Definition
Every year a company undergoes an external audit and will also undertake a program of internal auditing. Using external auditors to carry out internal audit work can lead to a conflict of interest. A conflict of interest may also occur when an internal auditor has a personal or professional involvement or association with the area that is subject to the audit.
There are two essential elements that apply to ensure that such conflicts of interest are avoided: independence and objectivity. Independence can be achieved by having an appropriate written internal audit charter that ensures the independence of auditors. The chief audit executive should report directly to the audit committee. Also, it is advisable that internal auditors do not have any operational responsibilities. The independence of an internal auditor appointed by the management of a company may be called into question if he or she is involved in reviewing the conduct of the management.
The objectivity element is ensured by the professionalism of the internal auditors. This is achieved by having a well-written and implemented internal audit charter. Recruiting and appointing the right internal auditor is of the essential. Maintaining good professional relations between the internal audit function and management is also extremely important. A good management team will be interested in a good audit process that will objectively highlight any positive or negative aspects of the way a company is managed. An internal auditor has a professional and ethical obligation to disclose any involvement on his or her part in an activity that could give rise to a conflict of interest.
The same firm should never be appointed to do both the internal audit and the external audit. Using different audit firms will not only avoid a conflict of interest but will provide independent opinions and reports that the management and shareholders can use to assess the business of the company.
Advantages
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Having an independent external audit helps an organization to assess the state of its business and to put in place measures to improve and develop it.
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Making sure that internal auditors are not involved in operational responsibilities avoids potential conflicts of interest.
Disadvantages
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External auditors are expensive, but trying to cut costs by using the same auditors for both internal and external audits can lead to conflicts of interest and may in the end increase costs.
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In certain circumstances, a company will be required to change its external auditor after a fixed period and avoid using the same audit company for both internal and external audit work.
Action Checklist
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Carefully assess your options for internal and external auditors. Obtain as much information from as many sources as you can before appointing auditors.
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Consider a selection bidding process and examine each bid carefully before making a decision.
Dos and Don'ts
Do
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Establish good communication between management and auditors.
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Avoid conflicts of interest by choosing separate internal and external auditors.
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Encourage internal auditors to disclose any involvement in activities that might give rise to conflicts of interest.
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Consider reputation: a more expensive external auditor may offer better value for money in the medium to long term.
Don’t
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Don’t make decisions that endanger the impartiality of an audit solely on the basis of financial considerations.
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Don’t appoint internal auditors that have had management functions in the company.
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