee in fulfilling its heightened responsibilities.
•    Participating in the organization’s disclosure committee.
•    Assessing the effectiveness of the organization’s code of conduct, ethics policies, and whistle-blower provisions.
•    Aiding in risk assessment and performance evaluation across the organization.
•    Monitoring corporate governance activities and ensuring compliance with organizational policies.
•    Facilitating improved communication with key executives such as the chief executive officer, general counsel, chief financial officer, chief information officer, and other oversight executives.
•    Evaluating the effectiveness of corporate governance activities and recommending areas for enhancements.

The rewards stemming from enhanced corporate governance extend beyond personal satisfaction or company pride. Research indicates a strong correlation between effective governance and lucrative investment opportunities. Internal audit plays a pivotal role in this process, contributing to the development of an integrated, well-planned, and progressive governance program.

Read More: Forensic Audits and Why Your Business Needs One

Conclusion

Assessing and enhancing governance policies is currently in the best interest of any organization. Conducting audits to evaluate the effectiveness of governance systems, practices, and performance demands a meticulous methodology and a comprehensive organizational perspective. Recognizing corporate governance as a guiding force, aligning the internal audit charter with the organization's long-term objectives is crucial. Improving governance involves costs, whether in augmenting internal audit staffing, adopting Enterprise Risk Management (ERM), or cultivating financial expertise within the audit committee.

While the returns on these investments may not be immediately quantifiable, the enduring outcomes of a successful governance program encompass improved brand and reputation management, heightened market value, regulatory compliance, adherence to sound business practices, and a more stable foundation for growth. Strong governance is an integral element of a prosperous business strategy. Effective governance can bolster an organization's competitive standing, aid in retaining high-calibre employees, attract top-notch directors, and contribute to sustained improvements in financial performance. The anticipation of enhanced stakeholder returns becomes a justifiable rationale for the undertaken investment. 

At Stransact, we understand the importance of effective governance and offer tailored solutions to help companies effectively enhance governance. From conducting comprehensive audits to providing strategic insights and recommendations, our team is dedicated to supporting your organization's governance journey.

Contact us today at [email protected] to learn more about how Stransact can assist your company in achieving its governance objectives.