Role of Internal Auditor in Corporate Governance Framework

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Contents Page
3.0.Literature Review4
4.1.Internal Audit5
4.2.Corporate Governance Framework5
5.0.Case Studies6
5.1.Royal Dutch Shell6
5.2.Royal Bank of Scotland6
6.0.Application of theory7
6.1.Royal Dutch Shell7
6.2.Royal Bank Of Scotland7

1.0. Introduction

A good governance system in an organization begins with having internal audit function. The value and the need to focus on improving strong corporate governance have increased due to a series of failure (bankruptcy and fraud) and financial scandals like earnings restatement to ensure financial reporting quality (Zeleke Belay, 2007). These corporate upheavals have driven external regulators to find ways of promoting greater accountability, disclosure and transparency. The main role of corporate governance is to restore the trust and market confidence as well; shareholders. (Carl Rosen, 2010) It has been widely recognised that the role of the internal auditor becomes a continuing contributor in terms of developing good corporate governance practices and structure. It is said that an effective internal audit function enables the board to perform its corporate governance duties through organizational involvement, assessment, training, professional guidance and communication at all levels within the organization (Kenneth D’Silva, Jeffrey Ridley, 2007). Audit committee, managers, internal auditors and external auditors play a critical role in effective control and appropriate leadership within the organization to act in the interest of the shareholders. (Sridhar Ramamoort, 2003). Most companies recognised and valued internal auditing and hence, the role of internal auditors has escalated and is being relied on to contribute significantly in business improvement, strategic and operation risks (Kenneth D’Silva, Jeffrey Ridley, 2007).

2.0. Background

The revolution of corporate governance started in the early 1990s in the United Kingdom (UK) with the Cadbury report (1992); with a code of best governance practices such as separation of the chairman and chief executive, the independence of audit committees and the practice of regularly reviewing the board’s effectiveness. Corporate governance is the relationships between managers, directors and shareholders (Cadbury report, 1992; FRC, 2012). It is a voluntary code for listed companies in the UK, with “comply or explain” principle. Listed companies must comply with the listing rules to report on the way they complied or explain why it does not in their annual reports. The principles also apply to the internal audit function; companies that do not have internal audit function are recommended to review if there is a need for one from time to time. This will provide more transparency and accountability of the board of directors which contributed to the development of the UK corporate governance code (FRC, 2012; Keay, Andrew R, 2012). As mention above, internal auditors plays a unique role in the governance system in terms of monitoring and identifying risk and testing of internal controls processes to ensure effectiveness or efficiency and adherence to relevant law and regulations. The institute of internal auditing (IIA) which was established in 1941 is a guidance setting body and is currently recognise in 165 countries as a comprising mandatory criteria standards and guidelines applicable to all internal auditors for internal auditing practices (IIA, 2013). It is essential that the board understands the importance of corporate governance and internal audit functions. The quality of corporate governance will have a profound impact on the efficiency of corporate assets use, ability to attract low-cost capital, ability to meet societal expectations and overall performance. It is said that investors are willing...
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