meeting stakeholder expectations for assurance: internal ... · governance 8 2/2/2012 iia - dallas...
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Urton Anderson
The University of Texas at Austin
Meeting Stakeholder Expectations for Meeting Stakeholder Expectations for Meeting Stakeholder Expectations for Meeting Stakeholder Expectations for
Assurance: Internal Audit’s Role in a Assurance: Internal Audit’s Role in a Assurance: Internal Audit’s Role in a Assurance: Internal Audit’s Role in a
Group EffortGroup EffortGroup EffortGroup Effort
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Agenda
� The IA Value Proposition
� The Demand for Assurance
� Assurance Mapping
� The Combined Assurance Approach
� Summary
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The IA Value Proposition
Thesis
The fundamental value proposition for internal auditing is the role it plays in maintaining a system
of effective organizational governance
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What is organizational governance?
The process through which (1) values and goals are established and communicated, (2) the accomplishment of goals is monitored, (3) accountability is ensured, and (4) values are preserved.
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The Two Basic Responsibilities of the Governance Body of an Organization
�Board of Directors
�Governance “Umbrella”
�Strategic�Direction
�Governance�Oversight
•Values
•Objectives
•Boundaries
•Accountability
•Values preservation
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Key Components of Governance Oversight
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Governance
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� Strategic Direction� Set boundaries� Set objectives� Establish values� Determine risk
appetite
� Oversight� Risk management� Assurance
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Depiction of Key Governance Elements
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Internal Audit
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� …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.
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IA Customers
Auditee
Audit
Committee
Senior Management
Financial
Management
External
Auditors
Regulators
Vendors
Suppliers
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What does the customer want?
Audit Committee/Board� Safeguarding Assets� Compliance with Laws and
Regulations� Reliability of Data
QUALITY OF INFORMATION
Operating Management� Effectiveness and Efficiency of
Operations � Achievement of Organizational
Objectives
CHANGE AGENT
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The IA Value Proposition
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ASSURANCE = Governance, Risk & ControlASSURANCE = Governance, Risk & ControlASSURANCE = Governance, Risk & ControlASSURANCE = Governance, Risk & Control
Internal auditing provides assurance on the organization’s governance, risk management, and control processes to help the organization achieve its strategic, operational, financial and compliance
objectives.
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OBJECTIVITY = Integrity, Accountability, & OBJECTIVITY = Integrity, Accountability, & OBJECTIVITY = Integrity, Accountability, & OBJECTIVITY = Integrity, Accountability, &
IndependenceIndependenceIndependenceIndependence
With commitment to integrity and accountability, internal auditing provides value to governing bodies and senior management as an objective source of independent advice.
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What STAKEHOLDERS should expect from your internal auditorsWhat STAKEHOLDERS should expect from your internal auditorsWhat STAKEHOLDERS should expect from your internal auditorsWhat STAKEHOLDERS should expect from your internal auditors
VALUE PROPOSITION OF INTERNAL AUDITING
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The Demand for Assurance� Board
� Executive Management
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Objectives� Effectiveness and Efficiency of Operations
� Reliability of Financial Reporting and Safeguarding of Assets
� Compliance with Laws and Regulations
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Responsibilities – Effectiveness &
Efficiency?
� Board’s
� Executive Management
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Responsibilities – Effectiveness &
Efficiency?Board’s� Reviewing and guiding corporate strategy, major
plans of action, risk policy, annual budgets and business plans; setting performance objectives; monitoring implementation and corporate performance; and overseeing major capital expenditures, acquisitions and divestitures.
OECD Principles of Corporate Governance, 2004
(#1 of 8 responsibilities)
� Executive Management
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Responsibilities – Reliability of Financial
Reporting and Safeguarding of Assets?
� Board’s
� Executive Management
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Responsibilities – Reliability of Financial
Reporting and Safeguarding of Assets?
