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The Evolving Relationship Between Internal Audit Professionals and CFOs

Board members prove to be more satisfied with internal audit function performa

The financial crisis and slow recovery of the U.S. economy has led companies across industries to reconsider many internal processes. With financial standing a top priority for organizational leaders, many businesses are reexamining how they keep themselves in check and are determining the tasks those responsible for maintaining internal cohesion will have to undertake.

Especially for companies that have branched out globally, market uncertainty and regulatory change have become a constant in business, and professionals occupying internal audit functions are asked to stay on their toes. As a result, the relationship between internal auditors and CFOs keeps evolving.

More CAEs report to CFO, CEO
According to "2013: Time to Seize the Opportunity," a report from The Institute of Internal Auditors' Audit Executive Center, an increasing number of internal auditor professionals report administratively to the C-suite, providing them with greater independence and allowing them to focus on risk management and aversion.

Among chief audit executives (CAEs) surveyed in the Center's most recent state of the profession assessment, 70 percent said they administratively report to their company's CEO or CFO, while being ultimately accountable to the board of directors and audit committee. Three-quarters of Fortune 500 businesses surveyed also said their CAEs report to the same executives.

Richard Chambers, IIA's president and CEO, pointed out that a decade ago, a minimal portion of CAEs worked with the C-suite. He anticipated the relationship between these professionals will grow even stronger in the near future.

"The higher up in the organization a CAE reports, the more objective that individual can be in overseeing audits of tough areas of responsibility and the more independent the internal audit function becomes in the eyes of stakeholders," Chambers said. "It enhances the credibility of the CAE and the internal audit function across the rest of the organization."

Where Internal Audits Fall Short
The "administrative," or dotted, line between CAEs and CFOs is important. Without it, the relationship could be too cozy, preventing the detection or revealing of potentially bad behavior in the finance department. Nineteen percent of internal audit professionals and 32 percent of Fortune 500 representatives said at least one senior officer at their organization was dismissed for unethical conduct. A significant portion of companies still lack ethics training for new hires and many fail to retrain employees periodically. 

A recent report by PricewaterhouseCoopers, "Reaching Greater Heights: Are You Prepared for the Journey?," examined other roadblocks internal audit departments face.

The report suggests internal audits may not be doing enough to keep businesses intact. In addition, the report questioned whether those responsible for these processes have enough resources to provide the right service. 

PwC outlined three major risks compromising the efficiency and effectiveness of internal audit departments today.

For the most part, different organization stakeholders don't have the same expectations for internal audit functions. While 79 percent of board members surveyed said the department contributed significant value, only 44 percent of executive management professionals agreed. Board members consistently rated performance of specific tasks -such as delivering cost-effective services and focusing on critical risks and issues - higher than their executive counterparts. PwC stated managers, who work more closely with internal auditors, are clearly unsatisfied with current service delivery.

Another major issue is a lack of foundational capabilities among audit department members. Board members and executives agreed their audit functions aren't adequately promoting quality improvement, have yet to leverage the right technology and need additional training.

Finally, areas in which stakeholders wish to see improvement include emerging risk areas, new product introductions, capital project management and mergers and acquisitions - all nontraditional responsibilities.

Room for Improvement
To overcome the discrepancies between internal audit performance and stakeholder expectations, PwC stated these functions require better and more training, must integrate risk management with other functions, master emerging risks and go beyond what's simply asked of them by proactively pointing out potential dangers or hindrances and providing well-founded advice.

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