Internal Audit & the Four Cs: Culture, Conduct, Corporate Governance and Customer Outcomes
By Michael Cowan, Regulatory Intelligence Analyst, Thomson Reuters
NEW YORK, July 30, 2014 – Corporate governance and culture have moved into the mainstream as a result of the financial crisis, and as the global recovery takes hold, governments and regulators are keen to ensure lessons are learned. It is clear, however, that despite the increasing profile of corporate governance with regulators, shareholders and customers, and the effect it has on the health and reputation of firms, it is still an area in which many internal auditors lack a high level of involvement.
Thomson Reuters annual State of Internal Audit Survey, which was published in June, found that 49 percent of internal auditors had no involvement in assessing their firm’s culture, while just over a quarter of internal auditors have not assessed their firm’s corporate governance; regionally, this figure was most concerning for North America, with 32 percent of internal auditors having no involvement in assessing corporate governance. This figure dropped to 18 percent for European respondents, where regulators like the UK Financial Conduct Authority have honed in on the interrelated issues of corporate governance, customer outcomes and conflicts of interest and have stated that they will start assessing culture by looking at relevant areas of a firm’s business and behavior and drawing conclusions from there.
The internal audit profession is aware of the need to roll up their sleeves and start auditing these ‘soft’ issues, but in many cases lacks the organizational support and operational framework to do so effectively. In fact, earlier this month, the Chartered Institute of Internal Auditors launched a report calling on boards to take more concrete steps to audit their corporate culture and behavior.
Culture is a vital regulatory priority around the world and it is therefore worrying that nearly half of all internal auditors have had no involvement in assessing their firm’s culture. The results further emphasize the need for a strong, well-resourced independent audit function which is equipped and empowered to extend their independent assurance activities beyond functional processes and controls to the values and behaviors that define a good corporate culture.
This is a particularly urgent issue now, as nearly a quarter (24 percent) of internal auditors expect their personal liability to increase in 2014. The adequacy of internal auditors’ skills, focus and approach is firmly on the radar of regulators worldwide. It is no surprise, therefore, that the IIA is calling for more board support at this time. But with or without this support, internal auditors are proactively searching for ways to rise to the challenge posed by auditing the 4 Cs. Useful resources include our special report Culture – Tips for Internal Auditors, the State of Internal Audit Survey 2014 and additional materials available on the IIA website, such as the McKinsey 7S Stakeholder framework which can provide a useful checklist for analyzing corporate cultures.