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Accountability of Internal Audit significant
January, 11th 2010

The World Bank defines accountability as the obligation of power-holders (those who hold political, financial or other forms of power) to take responsibility and answer for their actions.

It defines social accountability as the broad range of actions and mechanisms (beyond voting) that citizens and their organisations can use to hold societal power-holders (such as the state) to account, as well as actions on the part of government, civil society, media and other societal actors that promote or facilitate these efforts.

Therefore, if we argue that the internal audit has social accountability we need to establish that it has societal power and that there is a mechanism by which citizens participate in exacting the accountability.

Internal audit

The Institute of Internal Auditors, the global body of internal auditors, provides the following definition of internal audit: Internal audit is an independent, objective assurance and consulting activity designed to add value and improve an organisations operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance process.

Quite interestingly, the definition does not limit the role of internal audit to an assurance service. It expects internal audit to provide consulting service for improving the effectiveness of risk management, control and governance process.

Therefore, internal audit, as a consultancy service, is expected to provide inputs to the formulation and implementation of strategies. As an assurance service, it should conduct strategy audit and review management decisions, in addition to operational audit and financial audit.

Societal power of internal audit

A profession or institution enjoys societal power if either the society in general or a segment of the society (e.g. stakeholders of a listed company) depends on it to protect its interest or the activities of the profession or entity impact the community significantly. Although internal audit is a critical component of the enterprise governance system and in most situations the enterprise governance system fails if internal audit fails, many will argue that internal audit has no societal power and therefore has no social accountability. Two recent developments lead us to question this traditional view.

Two recent developments

On January 6, 2010, SEBI has issued a circular requiring internal audit of credit rating agencies and submission of action taken report on internal audit observations to SEBI. Internal governance of credit rating agencies is questioned by many researchers. Therefore, SEBIs reliance on the internal audit signifies increasing societal expectations from internal audit. Internal audit derives societal power from such increasing societal expectations.

In December 2009, the Ministry of Corporate Affairs issued Corporate Governance Voluntary Guidelines in an endeavour to improve enterprise governance. One of the guideline is In order to ensure the independence and credibility of the internal audit process, the Board may appoint an internal auditor and such auditor, where appointed, should not be an employee of the company.

This guideline implies that appoint an outside agency for internal audit is preferable over conducting internal audit internally. Although this view may be debated, it may be perceived as an articulation of the need for an internal auditing profession distinct from other accounting professions.

Internal audit as a distinct profession

In India internal audit is not recognised as a distinct profession. Companies and other entities, which outsource the internal audit, appoint an accounting firm to conduct internal audit. The current practice provides satisfactory results and therefore, the need for recognising internal audit as a distinct profession has not been felt.

However, we must appreciate that internal audit in India has not reached the level of maturity at which internal audit requires special knowledge and skills.

At this inflexion point we must recognise that the scope of internal audit is much broader than audit of financial audit and cost audit and requires a separate body of knowledge. Recognition of internal audit as a distinct profession will accelerate the development of this body of knowledge, which will immensely improve enterprise governance.

In absence of a recognised body of internal auditors having code of conduct for its members and a mechanism to sanction members who are negligent or guilty of misconduct, no mechanis exists to exact social accountability. Therefore, recognition of internal audit as a distinct profession should be considered seriously.

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