By Isaac Adjin Bonney, (BBA MFC CA CPFA CFIP ACFE MIPA AFA MIFA MIIA MIoD MISACA MIDEA)
Chief Internal Auditor, Ministry of Food and Agriculture, Ghana.
Dear Mr Stakeholder,
The absence of an effective internal audit function can have serious ramifications for an organization, even if an internal audit department exists in name only. An ineffective internal audit function fails to provide the necessary oversight, risk management, and assurance that are critical to good corporate governance and achieving organizational goals. Here are some detailed effects:
Effects on Good Corporate Governance
1. Inadequate Oversight and Accountability:
An ineffective internal audit function may not thoroughly review or accurately assess the effectiveness of the organization’s internal controls, risk management, and governance processes. This lack of thorough oversight can lead to insufficient accountability across departments.
2. Increased Vulnerability to Fraud and Misconduct:
Internal auditors are crucial in detecting and preventing fraud. If the internal audit function is ineffective, it may fail to identify fraudulent activities, allowing them to continue unchecked and potentially causing significant financial and reputational damage.
3. Poor Risk Management:
Effective internal audits identify and mitigate risks. An ineffective function might miss key risks or fail to provide actionable recommendations, leading to unmanaged risks that could harm the organization.
4. Inefficient Use of Resources:
An ineffective internal audit function might not identify areas where resources are being wasted or used inefficiently. This can lead to higher operational costs and reduced profitability due to unaddressed inefficiencies.
5. Non-compliance with Laws and Regulations:
Internal auditors ensure compliance with relevant laws and regulations. An ineffective audit function may overlook compliance issues, resulting in legal penalties, fines, and reputational harm due to undetected regulatory violations.
Impact on Achievement of Overall Organizational Goals
1. Strategic Misalignment:
An ineffective internal audit function may fail to provide insights on whether the organization’s operations align with its strategic goals. This can result in a misalignment between daily activities and long-term objectives, hindering the achievement of the organization’s overall goals.
2. Diminished Stakeholder Confidence:
Stakeholders, including investors and regulators, rely on the assurance provided by internal audits. An ineffective audit function can erode trust and confidence, as stakeholders may question the reliability of financial reporting and governance practices.
3. Impaired Decision-Making:
Management relies on accurate and timely information from internal audits to make informed decisions. An ineffective audit function may provide inaccurate or incomplete information, leading to poor strategic and operational decisions.
4. Failure to Identify and Correct Weaknesses:
Internal audits are supposed to identify weaknesses in internal controls and business processes. An ineffective audit function may fail to identify these weaknesses, allowing them to persist and potentially leading to operational failures or financial losses.
5. Hindered Organizational Growth and Sustainability:
An effective internal audit function supports organizational growth by ensuring robust control environments and promoting continuous improvement. An ineffective audit function can impede growth by failing to identify opportunities for improvement and by not supporting the development of effective strategies to adapt to changes.
Conclusion
In summary, an ineffective internal audit function can be almost as detrimental as having no internal audit function at all. It fails to provide the necessary oversight, risk management, and assurance that are critical to maintaining good corporate governance and achieving organizational goals. This can lead to unmanaged risks, inefficiencies, fraud, non-compliance, and ultimately, a lack of stakeholder confidence and impaired decision-making. To avoid these pitfalls, it is essential for organizations to ensure their internal audit function is not only present but also effective, well-resourced, and properly aligned with the organization’s strategic goals.
Recommendations: For Effective Internal Audit Function
To address the challenges posed by the absence or ineffectiveness of internal audit functions, regulators, board members, Parliament of Ghana, Audit Committee and Principal Spending Officers can take several proactive measures. Here are some tailored recommendations for each group:
Recommendations for the Regulator of Internal Auditing
1. Strengthen Regulatory Framework:
❖ Update and enforce robust standards and guidelines for internal audit
functions, ensuring they align with international best practices (e.g., International Standards for the Professional Practice of Internal Auditing / Global Internal Audit Standards effective January 2025).
❖ Mandate regular external quality assessments of internal audit functions to ensure they meet required standards.
2. Mandatory Internal Audit Reporting:
❖ Require organizations to submit annual internal audit reports to the relevant regulatory bodies, detailing their audit plans, findings, and corrective actions taken.
❖ Implement penalties for non-compliance to ensure organizations take internal auditing seriously.
3. Continuous Professional Development:
❖ Establish ongoing training programs for internal auditors to keep them updated on the latest auditing techniques, risk management practices, and regulatory changes.
❖ Encourage and finance certification programs such as Certified Internal Auditor (CIA) to enhance the professional qualifications of internal auditors.
4. Promote Independence:
Ensure that internal audit functions have sufficient independence from management. Regulators can require that internal auditors report directly (both functionally and administratively) to the audit committee or board of directors rather than to executive management.
