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Company, Internal Audit, Independence, and Objectivity
Companies are commercial organizations in a free market economy, and their founders are the initiators of these organizations. Relevant factors of production: the founder/entrepreneur brings together labor, capital, and natural resources. The entrepreneur may have various purposes for starting activities in the company, but it is clear that one of the primary purposes is profit.
In the governance structure, the entrepreneur expects a functioning assurance infrastructure to be established and functioning well in the company. Strategic leadership, a well-organized financial and operational reporting structure, fund management, recruitment practices, field-reflective current procedures, expert committees, a functioning risk, control and governance structure, operational controls, IT controls, compliance controls, marketing/sales information system, the presence of internal and external assurance providers (eg internal audit and external audit), etc. It will assure shareholders that the company is doing well and that the future is sound within its borders.
Trust is a fragile emotion and is among the foundations of relationships and communication. Trust between people/organizations and people/people is important for employee engagement, loyalty, organizational behavior, cooperation, organizational commitment, organizational citizenship, and job satisfaction. Trust has cognitive and emotional elements. For trust to be formed in a person or organization, characteristics such as talent, helpfulness, and honesty are required between the parties.
Individuals and organizations need trust and honesty to provide assurance about their future. Building trust is not easy.
Trust is a multi-disciplinary concept. It is important in the relationships between the company and its employees, between the company and its customers, between the company and its suppliers, and with other stakeholders. Trust affects marketing, strategy, entrepreneurship, economics, finance, accounting, communication, and, for example, scientific results tend to be discussed less. Some rating agencies are more reliable than others. Some institutes, companies, professions, schools, or individuals are respected and accepted by the majority. How does this happen?
Independence and objectivity are related to hierarchical position, interests, power (formal and informal power) and influences in a company. How do we decide whether to trust or not to trust when a person or an organization expresses an opinion or makes a claim? Independence and objectivity affect the reputation of decisions. When we have complete confidence, we can accept and implement these decisions, sometimes even against ourselves, because reliable decisions are generally expected to align with pure reality and organizational mission in the long run.
Naturally, people have egos, concerns for survival for their interests, ambitions, social pressures, prejudices, tendencies, weaknesses, and career prospects. People have different moral values, personalities, psychology, organizational climate, ethical atmosphere, perception differences, emotions and cognitive abilities blended with culture. Hence, people may not be able to make rational decisions. It’s not easy to criticize yourself, admit your weaknesses and act accordingly. It is also not easy for people to be objective and fair in decisions and actions related to their own interests. For example, cross-over board membership is limited in some places to avoid favoritism and conflict of interest. Or it is not easy to act objectively towards our family members or friends. Objectivity is an important attribute not only for internal audit but also for other company functions, such as performance appraisal in human resources.
When we examine corporate scandals, we can see that in some cases, even some board members are involved in fraud and abuse. Misbehaviors caused by ego and self-interest include embezzlement, cheating and abuse, fabricated transactions, inflating / reducing figures, abuse of power, personal use of corporate power, obstruction of normal flow, covering up for direct and indirect benefit, emotional harassment, mobbing, direct and indirect personal interests, pretending that someone else’s work is done as one’s own and profiting from it, blame, favoritism, glass ceiling (the invisible barrier that hinders career advancement), support of unfair practices, dishonesty, and so on.
While independence relates to internal audit’s position in the organizational structure and is relatively easy to establish on paper, objectivity and trust are much more difficult to establish and trust can often be built over the long term. Independent auditing is regulated by a central authority in many countries and follows its own standards, essentially giving assurance to the financial statements. While the working time of independent auditors is regulated and limited by law in many places, internal audit may be regulated, not regulated or recommended by law depending on the preference of the countries.
Internal auditing can be established as a function in the company, outsourced as a service, or performed through co-sourcing. Both are mechanisms that have different purposes and roles and provide assurance. Assurance and advisory functions help organizations recognize and manage their risks and opportunities.
Every process and function in an organization is expected to serve the overall strategy of the organization. This service can manifest in different ways such as increasing turnover, monitoring competition, providing assurance and consultancy, recognizing and managing risks, increasing customer satisfaction, increasing employee satisfaction, providing cash flow balance, providing supply, controlling costs and so on.
