Posted: April 28th, 2015

Internal Audit;

Internal Audit;

Question Scenario
In a recent round table discussion amongst business graduates, about corporate governance and auditing one of the participants commented as follows:
“In recent years the importance of good corporate governance in public companies in the UK and USA has been the subject of much commentary, regulation and legislation, although the implementation of an internal audit function in such companies is still not a statutory requirement. Given the absence of this statutory requirement, I do question whether there is any real value of an internal audit function both to the companies themselves and to the external auditors. Many public companies seem to be in a ‘no – win’ situation with regard to the audit function, in that they often pay millions of pounds a year to finance an internal audit department, and then pay further millions to external auditors for the audit of their annual financial statements. This simply adds weight to the argument that there is obviously no need for an internal audit function. Further, it is obvious that the relationship between companies’ shareholders and external auditors has developed over the years to the extent that external auditors are now responsible for the accuracy of the financial statements that they have audited. This is apparent from the relatively high number of instances where shareholders have placed the responsibility for the failure of their company on the company’s auditors. Maybe, this is why external auditors’ fees are so high. However,  I suspect the real reason is because that the big audit firms are run  by unscrupulous individuals  who are unprincipled, unethical, not regulated and charge ridiculously high fees simply to earn as earn as much money as possible at the expense of the companies that employ them – knowing that the shareholders are helpless to stop them.”
Required:
Critically assess the comments made by the delegate.
Use the guide in the next page (in red) to critically assess the comments made and to write the essay.
Please use proper references and references that could be accessed online.

“In recent years the importance of good corporate governance in public companies in the UK and USA has been the subject of much commentary, regulation and legislation” What is the participant talking about when they refer to ‘corporate governance’?  Is what they are saying true? – If it is where is the evidence to support the statement?
“Although the implementation of an internal audit functions in such companies is still not a statutory requirement.” What are they talking about (internal audit!)? Is this true? If it is – explain.  If it isn’t consider/ explain, if an internal audit department is something that has become an integral part of a companies’ corporate governance/ internal control.
“Given the absence of this statutory requirement, I do question whether there is any real value of an internal audit function both to the companies themselves and to the external auditors.” What do you think of this comment  – is there any merit in it , is there a lack of understanding on the part of the participator – or does it all make perfect sense?
“Many public companies seem to be in a ‘no – win’ situation  with regard to the audit function, in that they  often pay millions of pounds  a year to finance an internal audit  department,  and then pay  further millions to external auditors for the  audit of their annual financial statements.” Is this true are companies really in a ‘no – win’ situation because ‘they pay millions of pounds a year to finance an internal audit department   and also pay millions for an external audit?  What does the participant mean by a ‘no win’ situation – are they saying that companies are paying twice for the same thing?
“This simply adds weight to the argument that there is obviously no need for an internal audit function.”  Does it?  – is there any merit in this statement?
“Further, it is obvious that the relationship between companies’ shareholders and external auditors has developed over the years to the extent that external auditors are now responsible for the accuracy of the financial statements that they have audited.” Do you think this is controversial/ inaccurate statement? Or does it reflect reality? Think about it – then comment!
“It is apparent from the relatively high number of instances where shareholders have placed the responsibility for the failure of their company on the company’s auditors.” The commentator states this as fact?  Is it true? – Evidence?
“Maybe, this is why external auditors’ fees are so high.” Are they high –   absolute terms / relative terms?
“However, I suspect the real reason is because that the big audit firms are run by unscrupulous  individuals who are unprincipled, unethical, not regulated and charge ridiculously high fees simply   to earn as earn as much money as possible at the expense of the companies that employ them.”  All of the commentary here is emotive!  Break it down into its individual assertions – comment on the merit/ reasonableness of each?
“- knowing that the shareholders are helpless to stop them.” This part of the comment is all about the power of shareholders over the company’s auditors. Is there merit in what is said or do you think the comment is based on misunderstanding of shareholders powers. Explain!