Parliamentary Joint Committee on Corporations and Financial Services, Ethics and Professional Accountability: Structural Challenges in the Audit, Assurance and Consultancy Industry
Trish Hyde, CEO of the Institute of Internal Auditors, Opening Address
On behalf of the Institute of Internal Auditors-Australia, I thank the Committee for this additional opportunity to appear on the important issue of ethics and professional accountability in the Audit, Assurance and Consultancy Industry.
Our members are.
- · internal auditors that work within government agencies and businesses,
- · as well as those who work for service firms, such as the big 4, providing internal audit services to their clients.
Membership is voluntary and requires the individual to sign up to the Global Internal Audit Standards.
Given this higher level of ethical and professional commitment, only about 30% of the profession are members. We believe a high, level playing field is needed.
To recap… Internal Audit is a specialised profession. Its name can create confusion with the better-known external auditing profession. But the functions are starkly different.
An External auditor provides an independent opinion on a company’s financial statements and their conformance with accounting standards. It is focused on the past.
An Internal Auditor provides their organisation’s governing body and management with independent, risk-based, and objective assurance across all its operations.
The purpose is to provide advice, insight, and foresight to strengthen the organisation’s ability to create, protect, and sustain value. Unlike External Audit, the work is predominantly applied to bettering future performance.
The relevance of Internal Audit to this Inquiry relates to the functions ability to highlight unethical and poor cultural practice.
It may surprise some of you that approximately 60% of an organisation’s obligations – that is doing what it says it will do - do not fall directly under regulation. Financial regulations represent only 8% of an organisation’s obligations and a further 30% fall under other regulations like workplace safety.
Culture sits squarely in the 60%. Culture cannot be regulated. Culture cannot be set by bathroom posters bearing values. Culture can, however, be observed.
Internal audit, as part of a healthy governance, risk, and controls framework, provides vital independent information and insights on strategically important areas so that informed decisions can be made. This includes cultural alignment with obligations and governing body’s defined risk appetite.
Ethics and Professionalism are at the centre of this Inquiry. The Global Internal Audit Standards first came into being in 1978 and following a recent extensive review period they have been updated this year to reflect higher community expectations of organisations.
The Global Standards define the appropriate governance, management, performance and behaviour standards for the profession and function. They also mandate that an internal audit function needs to undergo 5-yearly independent assessment against the Standards. We call these assessments EQAs.
Key aspects of the new Standards that relate to behaviour are the requirements to
- · Perform work with honesty and with professional courage.
- · Be objective and preserve objectivity.
- · Ensure the truthful flow of information. And
- · Consider the public interest.
Given we have not yet had a member disciplinary action, you may be wondering how we know if the Standards are working.
In the past 4 years, IIA Australia has performed 125 EQAs. Keep in mind that this is a voluntary process, of these, none were completely non-compliant; 11% was partially compliant and the remainder generally conformed. All received improvement recommendations.
We believe that the Global Internal Audit Standards, with the requirement for EQAs delivers a high commitment amongst members to ethical behaviour and professionalism.
Thanks to this Inquiry, we have been able to refine our recommendations. We recommend:
- Professionalise “internal audit” by adopting the definition of the profession as outlined in the Global Standards and supporting relevant professional membership to demonstrate individual commitment. We would be happy to collaborate on this.
- For better governance of the Service Firms themselves, we recommend mandating that, before a Firm can undertake ANY form of government work, the firm must have their own internal audit function assessing their own operation. And that this function must comply with the Global Standards, including EQAs.
- In the broader public interest, we recommend mandating that, before a Firm can undertake ANY form of government work, that all their employees who are internal auditors be required to commit to the Standards by being Members of the IIA.
- For internal audit services that government may procure from a Service Firm, we recommend that this work must be:
a. led by a Certified Internal Auditor.
b. staffed by people who are IIA members.
c. completed according to the Global Standards.
d. And, subject to EQAs.
We believe these recommendations will provide non-regulatory means to improve ethics and professional accountability in the Audit, Assurance and Consultancy Industry.
Thank you again for this opportunity.
Cover Letter | Response to Questions on Notice