The superstructure that internal audit serves is the legal entity and the shareholders or the owners of the legal entity. As a critical governance tool and shareholder control function, along with some other governance and assurance tools, internal audit has the potential to generate the most benefit for the organization if it works primarily for shareholders, reporting to the Board of Directors, which represents the shareholders. For management, internal audit provides both assurance and consulting services.
In internal auditing, reliable, objective and mature communication must be established between the internal auditors and the auditees. This is a delicate balance and is vital to the smooth and efficient functioning of internal audit. For internal auditors to be seen as “voice of common sense and trusted advisors,” and for auditees to collaborate and communicate openly and transparently with internal audit, internal audit must maintain an equal footing and gain the auditee’s trust. Independence and objectivity are powerful tools for credibility.
According to Internal Auditing Standard No. 1100, “The internal audit activity must be independent and internal auditors must act objectively while performing their duties.”
According to Internal Audit Standard No. 1110, “The chief audit executive must be affiliated with a level of management within the organization that allows the internal audit activity to fulfill its responsibilities. At least annually, the CAE must confirm to the board the internal independence of the internal audit activity.”
According to the Interpretation of Internal Audit Standard No. 1110: “Organizational independence is effectively achieved when the chief audit executive reports functionally to the board. Examples of functional reporting to the board involve the board:
- Approving the internal audit charter,
- Approving the risk based internal audit plan,
- Approving the internal audit budget and resource plan,
- Receiving communications from the chief audit executive on the internal audit activity’s performance relative to its plan and other matters,
- Approving decisions regarding the appointment and removal of the chief audit executive,
- Approving the remuneration of the chief audit executive, and
- Making appropriate inquiries of management and the chief audit executive to determine whether there are inappropriate scope or resource limitations.”
According to the definition of Internal Auditing Standard No. 1120, “Internal auditors must act in an objective and unbiased manner and avoid any conflict of interest.” The decisions and actions of shareholders, the board of directors, senior management and internal auditors are critical so that this does not become a mere “if only” thinking.
According to Internal Auditing Standard No. 1130.A1, “Internal auditors must refrain from assessing specific operations for which they were previously responsible. Objectivity is presumed to be impaired if an internal auditor provides assurance services for an activity for which the internal auditor had responsibility within the previous year.” To strengthen objectivity in new versions of the International Professional Practices Framework (IPPF), this period may be revised to be longer than one year, depending on the strategic importance of the responsibilities undertaken in the previous year.
Internal Audit Standard No. 2050 has the title of Coordination and Reliance and is stated “The chief audit executive should share information, coordinate activities, and consider relying upon the work of other internal and external assurance and consulting service providers to ensure proper coverage and minimize duplication of efforts.” In other words, it refers to the effective use of resources by ensuring the coordination of different internal and external assurance and consultancy services of the institution, and by ensuring that the unaudited areas in the institution are audited instead of auditing the same areas unless necessary. The Practice Guide titled “Coordination and Reliance” published by The IIA in February 2018 examines this issue.
Critical points such as corporate culture and human resources practices are of high importance for the visibility of an unbiased view in the company. Let’s be realistic, absolute objectivity is difficult to establish, just as absolute rationality is difficult, so perhaps the company can aim for relative and reasonable objectivity and set up appeal mechanisms. So, rather than having 100% objectivity, reasonable objectivity may be a more achievable goal. Reasonable objectivity to be credited must be well defined and measurable. As a precaution, the CAE, internal auditors, the board, or the audit committee may be required to approve an annual statement of objectivity. Independence and objectivity may emerge in practice through additional measures such as policy, procedures, internal audit charter, performance appraisals of the chief audit executive and internal auditors, and training of new internal auditors.
As a result, organizations should establish and keep the necessary institutional infrastructure up-todate, in order to be able to carry out their activities in line with the targets they have determined, and by paying attention to independence and impartiality, taking into account the benefits that the sound functioning of the internal audit structure will provide to the organization.