Recommendations for the Board of Directors
1. Enhance Oversight Responsibilities:
❖ Establish a dedicated audit committee within the board, responsible for overseeing the internal audit function, including its independence, scope, and resources.
❖ Regularly review and approve the internal audit charter, internal audit manual, and internal audit plan ensuring it covers all significant risk areas and aligns with the organization’s strategic objectives.
2. Ensure Adequate Resourcing:
❖ Allocate sufficient budget and resources to the internal audit function to ensure it can effectively perform its duties.
❖ Recruit skilled and experienced internal auditors and provide ongoing training and development opportunities.
3. Promote a Culture of Accountability:
❖ Foster a corporate culture that values transparency, accountability, and continuous improvement.
❖ Encourage management to act promptly on internal audit findings and recommendations.
❖ Implement a system for tracking and reporting the status of audit recommendations and corrective actions.
4. Regular Performance Evaluations:
❖ Conduct regular evaluations of the internal audit function’s performance, including its effectiveness, efficiency, and impact on the organization.
❖ Utilize feedback from these evaluations to make necessary improvements and enhancements to the internal audit process.
Recommendations for the Parliament of Ghana
1. Legislative Mandates:
❖ Enact a new law to replace the current IAA Act 2003 requiring all public and significant private organizations to establish and maintain an independent and effective internal audit function well-resourced by a Budget line direct from the Ministry of Finance.
❖ Specify the roles, responsibilities, and qualifications of internal auditors in legislation to ensure consistency and professionalism.
2. Support and Oversight:
❖ Create parliamentary committees to oversee the implementation and effectiveness of internal auditing across public institutions.
❖ Conduct regular audits and reviews of government departments and agencies to ensure compliance with internal audit standards and practices.
3. Promote Public Awareness:
❖ Launch initiatives to raise awareness about the importance of internal auditing for good governance, transparency, and accountability.
❖ Encourage public and private sector organizations to adopt best practices in internal auditing through seminars, workshops, and public campaigns.
4. Funding and Resources:
❖ Allocate funds directly to support the training and development of internal auditors in public institutions.
❖ Provide resources for the establishment of internal audit units in smaller public entities that may lack the capacity to set up such functions independently.
Recommendations for Audit Committees
Audit Committees play a critical role in ensuring the effectiveness and integrity of an organization’s internal audit function. Here are specific recommendations for Audit Committees to strengthen their oversight and enhance the impact of internal auditing:
1. Ensure Independence and Objectivity of the Internal Audit Function*:
❖ Confirm that the internal audit function operates independently of management by having a direct reporting line to the Audit Committee.
❖ Meet with internal auditors without the presence of management to discuss sensitive issues and ensure unbiased reporting. (Audit Committee must meet Head of Internal Audit 30mins – 1 hour before Committee meeting and/or 30mins – 1 hour after Committee meeting)
2. Appoint Qualified and Experienced Members:
❖ Ensure that the Audit Committee is composed of members who have relevant expertise in finance, auditing, risk management, governance and other technical expertise / disciplines.
❖ Provide ongoing training and professional development opportunities for Audit Committee members to stay updated on best practices and emerging issues in internal auditing and corporate governance.
3. Develop and Approve the Internal Audit Charter:
❖ Work with internal audit leadership to develop a clear and comprehensive Internal Audit Charter that outlines the purpose, authority, and responsibilities of the internal audit function.
❖ Regularly review and update the Internal Audit Charter to ensure it remains relevant and aligned with the organization’s objectives.
4. Review and Approve the Internal Audit Plan:
❖ Collaborate with the Chief Audit Executive to develop a risk-based internal audit plan that prioritizes the organization’s most significant risks and areas of concern.
❖ Approve the internal audit plan and ensure it includes adequate coverage of critical areas, including financial controls, operational efficiency, compliance, and risk management.
5. Monitor Internal Audit Performance:
❖ Establish key performance indicators (KPIs) and benchmarks to evaluate the effectiveness and efficiency of the internal audit function.
❖ Regularly review internal audit reports, findings, and recommendations, and track the status of corrective actions taken by management.
6. Facilitate Open Communication:
❖ Encourage open and transparent communication between the internal audit function, management, and the Audit Committee.
❖ Ensure that internal auditors have the authority to communicate directly with the Audit Committee on significant issues, especially those involving management.
7. Oversee the Appointment and Removal of the Chief Audit Executive:
❖ Play an active role in the selection, appointment, and, if necessary, removal of the Chief Audit Executive / Head of Internal Audit to ensure the internal audit function is led by a competent and qualified individual.
❖ Evaluate the performance of the Chief Audit Executive / Head of Internal Audit regularly and provide constructive feedback to support their professional development.
