01 July 2013

Audit&Risk: The IIA's code of guidance – A great leap for internal audit

The Institute of Internal Auditors announced the launch of the first code of guidance specifically aimed at enhancing the application of the institute's international standards in the financial services sector. This is a milestone for the sector.

The guidance, "Effective Internal Audit in the Financial Services Sector", is based on the recommendations of an independent committee set up by the institute. The IIA has welcomed the recommendations and has published them in full, commending them to the sector.

It is being published at a crucial time in the history of financial services, as the sector is still working out the full implications of the report of the Parliamentary Commission on Banking Standards, which has suggested that senior bankers who are guilty of reckless misconduct should be sent to prison. The Treasury welcomed this report and has promised to consider amendments to the banking bill to back it up with legislation.

Of course, the guidance alone, however helpful for internal auditors in the sector, cannot solve some of the key problems highlighted by the commission, namely that expectations of internal audit in the sector have been too low and that internal audit has not been able to play an influential enough role in supporting executives and non-executives in their responsibilities for managing risks and controlling the business.

This is why the real significance of the new guidance is that its primary target audience is not internal audit practitioners, but boards, audit committees and senior executives. Its recommendations should gain even greater force if senior executives realise that a strong internal audit function, with real access to core risk data and a voice that is heard loud and clear on the board, could help them to stay out of gaol if things go wrong.

The guidance should also help internal auditors to put their points across more consistently and forcefully. It is intended to give greater relevance to the IIAs international standards by ensuring that best practice internal audit is expected by boards and audit committees and delivered by practitioners, consistently across the whole sector. The recommendations seek to enhance internal audit’s role and influence by clarifying reporting lines to the chair of the audit committee, demanding a broad scope and coverage for internal audit so that the function decides for itself what are the major areas of risk and establishing that no area of risk is beyond its focus.

Last, but by no means least, the success of this groundbreaking new guidance could enable the institute to produce similar advice for other sectors in future.

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