Audit Committees Setting Higher Goals for Internal Audit


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Audit Committees Setting Higher Goals for Internal Audit

Time for Internal Auditors to Transform Their Thinking, According to PricewaterhouseCoopers Study State of the Internal Audit Profession Study

Dennis Bartolucci
Partner
PWC

There is a clear gap between the current focus of many internal audit functions and stakeholder expectations for greater value, according to the fourth annual study of current issues for the internal audit profession conducted by PricewaterhouseCoopers LLP (PwC). The growing tendency of audit committee members to share best-practice ideas drawn from other companies where they serve on the board are primary factors contributing to the need for internal auditors to address the rising expectations of their chief stakeholders.

Sixty-three percent of survey respondents consider operational risk to be of significant importance to audit committees, suggesting a deepening appreciation among both audit committees and audit leaders of the need for internal audit to increase its focus on operational, strategic, and business risks. At the same time, only 52 percent of respondents consider providing assurance on the effectiveness of a company’s risk management processes to be of significant importance to audit committees.

“In our view, the ability to provide such assurance represents one of internal audit’s best opportunities to deliver greater value in the years ahead,” said Dennis Bartolucci, partner, PricewaterhouseCoopers' Advisory practice. “Internal audit is at a crossroads and there is a pervasive need for members of the internal audit profession to move urgently and strengthen internal audit capabilities in the risk areas where the board and executive management need them most.”

The study also finds that at the same time that the demands of Sarbanes-Oxley were easing in 2007, stakeholder expectations were shifting. Audit committees and senior management are now putting increased pressure on internal audit to place a higher priority on strategic, operational, and business risks. Nearly 60 percent of respondents have a risk assessment process in place that includes annual updates to an existing risk universe and seeks stakeholder input on key risks facing the organization.

Many internal audit functions, however, still focus extensively on financial compliance risks. Eighty-seven percent of Fortune 500 respondents and 79 percent of other respondents spend less than 20 percent of their resources on non-financial compliance audits.

“Trying to determine the nature of strategic, operational, and business risks is one of the most significant challenges internal auditors will face as they strive to enhance their audit coverage,” added Mr. Bartolucci.

Another ongoing trend in the internal audit profession has to do with the search for the right talent. In the post-Sarbanes-Oxley era, many internal audit directors are finding that they have the right head counts but the wrong skill sets to address non-financial risks that had previously taken a backseat to Sarbanes-Oxley compliance. The talent shortfall cited by survey respondents over the past three years continues unabated.

The study also found that lengthy audit times can erode stakeholder support. For nearly 80 percent of total respondents, average audit cycle time is three months or more per audit. This finding also reflects an area of potential inefficiency.

The study also looked at how AS5 is helping to reduce the number of resources required to manage Sarbanes-Oxley compliance. Partly due to the implementation of AS5, only 27 percent of 2008 State of the Profession survey respondents reported that they had dedicated 50 percent or more of their internal audit resources to Section 404 compliance in 2007, compared with 41 percent of 2007 State of the Profession survey respondents who reported having done so in 2006.

To download a full copy of the report, “Targeting Key Threats and Changing Expectations to Deliver Greater Value – PricewaterhouseCoopers 2008 State of the Internal Audit Profession Study”.

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