Transcript Relevance of Internal Audit in Coprorate governance

Role of Internal Audit in Corporate
Governance
Bimal R Bhatt
[email protected]
9825408120
Where Do I Stand?
• Self-Governance
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Ethics, Values, Principles,
Transparency
Self-Control
Self-Monitoring
Self-Discipline
Self-Knowledge
Self-Image
Self-Confidence
Self-Love
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Interaction of a Corporation/ Company with
Civil Society for Accountability
• To investors and lenders: areas of accounting, auditing,
laws, stock market and thereby, Governance.
• To the direct participants in the corporate value
creation process : customers, employees, vendors,
consumer protection, labour laws, commercial
contracts, etc. as a principal focus of corporate
management
• For the effect
environment
of
operations
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the
physical
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• For the human condition around their operations:
related to health, education, employment, cultural
need of the community.
• For the political health of the societies in which they
operate: human rights, fair democratic practices, etc.
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Internal Control
• Internal control is broadly defined as a process, affected
by an entity's board of directors, management and
other personnel, designed to provide reasonable
assurance regarding the achievement of objectives in
the following categories:
--Effectiveness and efficiency of operations.
--Reliability of financial reporting.
--Compliance with applicable laws and regulations.
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Internal Audit
• According to The Institute of Internal Auditors, “Internal
Audit is an independent, objective assurance and
consulting activity designed to add value and improve
an organization’s operations. It helps an organization
accomplish its objectives by bringing a systematic,
disciplined approach to evaluate and improve the
effectiveness of risk management, control and
governance process”. This definition has dealt with
following aspects:
– Independence and objectivity
– Assurance and consulting activity
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– Value addition for improvement in efficiency
– Systematic and disciplined approach
– Improves the effectiveness of risk assessment,
management, control and governance process.
Thus, internal audit is a most important activity in
support to the Board of Directors and Top management
for having a sound governance practices for the interest
of stakeholders.
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Corporate Governance
Sir Adrian Cadbury Committee-“In a simple way, corporate governance is the system by
which companies are directed and controlled.”
Deepak Parekh-“Corporate governance is about the spirit in which you
do business and about credibility and accountability as
shareholders want to be assured of a board’s
independence and its willingness to act in their best
interests.”
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Governance-Part of Integrated Reporting
The ethical standards of a company are an important
aspect that a stakeholder is concerned about when
investing. Transparent reporting on the governance
process helps reassure stakeholders and builds trust.
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Tata Steel
The scope and authority of the Corporate Audit division is
derived from the Audit Charter approved by the Audit
Committee. The Charter is designed in a manner that the
Audit Plan is focused on the following objectives:
• All operational and related activities are performed
efficiently and effectively.
• Significant financial, managerial and operating
information that is relevant, accurate and reliable, is
provided on time.
• Review the process of identification & management of
business risks.
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• Resources are acquired economically, used efficiently &
safeguarded adequately.
• Employees’ actions are in accordance with the
Company’s polices & procedures, Tata code of conduct
and applicable laws & regulations.
• Significant legislative & regulatory provisions impacting
the organization are recognized & addressed
appropriately.
• Opportunities identified during audits, for improving
management control, business targets,& profitability,
process efficiency & the organizations image, are
communicated to the appropriate
level of management.11
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• Shareholders’ and other Stakeholders’ wealth and
welfare are preserved, protected and enhanced.
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Understanding of Role
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Internal Auditor.
Statutory Auditor.
Executive Director.
Non-Executive Director.
Company Secretary.
Chief Finance Officer.
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National Voluntary Guidelines on Social,
Environmental & Economic Responsibilities of
Business i.e. Sustainability
• Business should conduct & govern themselves with
Ethics, Transparency and Accountability.
• Provide goods & services that are safe & contribute to
Sustainability “throughout their life cycle”.
• Provide the well being “of all employees”.
• Respect the interests of & be responsive towards all
Stakeholders, especially those who are disadvantaged,
vulnerable & marginalized.
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• Respect & promote human rights.
• Respect, protect & make efforts to restore the
environment.
• When engaged in influencing public & regulatory policy,
should do so in a responsible manner.
• Support inclusive growth & equitable development.
• Should engage with & provide value to their customers
& consumers in a responsible manner.
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Clause 49-Audit Committee-Role
i.e. Responsibility
6. Reviewing, with the management, performance of statutory
and internal auditors, and adequacy of the internal control
systems.
7. Reviewing the adequacy of internal audit function, if any,
including the structure of the internal audit department,
staffing and seniority of the official heading the department,
reporting structure coverage and frequency of internal audit.
8. Discussion with internal auditors any significant findings and
follow up there on.
9. Reviewing the findings of any internal investigations by the
internal auditors into matters where there is suspected fraud
or irregularity or a failure of internal control systems of a
material nature and reporting
the matter to the board.
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Clause49-Audit Committee-Review
i. e. Responsibility
The Audit Committee shall mandatorily review the following
information:
1. Management discussion and analysis of financial condition and
results of operations;
2. Statement of significant related party transactions (as defined
by the audit committee), submitted by management;
3. Management letters / letters of internal control weaknesses
issued by the statutory auditors;
4. Internal audit reports relating to internal control weaknesses;
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5. The appointment, removal and terms of remuneration of the
Chief internal auditor shall be subject to review by the Audit
Committee
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Example –Scope of Internal Audit
1. Accounting System Manuals Updating--Yearly
2. Adequacy of Internal Controls more so about
adherence to Financial Powers--Half Yearly
3. Risk Management Systems and it’s AdequacyQuarterly Review
4. Physical Verification of Fixed Assets--Yearly
5. Physical Verification of Inventories--Yearly
6. Project Expenditure Monitoring--Quarterly
7. Bank Reconciliation—100% Monthly
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8. Related Party Transaction Pricing say for Sales,
Purchase, Loans, Advances, Services, etc.-Arms Length
Pricing—100%
9. Verification of Sales with Excise Payment and Security
Gate
Register
and
Transport
Bills-Monthly
Reconciliation.
10. Adequacy of Tendering Process
11. Balance Confirmation for Debtors, Creditors, Loans,
Advances and other Debits & Credits—Yearly and Need
base with Impact Analysis on Financial Portfolio
12. Correctness of Debtors Age Analysis--Quarterly
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13. Inter-Unit Transfer Pricing—Base Verification
14.Verification of Standard Costing of Products
Manufactured/ Service Provided.
15.Reconciliation of Traded Goods –Opening Stock,
Purchase, Sales and Closing Stock
16.Adherence to Provisions of Statutory Payments like
Service tax, Income tax, Tax deducted at source, Sales
tax, VAT, P.F., ESI, Wealth tax, Municipal taxes, Gram
Panchyat taxes, etc.
17.Verification about correctness of Monthly Statement of
Inventories and Book-debts as submitting to Banks
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18.Salary payments with attendance records—Test Check
at Random base for every quarter
19,Wages payments including to Contractors with
attendance records—Test Check at Random base for
every quarter
20.Verification of Receipt-Payment Vouchers
21.Verification of Journal Vouchers
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Can we conclude -Internal Audit
-Lifeline of any organization?
If yes, Who is Best to Perform?
Re-look to 1st Slide.
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• Be Positive.
• Great Future Ahead for ALL of US.
• Let’s Join together to help “Corporate India” and
thereby, “Mother India” to improve Governance
Practices.
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