Singapore Government

Interview with David Gerald - The need for an in-house IA function

The Singapore Code of Corporate Governance Principle 13 states that "The company should establish an effective IA function that is adequately resourced and independent of the activities it audits." The is a strong reason for establishing an in-house IA function. In a recent interview with Mr. David Gerald, president of the Securities Investors Association (Singapore) or SIAS, we learnt that he has been strongly promoting this idea.

The Singapore Code of Coporate Governance principle 13.2 follows up by saying that "the IA function can be in-house, outsourced to a reputable accounting/auditing firm or corporation, or performed by a major shareholder, holding company, or controlling enterprise with an IA staff." Some companies do outsource their IA functions, which, in Mr. Gerald's opinion, is far better than not having any IA function.

However, Mr. Gerald, a strong advocate of corporate governance and transparency in firms, believes that even outsourcing the IA function is also not ideal. An outsourced IA function is not present daily at the company's premises, this not only robs the IA function of time and resources to fully perform their audit work, it may even give rise to a smaller scope of audit work being planned. A daily presence of internal auditors at the company creates awareness of the function, creating a sense of watchfulness and may even, in the course of their audit work, discover risk areas which have not yet been addressed.

Internal auditors, Mr. Gerald says, should have eyes and ears on the ground to understand the company's operational and financial processes. Otherwise, he asks, how would anyone know if any wrongdoing is going on, especially if the internal auditors are not familiar with the daily workings of the company?

Given the benefits of a properly established, in-house IA function, why would companies choose otherwise? Mr. Gerald suggests that a possible reason could be cost. Companies believe that they may be able to save more by outsourcing their IA function. However, if and when, something goes wrong, and special audits and litigation measures are employed, even greater costs may be incurred to engage other auditors, accountants and lawyers. And if we were to add in the likelihood that the company's image and reputation could be severely tarnished in the wake of any financial scandals, it would seem better and maybe cheaper, for the company to establish an effective in-house IA function.

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