A study of the accommodation of professional internal auditing standards by internal audit departments of industrial organizations

Abstract

The most significant step taken since its inception by the Institute of Internal Auditors to enhance the professionalism of internal auditing is the publication of the "Standards for the Professional Practice of Internal Auditing." The purpose of this study is to learn the characteristics of internal audit departments that accommodate these "Standards", to draw conclusions about how well this accommodation is being accomplished, and to make recommendations in areas where this study indicates a need for improvement. "Professional Standards" for internal auditors have become increasingly more important because of the attention being given to internal accounting controls by the Securities and Exchange Commission, the American Institute of Certified Public Accountants, and the passage of the foreign Corrupt Practices Act. A questionnaire was developed and mailed to 200 companies selected from the "Fortune" 1000. Only the sections of the "Standards" that were objective in nature were addressed. One hundred one companies responded. The results showed a number of positive indications about the professional posture of internal audit departments. There is a high ratio of supervisors to staff and 25 per cent of all personnel have graduate degrees. Eight-two per cent of the personnel specialize in the financial area and 12 per cent specialize in the EDP area. All other areas of specialties combined comprise only 6 per cent. Only 29 per cent of the staffs hold professional certificates while 56 per cent of the supervisory level hold certificates. It is recommended that a greater effort be made in certifying internal auditors with the Certified Internal Auditor being emphasized. Seventy per cent of the companies had audit staffs taking continuing education courses in 1978. All companies should consider requiring continuing education for their internal audit staffs. The internal organizations of the audit departments provide their staffs with guides for completing their audit tasks. Staffs are counseled and appraised, and their work is reviewed by the audit managers to be sure the audit objectives are achieved. Audit managers are formulating goals to be compared to actual performances. Seventy-three per cent of the departments are internally reviewed by someone within the organization to appraise the quality of the departments' activities. All companies should undergo these reviews to be sure they are meeting their intended objectives. Most of the internal audit departments' relationships with those outside the departments are adequate. Seventy-six per cent of the departments report to executives who are vice-presidents or higher, but most of these executives are in the financial or accounting area. To promote independence, it is recommended that the internal audit department report to an officer outside the financial area. Most audit managers meet with their boards of directors or audit committees at least annually, but only 36 per cent of the boards concur in the appointment or removal of the director, a procedure recommended as enhancing the department's independence. Sixty-one per cent of the departments have written charters, and 38 per cent have charters approved by their boards of directors. It is recommended that all departments have approved charter expressing their corporate authority. The coordination between internal auditors and external auditors appears to be adequate in that they share audit techniques and reports. Half of the departments received an external review and only half of those culminated in a written report. It is recommended that a review be performed by someone outside the organization at least every three years. The implementations of these recommendations should improve the environment for the professional performance of internal auditing. The goal of professional internal auditing is not only a decision to be made by internal auditors but by management as well.