It’s not that accountants can’t give good advice. It’s also not that the accountants won’t share competent advice. It’s very much about what they can give owing to the work they do.
Recently in a friends get together; I came across an interesting comment; privately owned businesses directly managed by entrepreneurs don’t need internal audit since the owners are hands on already! It was an interesting argument against the internal audit not because of being a negative one but because of its qualification; privately owned entities directly managed by owners.
I decided not to argue so that my buddy could back up his argument with examples reflecting his experience but was observant enough to understand if the case he was making was indicative of a good understanding of what internal auditing is. Sadly, it wasn’t. Not because it was based on traditional belittling of the value and significance of internal auditing, but because it was based on a bloated self-assessment of the accountant’s work.
In this space however I won’t decimate the work of an accountant or a finance manager, as I have dispassionately written several times about that in the past. Here I would try to identify and examine the merits and demerits of the argument against internal audit’s value in a privately owned business.
So, let’s first examine the examples in support of the argument and then dive deeper into why the argument is invalid not only by reviewing the examples but also by what internal audit has to offer for privately owned entities.
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Examples |
Examination |
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Since ownership is directly managing the business, problems are known |
Theoretically, auditors are not responsible for identification of problems; primary responsibility is always with management since internal audit is not responsible for operations |
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Since ownership is hands on, the risks to the business are known |
Again, auditors are not responsible for business risk management that starts with identification, managers are best suited to do |
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Since business is owner managed, costs of the problems are known |
Righty said, auditors are not there to provide cost implications and costs are even known in a business that’s not privately owned |
The understanding of audit being synonymous to ‘problems’ is nothing new. But what’s surprising is that it’s still around. Internal audit is neither a police function nor a detective, at least not anymore. It never runs the business operations; thus, it cannot have responsibilities reserved for the business managers.
But let’s take a step back and understand a bit further what business owners should expect internal auditors to do in such examples.
- Known Problems; can entrepreneurs be sure that they only face the problems they are aware of? Do the problems they know of have been assessed comprehensively and adequately? Do known problems remain problems?
- Known Risks; can owners be self-assured that the recorded risk profile of their entity is complete? Have the recorded risks been assessed accurately and adequately for an appropriate management response? Has the strategy for risk assumption or response been adequately tested for costs versus benefits?
- Known Costs; are the owner managers sure that they have quantified all costs? Are the costs of action or inaction accurately and fully known and understood against a multitude of options? Can all costs be quantified? Are the costs of processes not owned and understood by the accountant adequate? Is a lost or continually ignored opportunity for improvement / growth / upside risk not a cost?
See now we have our own multiverse of queries-based examples that serves to undo the argument of the internal audit naysayers. The answer to these issues; Internal Audit!
For an accountant, everything ends up in accounts, which is true. And that’s why the accountants are hard wired to look back into the figures; churning out advisory about the known, reflecting upon historical financial information to determine the future trajectory and course of action.
That’s exactly what statutory / external auditors do as well; giving opinion on the true and fair view of historical financial statements and then giving out a management letter as a byproduct of the external audit. This management letter has, what they believe, deficiencies in the internal control systems of the business purely based on their assurance-based review.
The question then here should be why do the privately owned enterprises directly managed by owners, need external auditors for giving an opinion on the historical financial information when this information is produced by their employed accountants and why should they be concerned with the external auditors’ letter identifying deficiencies, when their ‘know it all’ accountant is well versed with all these?
- Because of statute?
- Because of lenders?
- Because of entity profile benefits?
Aren’t these the same reasons why internal auditors are needed too? Except for statute that could be substituted by best practices (internal audit good to have) in some jurisdictions, entrepreneurs need internal audit more than they need external audit. Since external audit is confined to assurance and that too on historical financial information, while internal audit is audit of everything!
Once again let’s get back to the exceptionally well written definition of internal auditing: Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.
The objectivity and independence brought to the assurance and consulting-based engagements by the internal auditors cannot be expected from the accountants since they’re the architects of the accounting and their domain specific control systems and their business processes understanding is non-existent owing to their limited outreach, outside finance. Finally, Risk Management and Governance also always remains elusive from an accountant.
Thus, dear entrepreneurs if you want to be assured of and well advised about the relevant problems, risks and costs identified, assessed, evaluated, managed, monitored and reported through a meticulous process, look no further than internal audit, especially if you’re managing your business yourself!