Effectiveness of Internal Audit in Promoting Good Governance

Internal Audit

Internal audit can be defined as an independent and objective assurance and consulting activity designed to add value and improve an organization’s operations to help achieve its objectives through the systematic and disciplined approach to evaluate the effectiveness of risk management, control, and governance processes, (The Institute of internal auditors of 1999). Internal auditing today is essential and demanded by stakeholders to be applied as a tool of adhering to sound risk management and as a demonstration to the public that they are in control of their organizations.

What is Good Governance?

On the other hand, the International Finance Corporation (2011) has defined governance as the structures and processes for the control of companies. It’s a relationship between the management, board of directors and the shareholders. This leads to prove that internal audit is now a matter of both private and public accountability for efficiency and accountability. A scrutiny from within the organizations is therefore no longer some additional function but a very crucial fundamental foundation on which an organization is built.

Correlation of Internal Audit and Corporate governance

The need for internal audit for effective governance far outweighs the concern for the relationship if an organization is to survive the economic competition and globalization.

Corporations are entirely responsible for effective and efficient management. Melese et al (2004) point out the same in her discussion of public sector organizations. The genesis of it all being economic collapses and the increasing financial scandals.

Some of the hard to miss practices have been an introduction and vast use of performance contracts and activity-based management practices that have continued to be adopted in developed and developing countries. Consequently, the role played by these has proven that internal auditing is very essential in promoting good governance structures.

The effectiveness of Internal Audit: A pillar of good governance

Internal audit is a pillar of good governance assisting the board to monitor its effectiveness in governance as noted by Gramlin et al (2004) which makes it very essential.

Internal audit also helps organizations meet their expectations as far as business risk management is concerned. This is achieved when the board sets up strategies to manage business risks; they ensure the effectiveness of internal controls and improve the organization’s performance. Internal audit enables the board to ensure that effective risk management systems are put in place and that internal measures set are adequate for any risk level that may occur. Internal audit will assist the parties involved with the risk management implementation.

Internal audit is however not only born of the corporations but has been reinforced indirectly through legislation. Although not directly influenced, it’s required by most statutes that internal audit be done for expanded accountability by stakeholders.

This has made this functionality become an expanded role leading to additions of audit committees by the board and the management as a means to ensure accountability requirements is met. This, however, leaves the issues of credibility and integrity to be questionable seeing the close relationship of auditors with the management.