Singapore Government

Interview with David Gerald - The need for Independence and proper respect for the Internal Auditor

The Singapore Code of Corporate Governance Principle 13.1 states that “The Internal Auditor's primary line of reporting should be to the AC Chairman although the Internal Auditor would also report administratively to the CEO.” The reason for this is simple: the internal audit function must remain independent of the activities that it audits.

Mr. Gerald stressed the need for independence of the internal auditor in companies. He notes that many companies have the internal auditors reporting directly to the audit committee chairman on audit matters but to perhaps the CEO or CFO for other daily administrative matters.  Such an arrangement should be ideal for the internal auditor, as it is important that an internal auditor be free of other influences when writing the audit report.

But Mr. Gerald noted that it would be very likely that internal auditors, especially the young and inexperienced, are unlikely to be able to operate on such a level. This is because, CEOs and CFOs tend to be senior, experienced individuals who may be used to getting their way, and as a result, present an overbearing image of themselves to their internal auditors. Young and inexperienced auditors may succumb to any of such pressure and subsequently be influenced in their work.

It is therefore, important to establish a proper standing of the internal audit function within a company. There should be mutual respect between the c-suite personnel and the internal auditor. Having a direct line of reporting to the audit committee and its chairman will help alleviate some of the pressures of the internal auditor in this aspect.

The internal audit charter is also another tool that can be used to establish the internal audit function. The internal audit charter states the roles, responsibilities and the authority of the internal auditor, and is signed off by the audit committee.

Mr. Gerald says that there is no reason why management and internal auditors cannot get along. Management ensures that internal auditors are adequately resourced, and are given access, and respect, to conduct their audit work, and in turn, the internal auditors are able to present a clear and accurate report card which may indicate potential red flags for management to follow up. In the long run, both parties benefit.

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