Board’s
� Ensuring the integrity of the corporation’s accounting and financial reporting systems, including the independent audit…
OECD Principles of Corporate Governance, 2004
(#1 of 8 responsibilities)
Executive Management
� SOX 302
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�23
Sky-rocketing Demand for
Compliance Assurance
Factors Increasing Complexity of the Legal and Regulatory
Environment
� Technological Advancements
� Globalization
� Increased Interdependency of Organizations
� Demand for Accountability
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The Board’s Role in Compliance
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Board’s Role2) (A) The organization’s governing authority shall be knowledgeable about the content and operation of the compliance and ethics program and shall exercise reasonable oversight with respect to the implementation and effectiveness of the compliance and ethics program.
Fed. Sent. Guidelines Chapter 8
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Reasonable OversightA director has a duty to attempt in good faith to assure that
(1) a corporate information and reporting system exists, and
(2) this reporting system is adequate to assure the board that appropriate information as to compliance with applicable laws will come to its attention in a timely manner as a matter of ordinary operations.
In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996).
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The Executive Management’s Role in
Compliance
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Management’s ResponsibilityTo ensure that all operations are conducted in accordance
with applicable law, regulations and policies, including internal policies.
Compliance Programs are designed to establish a culturewithin a organization that promotes prevention,detection and resolution of instances of conduct that donot conform to federal and state law, as well as theorganization’s ethical and operations policies.
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Assurance Mapping� Web of Assurance
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Practice Advisory 2050-2 - Assurance Maps
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� One of the key responsibilities of the board is to gain assurance that processes are operating within the parameters it has established to achieve the defined objectives.
� It is necessary to determine whether risk management processes are working effectively and whether key or business-critical risks are being managed to an acceptable level.
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Sources of Assurance
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� Line management and employees (management provides assurance as a first line of defense over the risks and controls for which they are responsible.)
� Senior management� Internal and external auditors� Compliance� Quality assurance� Risk management� Environmental auditors� Workplace health and safety auditors� Government performance auditors� Financial reporting review teams� External financial statement auditors� Other external assurance providers, including surveys, specialist
reviews (health and safety), etc.
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Assurance Net (PWC)
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3 Fundamental Classes of Assurance Providers
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1. Those who report to management and/or are part of management (management assurance), including individuals who perform control self-assessments, quality auditors, environmental auditors, and other management- designated assurance personnel.
2. Those who report to the board, including internal audit, some cases compliance.
3. Those who report to external stakeholders (external audit assurance), which is a role traditionally fulfilled by the independent/statutory auditor.
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Management Based Assurance
� Monitoring Function -Actions taken by management and others to assess the quality of internal control system performance over time
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Assurance Continuum(Levels of Control in COSO)
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Effective Monitoring
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The Monitoring Function� Supervisory Controls
� Investigation of unusual items
� Oversight Controls� Customer surveys and complaint analysis
� Auditing Controls� Traditional internal audit
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Assurance Map
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3 Lines of Defense � Basel II - Basel Committee on Banking Supervision, UK,
ECIIA
Line 1 Management oversight - management review, control self-assessment, andcontinuous monitoring mechanisms
Line 2 Staff functions – Risk management, SOX review, compliance
Line 3 Independent and objective assurance – IA, EA, ISO, regulatory audits and other impendent reviews
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Lines of Defense
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How is assurance provided
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COMBINED ASSURANCE
King III
Principle 3.5
The audit committee should ensure that a combined assurance model is applied to provide a coordinated approach to all
assurance activities.
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Combined Assurance Benefits� Provides Board/Governance Body and senior management
with assurance needed to carry out their responsibilities
� Reduce “assurance fatigue”
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Implementing� Step 1: Establishing the business case
� Step 2: Assurance reality check – what risk, source of assurance, how
� Step 3: Risk mapping
� Step 4: Combined assurance design
� Step 5: Implement
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Assurance Map (PWC)
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Summary� New approach to assurance required
� Increased demand for assurance
� Assurance fatigue
� Map of the organization’s network of assurance
� Combined assurance approach
� New challenge for IA
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CaE to CAE
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� Responsibility of the CAE to understand the independent assurance requirements of the board and the organization, to clarify the role the internal audit activity fills and the level of assurance it provides.
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Thank you!Thank you!Thank you!Thank you!
Contact Information:
Urton Anderson
McCombs School of Business
The University of Texas at Austin
(512)471-5339 (messages until 8/1/12)
(202)551-5308 (until 7/31/12)
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Agenda� IPPF
� Code of Ethics
� Standards
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