Term Paper on "Internal Auditing"

Term Paper 6 pages (2504 words) Sources: 1+

[EXCERPT] . . . .

Internal Auditing

Over the past two decades, a number of changes took place that greatly altered the business world. Some of these were external, such as ever-increasing globalization, growing competition and fast-paced technological innovations. However, some of the changes were internal, as well. At the beginning of the millennium, for example, huge cases of company fraud rocked the structures of many organizations. As a result, the entire auditing field was put on trial.

Enron and similar financial disasters made many companies think and then think again about how to enhance their own internal audit functions. Organizations clearly realized they had to be more careful about aggressive or risk-taking accounting techniques and be mindful of the pressures to meet earnings estimates. They could not ignore risk management issues and had to follow up on audit findings once they were issued to determine the strength of financial controls. The bottom line: The internal audit needed to meet stringent quality assurance goals as with any other company products and services.

Thus, although the role of internal auditor stems back to the 1940s, it has now taken on much greater meaning. What many considered a ho-hum position about a decade ago has become one of the most important aspects of a successful organization.

In order to find out more about this position in present times, I interviewed, Robert Norwick, the internal auditor of a local mid-sized family-owned business. Despite the fact that most financial concerns have been equated to publicly owned corporations, studies show that even smaller privately owned companies are at risk. In fact, Wells (2004) concluded "...small businesses remain the most vulnerable to occupational fraud because of three factors: They are the least likely to have an audit, a hotline or adequate internal controls" Passage of the Sarbanes-Oxley (SOX) Act of 2002 raised the profile of internal audit staff at both publicly and privately held companies. Privately-held mid-sized companies are thus adopting some of the SOX principles and turning to their present internal audit staff for help or hiring new personnel to meet changing and growing needs.

Adds Dalton and Dalton (2005): Even the private firm not subject to SOX oversight operating in a state without parallel legislation that applies to private companies or is not subject to other regulatory guidelines that essentially enable SOX, there are a host of reasons to be SOX-compliant:

if private firms have plans to go public, underwriters and investors will insist on compliance prior to the initial public offering;

if private firms are attempting to raise capital from banks, venture capitalists, or private equity firms, audited financial statements and assurances about best practice corporate governance will be a requirement;

insurance companies will request certified financial statements and other governance provisions to establish coverage for directors and officers;

if private firms prepare and distribute financial statements for any purpose (e.g. banks, venture capitalists, private equity, trustees, institutional investors), they will be expected to be SOX-compliant;

any private company involved as partner in a merger with a public company or as an acquiree in an acquisition may be certain that SOX-compliance will be part of the due diligence process;

private companies with an employee stock ownership plan may expect that its trustee will encourage - if not insist on - SOX-like compliance; and private companies will want to consider that its clients, joint venture partners, vendors, and other business partners that are publicly-traded firms may insist on compliance with the same practices to which they are subject. (8)

INTERNAL AUDIT POSITION

Norwick works for a farsighted company that recognizes the value of prevention. They also realized that if they ever wanted to go public or acquired a public company, they would be accountable by legislation. Instead of using external auditors, they decided to expand their internal department. It hired him a couple of years ago after an extensive search to find the right individual for the new internal audit position. They put together a cross-functional search committee, including the human resources director and CFO, to get varied input. They also looked at additional skills beyond the traditional ones normally required for internal auditors. For example, they wanted someone who was just as comfortable in front of the desk talking with people as well as behind the desk crunching numbers. (Communication skills are becoming very important for internal auditors. See Smith 2005). They also desired an individual who could think out of the box for ways to evaluate and alter the status quo auditing processes if necessary.

In addition, they wanted a person who felt comfortable being part of a business team and who would be able to communicate the goals of his department -- make it seem less fearful and more understanding for everyone involved. From a skills standpoint, they sought an accountant or MBA with the certified internal auditor (CIA) designation and three to five years experience with another company in a management role. Just as important was a person who held a high level of professional and personal ethics.

This expanded role of the internal auditor presents a host of challenges for many company human resource departments. They have to hire auditors who are going to take on new responsibilities and leadership roles, which require different types of skill sets that may internal auditors do not yet have.

