5 Reasons why you need Internal Audit for your Business Success

Before evaluating the reasons why internal audit for your Business Success, we have to analyze the reasons why Businesses are failing? From the internal perspective, we can list a few of the major concerns and how an internal audit can solve these issues.

1.         Compliance with Statutory Requirements:

Going through the Deepwater Horizon Oil Rig Explosion that occurred in the Gulf of Mexico killing 11 people and spilling 53,000 barrels of oil per day made BRITISH PETROLEUM COMPANY (Oil and gas company) to witness the biggest industrial disaster.Due to the months-long spill, It had end up with extensive damage to the marine and wildlife habitat. Series of cost cutting decisions and inadequate safety system motivated them to save money and time, without complying industry practices and government policies.As a result BP obliged to 4 years of Government monitoring and the Environmental protection Agency temporarily banned BP from new contracts with the US Government. Moreover BP had to pay cleanup cost, charges and penalties amounting to more than $65 billion.

 

The laws and regulations of the country in which an organization thrives are also to be considered rather than making profit. Internal audit will play a crucial role in evaluating the nature of a business and thereby ensuring its compliance. Internal auditors will monitor the dynamic business environment and implement statutory compliance procedures at the earliest.

 

2.                Efficient Decision making:

We had heard about KODAK, the first photo film company in the industry, Why did it go into bankruptcy even though the company’s research founds that digital photos could ultimately replace Kodak’s film technology?

The reason is that it estimated it had 10 years to prepare and continued to invest in the old core businesses.

 

There is no point in taking inappropriate decisions in the competitive environment when the industry is accepting emerging innovative technologies. Sometimes internal auditors will act as an expert consultants by providing advisory services. They are capable of assisting in investment and financial decision-making.    

 

3.                Reliable Financial Informations:

Discussing WORLDCOM SCANDAL, (WorldCom was an American telecommunications company). In 2022, it was discovered that WorldCom has inflated its asset by almost $11 billion, making it one of the accounting Scandals ever. The company had underreported line costs by capitalizing instead of expensing them and had inflated its revenues by making false entries. The first scandal came to light when company’s internal department found fraudulent accounting.

In every organization integrity of Financial information are fundamental because the operating efficiency of any business shall be interpreted in terms of financial information.

 

Independent Internal audit team can ensure:

• • The reliability and integrity of financial information.
  • Every transaction to be recorded is authorized by the concerned department according to their General or Specific authority.
  • That No one individual can handle more than one task simultaneously..
  • Internal control over financial reporting.
  • Proper documentation was in place.
  • There is no revenue leakage..

4.                 Adequate Internal Control Systems and Corporate Governance: 

“There are two big forces at work, external and internal. We have very little control over external forces such as tornadoes, earthquakes, floods, disasters, illness, and pain. What really matters is the internal force. How do I respond to those disasters? Over that, I have complete control”

 -Leo Buscaglia-

 

We can see a lot of companies reported fraud committed by their employees because of inadequate Internal control Systems and corporate Governance, some of them are listed below:

·          Reimbursing money by making false expenses 

·          Hiring a Professional thief as a theft prevention specialist because of real-life expertise 

·          A former  Calgary Transit employee pilfered almost $375,000 from his company as coin along 7 Years

·          A bookkeeper who used to handle the company books without any oversight was nabbed for embezzling $348,975  

·          After mastering companies phone and mail-order system, the employee started issuing himself refunds for purchases made by the customers. He covered up his rampant refunding by altering inventory records.

 

From the above, we can conclude that an effective and efficient Internal control system is to be placed throughout the organization. Robust internal control systems are capable of identifying and preventing wrongdoings, therefore organizational personnel see it as critical and avoid engaging in fraudulent activities.

The Internal audit assesses the compliance of organizational policies and procedures that are complied with at all levels of management from the lower hierarchy to the higher one. If there is an independent check in the organization, the more accountable the employees will be.

 

5.                Effective Risk Management:

“If you don’t invest in risk management, it doesn't matter what business you’re in, it’s a risky business”

-Gary Cohn-

 

Risk can be defined as “A situation Exposure to Danger”. We have discussed the root causes of controllable risk an organization faced in the industry. If an organization can analyze and mitigate that risk, it will pave the organization toward success. Thus Internal audit team helps in regular monitoring for evaluating there is a chance of breaking the chain of Internal control Systems.

 

At the end, whatever we are going to CHANGE will ultimately add value to the Organization. Internal audits are performed by professionals with an in-depth understanding of the business culture, systems, and processes. Internal audit activity assures that internal controls in place are adequate to mitigate the risks, governance processes are effective, and efficient and organizational goals and objectives are met.

 

Some of other relevant functions performed by internal Audit teams are:

• • Oversight Day to day Operations and Documentation.
  • Compliance with Rules and regulations.
  • Assessing Risks, controls, ethics, quality, economy, and efficiency.
  • Assuring that controls in place are adequate to mitigate the risks.
  • Communicating information and opinion with clarity and accuracy.
  • Regular monitoring of business and its improvement for continous improvement.
  • Evaluating emerging technologies.  
  • Analyzing opportunities. 
  • Examining global issues.

 

(Author is an auditor and business consultant in AK & Partners Auditors and Chartered Accountants. AK is one of the leading audit firms in qatar. Please send your comments and suggestions to ajmal@akauditors.com )