Internal Audits: why even bother??

As many entrepreneurs, CEOs and business managers can attest, days at ‘the office’ are more often than not filled with tasks and responsibilities geared towards maximizing  profits.  Some examples include developing new services and products, marketing the brand, and strategically planning ways to reach or surpass the company’s mission, vision and goals.
As such, it is more important now than ever for organizations to decrease costs by increasing efficiency.  In my experience, identifying shortcomings and improvements through internal audits will exponentially increase effectiveness and reduce waste of resources (labor, materials, equipment, etc.).

But before we go any further, lets ensure we’re speaking the same language and define what I call an internal audit. The Institute of Internal Auditors (IIA) defines an internal audit as:

“… an independent, objective assurance and consulting activity designed to add value and improve an (organization’s) operations. It helps (organizations) accomplish its objectives by bringing a systematic disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.”
So why are internal audits conducted? 
In same cases, industry/state/federal regulations mandate the incorporation of internal audits into a company’s processes. On others, companies like mine elect to incorporate their own internal Screen Shot 2014-08-04 at 8.47.37 PMaudits in an effort to identify weaknesses and become more efficient. However, understanding that internal audits provide numerous benefits does not have in itself eliminate all challenges. As with any new function, hiring/allocating an employee/team to perform the company’s internal audits incurs some costs.  Some of the other challenges faced by organizations seeking to adopt an internal audit plan include:
  • missing internal auditing standards to measure against;
  • the company has poorly trained staff;
  • the IA team lacks managerial support;
  • the company fails to follow up deficiency root causes and corrective actions;
  • the IA team fails to report a balanced analysis;
  • staffing permanent IA teams requires significant commitment to hiring, retention and development of team members;
  • assigning members to the IA team from other areas of the company can have advantages for company, but it can also pose a challenge for continuity in internal audit.

If you’re still reading this article then I’m sure you understand why some feel “Why even bother conducting an internal audit?” Well this is why:

  • As your business grows oversight can get diluted. This growth necessitates the need for a full time, independent and dedicated team to review and assess risks within the organization.
  • Increases in the geographical spread of businesses (globalization) has led to crossing of political frontiers by businesses both large and small. This rapid growth highlights the need for compliance with the laws of not only the home country, but the country and jurisdictions of the countries/states the business operates.
  • Businesses utilize unconventional models and practices, such as customer service, accounting, and online services. Businesses like these require the assurance that controls relating to these models and practices are adequate and operating effectively.
  • Regulations (where applicable) are mandated to protect investors; as such, regulation authorities are applying ever mounting pressure and stringent norms. Meeting or exceeding these regulations enhance corporate governance and financial reporting requirements.
  • Your competition is doing it! As globalization expands and entry barriers lessen in the market for goods and services, competition quickly adapts and copies business models that work. As such, decreasing costs of production and overhead allows the company to maximize the profit it takes in.
So you’ve analyzed the pros and cons and realize that you can benefit from becoming more efficient. You’ve trained yourself or a staff member/new hire and have conducted your internal audits. You have some ‘findings’ or observations, do you just make on-the-spot corrections and move on?
It depends.

audit_heroMy advice is to keep your eye on the prize, and remember the GOAL of the internal audit is to find areas that can be improved by identifying compliance violations and assessing risks. Observing a ‘finding’ allows the company the opportunity to improve by establishing fail-safe systems or processes to mitigate the risk of repeat offenses. Once a finding is identified, determine the significance of said discrepancy, identify the root cause (poor procedures, untrained staff, etc.), and track the discrepancy so you may evaluate trends. Also, take notes of what the company is doing especially-well and analyze whether this can be replicated in other areas. This will help you identify what is working well with the company, as well as commend those employees and/or departments following established regulatory/company procedures.

So in conclusion, why bother conducting internal audits? Becoming and remaining effective at whatever you or your employees do is essential to continued success.  Internal audits are an investment in your organization, which helps you identify areas of weakness you can fortify. Certain industries (defense contractors) are typically mandated by regulations to conduct said audits, in which case, there’s no choice about it, get to it! 🙂 While other industries are not mandated by regulations, industry leading practices show internal audits are an effective tool to increase efficiency. So if you don’t enjoy throwing dollars down the drain, internal audits are great options to incorporate into your management plan.

I’m very interested in hearing your thoughts, what is your experience with conducting internal audits? Do you agree/disagree with this article?  Feel free to contact me on twitter, or simply leave your  comment below.  Stay tuned and subscribe to read more business management tips, suggestions, and articles.  Internal Auditing “how-to” articles coming soon!

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