Previously, Norwick received his BA degree in Accounting. During school, he had a summer internship at an accounting firm in the auditing department and decided to pursue this field. He then worked with another privately owned company for about five years, reporting to the internal audit manager. This organization was small enough that he was involved with most aspects of the internal control systems, which included co-leading a newly formed committee in the midst of developing an international audit system. After close to three years' experience in his internal audit position, he decided to go for the CIA certificate to speed his rise up the ladder. He also enrolled for an MBA. Some day, he hoped, he would be part of a team that led a progressive global organization.

Norwick was excited about his present job from the initial call from the headhunter, because of the primary reason he went into the accounting field -- to play an important role in a competitive business setting. In college, he could see the growing need for the internal auditor position: He knew auditors would increasingly be in demand as businesses became more complex. Even though individuals in this role used to stay in the background and out of sight, he also knew that this would no longer be the case in the near future. The scandals confirmed this view.

He was not wrong. His present position has been everything he wished it would be. It gives him the opportunity to work with all areas of the company including senior management. He enjoys being creative, multitasking and playing detective for new auditing approaches. He is also pleased that the company's mission statement stresses ethical behavior. He was disappointed to see the fraud that occurred in the large U.S. corporations, because it was a blemish on America as an international role model and represented unnecessary greed on the part of already bountiful organizations against the people who needed the funds most.

As hoped, one of his first roles with his company was to actually audit the auditing process. He needed to step back from the big picture and identify what the company has been and has not been doing right over the recent past. Questions that needed answering included: Are the right procedures in place for the necessary work to occur, are the right messages being sent throughout the organization, and do these messages coincide with the company's culture? He worked as a team member not only on establishing the audit procedure but other company planning as well. This, of course, was in addition to the more traditional nitty gritty work of internal auditing.

There are always challenges in any position, and this is job is no exception. Whenever someone new starts at a company, there are those who welcome that person with open arms and others who do not for myriad of reasons. There were a couple of managers who did not see the reason for bringing on another senior management person -- especially so young. Also, some of the employees were concerned about the impact of enhancing the internal audit department on their futures. However, he was pleased to see that he had the backing of the CEO and CFO from the very beginning, which was crucial to his moving forward.

NEED FOR INTERNAL AUDITORS

He was also right about the need for the growing need for internal auditors. According to the U.S. Department of Labor's Occupational Outlook Handbook, employment of accountants and auditors is expected to increase faster than for all occupations through the year 2014. The growth in the number of businesses, changing financial laws and legislation, and increased inspection of company finances will also enhance growth. Similarly,… READ MORE

How to Reference "Internal Auditing" Term Paper in a Bibliography

Related Term Papers:

Audit Plan Outline Term Paper

Audit Plan Outline

Over the last several decades, there has been an emphasis on having accountants play a central role in the financial activities of corporations. The reason why is… read more

Term Paper 3 pages (913 words) Sources: 2 Topic: Accounting / Auditing

---

External Auditing Essay

External Auditing UK

Modern corporations are run by directors and managers, who are essentially investing the funds of investors. These managers owe a fiduciary duty to the investors, but as… read more

Essay 8 pages (2960 words) Sources: 10 Style: Harvard Topic: Accounting / Auditing

---

Southwest Airlines. The Case Case Study

Southwest Airlines. The case is set in 2010, and Southwest has emerged as one of the leading U.S. airlines (#1 by passenger volume) through a combination of unique culture, sound… read more

Case Study 11 pages (3131 words) Sources: 5 Style: APA Topic: Business / Corporations / E-commerce

---

Leadership and Strategy in Clinical Audit Term Paper

Clinical Audit

The concept of clinical audit was introduced in 1993 as a quality improvement process aimed at improving patient care and outcomes through a systematic review of care according… read more

Term Paper 10 pages (3002 words) Sources: 6 Style: APA Topic: Leadership / Mentoring

---

Comprehensive Study of Offshore Financial Centers and Their Effects on Global Economy Dissertation

Offshore Financial Centres and Their Effects on Global Economy

The past 3 decades or so have witnessed the proliferation of offshore financial centres that have drawn both criticism and praise… read more

Dissertation 60 pages (22477 words) Sources: 20 Topic: Economics / Finance / Banking

---

View 100+ more related papers  >>