8. Ensure Adequate Resources for Internal Audit:
❖ Advocate for sufficient budget, staffing, and resources for the internal audit function to carry out its responsibilities effectively.
❖ Monitor resource allocation and ensure that internal audit has the necessary tools and technology to perform comprehensive and efficient audits.
9. Promote Continuous Improvement:
❖ Encourage the internal audit function to adopt best practices and seek opportunities for continuous improvement.
❖ Support participation in external quality assessments and peer reviews to benchmark the internal audit function against industry standards and identify areas for enhancement.
10. Foster a Culture of Ethical Conduct and Compliance:
❖ Reinforce the importance of ethical conduct, compliance, and good governance within the organization.
❖ Ensure that internal audit findings related to ethics and compliance are addressed promptly and effectively by management.
Recommendations for Principal Spending Officers
Principal Spending Officers, such as Chief Executive Officers, Chief Directors, Coordinating Directors, Managing Directors, Executive Directors, Chairpersons of Commissions, Vice Chancellors, and Director Generals, play a critical role in ensuring the effectiveness of the internal audit function within their organizations. Here are specific recommendations for these key
leaders:
1. Promote the Importance of Internal Audit:
❖ Clearly communicate the value and importance of internal audit within the organization.
❖ Ensure that all employees understand that internal audit is a vital part of risk management and good governance, rather than a punitive measure.
2. Ensure Independence and Objectivity:
❖ Safeguard the independence of the internal audit function by ensuring that internal auditors have direct access to the board or audit committee.
❖ Avoid interference in the work of internal auditors and ensure they can report their findings without fear of retaliation.
3. Provide Adequate Resources:
❖ Allocate sufficient budget, staffing, and resources to the internal audit department to enable it to carry out its duties effectively.
❖ Ensure that internal auditors have access to necessary tools, technologies, and training.
4. Support Continuous Professional Development:
❖ Encourage and support internal auditors in pursuing professional certifications and ongoing training to keep up with the latest developments in auditing, risk management, and industry-specific issues.
5. Foster a Culture of Accountability and Transparency:
❖ Lead by example in promoting a culture of accountability and transparency within the organization.
❖ Encourage open communication and the prompt implementation of audit recommendations.
❖ Hold regular meetings with internal auditors to discuss significant findings, risks, and recommendations, and ensure follow-up actions are taken.
6. Integrate Internal Audit into Strategic Planning:
❖ Involve internal audit in the strategic planning process to ensure alignment between audit activities and organizational goals.
❖ Use insights and recommendations from internal audits to inform strategic decisions and risk management strategies.
7. Monitor and Evaluate Internal Audit Performance:
❖ Regularly review the performance of the internal audit function to ensure it is meeting its objectives and adding value to the organization.
❖ Seek feedback from various stakeholders, including the audit committee, management, and external auditors, to assess the effectiveness of the internal audit function.
8. Implement Robust Internal Controls and Risk Management:
❖ Work closely with internal auditors to develop and maintain strong internal controls and risk management frameworks.
❖ Ensure that internal controls are regularly reviewed and updated based on the findings and recommendations from internal audits.
9. Enhance Communication and Collaboration:
❖ Promote effective communication and collaboration between internal auditors and other departments within the organization.
❖ Encourage a collaborative approach to addressing identified issues and implementing recommendations.
10. Leverage Technology and Data Analytics:
Support the internal audit function in adopting advanced technologies and data analytics to enhance audit processes and improve the identification of risks and inefficiencies.
Ensure that internal auditors are trained in using these tools to maximize their effectiveness.
Conclusion
By taking these actions, regulators, the board of directors, and the Parliament of Ghana can significantly enhance the effectiveness of internal audit functions within organizations. This will lead to better corporate governance, improved risk management, greater accountability, and ultimately, the achievement of organizational goals. Implementing these recommendations will help ensure that internal audit functions are not only present but also effective, independent, and aligned with the strategic objectives of the organizations they serve.
Audit Committees are pivotal in ensuring the robustness and effectiveness of an organization’s internal audit function. By promoting independence, ensuring adequate resourcing, facilitating open communication, and actively overseeing the internal audit process, Audit Committees can significantly
enhance corporate governance, risk management, and overall organizational performance. Implementing these recommendations will help Audit Committees fulfil their responsibilities and support the internal audit function in delivering valuable insights and assurance to the organization.
Principal Spending Officers are instrumental in ensuring the success and effectiveness of the internal audit function. By promoting its importance, ensuring independence, providing adequate resources, fostering a culture of accountability, and integrating internal audit into strategic planning, these leaders can enhance corporate governance, improve risk management, and support the achievement of organizational goals. Implementing these recommendations will help create a robust internal audit function that adds significant value to the organization and ensures long-term sustainability and success.
Email: [email protected] / +233244854902
