The Role of Internal Auditors in Ensuring Good Governance -State Sector
Charith Leelarathne
FCMA-UK,MSc BA,AIB, PGDEBM,CISA,CFE,CIA,CC, DISA, ISO27001 LA General Manager Internal Audit at Axiata Digital Labs
President Donald Trump took only a few days in office before dismissing 17 Federal Inspector Generals, bypassing established procedures in the United States. This action caused a significant uproar within the global auditing community, as Inspector Generals in the U.S. Federal System are regarded as equivalent to Chief Audit Executives or Chief Internal Auditors in other parts of the world. The Institute of Internal Auditors (IIA), representing over 270,000 members, vocally criticized the President's decision, questioning its impact on the independence of the Inspector Generals' oversight role. The Institute of Internal Auditors of Australia, an affiliate of IIA Global, humorously remarked that the President's actions turned watchdogs into lapdogs, highlighting the potential systemic impact on the Internal Audit Profession within the U.S. Federal Government.
Fast forward five days, a young deputy minister from a developing country questioned the effectiveness of the Internal Audit process within the state system. This was an unusual remark from a parliament member, especially one from the ruling party, which holds a significant majority in parliament. The significance of this statement is heightened by the fact that the country had recently emerged from a 32-month period of bankruptcy. Having listened to many debates in the Sri Lankan parliament over the past 20 years, including COPE and COPA sessions, this was the first time I heard a minister emphasize the importance of Internal Audits in the state sector. He even highlighted how the private sector benefits from robust Internal Audit practices.
If you are an avid listener of the proceedings at the Sri Lankan Parliament, particularly the COPA and COPE Committees, you will frequently hear about the waste, corruption, underutilization, and inefficiencies in the state system as reported by the Auditor General. In 2023 alone, the Auditor General conducted 2,368 audits. While the Auditor General's work has been commendable, focusing primarily on Financial Audits, the emphasis on internal control and risk management at the enterprise level is often overlooked due to the sheer volume of work. Additionally, with two committees responsible for reviewing the Auditor General's work, it is impractical to assume that all of the AG's work can be thoroughly reviewed.
This context underscores the need for the government sector to strengthen its Internal Audit functions across enterprises. Auditors should be empowered to understand the risk universe and adopt a risk-based approach to internal audits, with independent directors appointed to the Board and Board Audit Committees empowered to execute their tasks. One fundamental issue in the state sector's Internal Audit function is the deployment of unskilled or unspecialized staff. Often, internal audit functions in state departments are neglected, lacking proper resources, training, or adequate staffing. Furthermore, there is no strong fallback mechanism or protection available for Internal Auditors in the Government Sector. The Auditor General's work should also consider and appraise the actions taken by Internal Audit in executing their duties and provide feedback to the state. Nevertheless, most Internal Auditors in state organizations currently act as liaisons between the Auditor General and the State Entity.
Way forward… Given the government's clear focus on strengthening the Internal Audit Environment within the state system, several key areas require attention:
a) Train Internal Audit functions across the State sector on Risk-Based Internal Auditing and equip them with modern internal auditing knowledge.
b) Recognize the Head of Internal Audits by placing them in positions equivalent to the Head of Finance and other key figures in the sector, ensuring they have the right power and authority balance within the system.
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c) Appoint independent Board Audit Committees and ensure that the Head of Internal Audit reports directly to the Board Audit Committee for functional roles and administratively only to the respective head of the institution.
d) Establish protection mechanisms for Internal Auditors, including an independent support and professional consulting unit with direct access to the two oversight Committees of parliament to address any key issues faced by Internal Auditors across state entities while executing their roles.
While these measures may take time to materialize, if the government plans to optimize resource utilization, reduce waste, curb corruption, and improve efficiency within the government system, strengthening Internal Auditing will be a key contributor in the coming years.
Experienced Risk Management and Internal Audit Professional
1 个月Very insightful comment Charith. As rightly mentioned, it's a long due concern to be addressed. While (good) governance, including risk management process and board governance itself, whether in private or state sector, is heavily dependent on the effectiveness of the audit process, the effectiveness of the audit process is also largely dependent on the effectiveness of the overall governance process within the organisation/system including the board supervisory/review process. When this reality is applied to this context, it appears that the state sector is trapped in this vicious circle, which has severely impaired the public perception. While a top-down approach would be most appropriate to correct this sustainably, concurrent changes to the audit process itself would yield better results and assist the state institutions get out of this predicament much faster. My view is that the audit process and the governance process are inextricably entwined and mutually interactive/responsive. Having extensive exposure to this reality in corporate sector, the hon. Minister would have highlighted the flaw.