ALP BULUÇ
Teolupus Partner
Trainings Given to Authorized Institutions and Precious Metals Intermediary Institutions within the Scope of Prevention of Laundering of Proceeds of Crime and Compliance Obligation within the Framework of Foreign Exchange Legislation
Our trainings on compliance programs, legal regulations and basic concepts that should be implemented by authorized institutions and precious metal intermediary institutions held liable within the scope of “Legislation on the Prevention of Laundering of Proceeds of Crime” and “Exchange Legislation” organized by Teolupus Internal Audit and Risk Management Consultancy continues.
Project for Preparations Prior to ERP Selection & ERP Purchasing Decision Making Process for Companies
The first phase of the project of providing pre-ERP preparations and selection and installation of the ERP software to be used by our customer, which operates in the chemical production sector and is on the list of Turkey’s Second Top 500 Industrial Enterprises in 2020, has been completed. Teolupus provides management consultancy services on ERP/best practices/risk/ internal control to this large-scale project.
Teolupus Business Talk titled “Organizational Culture and Change” was Held
Within the scope of Teolupus Business Talks, the presentation of the talk titled “Organizational Culture and Change” was made in June 2021 by M. Gürşan Gürel. The types of corporate culture, the cornerstones of the life lines of the institutions and the change actions were among the topics mentioned in the business talk.
2021 and 2022 Trends in Enterprise Resource Planning
The COVID-19 pandemic has been transformative for Enterprise Resource Planning (ERP), as it has been in all areas. Its impact on the demand and supply cycle has led companies to find fundamental solutions.
Companies that have previously transitioned to Enterprise Resource Planning can more easily adapt their business processes to the pace of change. Businesses rely on ERP not only to cut costs by automating many tasks, but also to give authorities faster access to important information to make the right decisions.
While companies are giving more space to ERP day by day in order to easily carry out their business processes and make the right decisions, ERP systems are constantly developing by adapting to new technologies. In this article, we would like to talk about the developments in ERP systems since 2020.
Advantages of ERP
All data is always kept up-to-date in a central database, eliminating manual verification and validation processes. All employees can access the same database within the limits of their authority, so internal communication becomes easier. It allows to use time more efficiently and save time.
Properties of ERP Systems
ERP systems are provided with different modules that can be integrated into a single main software for the company’s operating processes and needs. ERP modules vary according to the company’s type of activity, industry, structure and number of users. Standard ERP modules are:
- Sales and Distribution, Inventory Management, Purchasing Management, Production Planning and Production Control
- CRM (Customer Relations Management)
- Financial Affairs (General Accounting, Finance, Cost accounting, etc.)
- Payroll and Human Resources
- ERP trends
- One app for everything- Intelligent services- Data mining- Cloud ERP- Two-tier ERP- Digital transformation- Other technologies integrated with ERP- Personalization- Artificial intelligencepowerful insights and improvements- Predictive analytics- Mobile ERP
ERP in the Future…
The sudden impact of the COVID-19 global pandemic on demand and supply has prompted companies to seek solutions. Optimizing processes to use and manage ERP software remotely is one of these solutions. Examples of this are transactions such as benefiting from the practicality of more mobile ERP, providing secure remote access, increasing automation of business processes and benefiting from ERP supply chain capabilities so that the business can continue its operational processes uninterruptedly.
Survey: Five Lasting Internal Audit Trends Emerge from Pandemic Response
The findings of the survey, which included more than 175 CAEs from various industries, are as follows:
- Audit teams will focus more on innovative ways to gather and analyze evidence as part of their
- The use of technology will be more critical in the conduct of internal audits in the future.
- Most face-to-face meetings will be replaced with virtual meetings using video streaming technology.
- Internal audit teams will focus more on emerging risks and their possible impacts on the company.
- Internal audit teams are unlikely to return to a traditional workplace model and expect to work remotely all or part of the time
“Risk in Focus” 2022 report: Hot topics for internal auditors
“Risk in Focus” is an annual thought leadership research project that analyzes the most important risks facing European organizations. It is an essential tool for audit committees and a barometer of what CAEs perceive as their organization’s risk priorities for 2022 and beyond. “Risk in Focus” helps CAEs understand how their colleagues view today’s risk landscape as they prepare future audit plans for 2022. For the past six years, “Risk in Focus” has sought to highlight key risk areas to help internal auditors determine independent risk assessment work, annual planning, and audit scope.
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