Internal Audit’s Role in a Private Company or Non-Profit

CHRIS JEFFREY

Senior Manager

Baker Tilly, LLP

cjeffrey@bakertilly.com

www.bakertilly.com

Topic: Accounting

An internal audit function is typically seen by financial executives as a best practice, and in the case of a publicly-traded company, an internal audit group can be a necessity. In the recent past, internal audit’s role has been varied, but most internal audit groups have spent a significant amount of their time dealing with the requirements of SOX. Where then does internal audit fit into a private company or a not-for-profit organization?

In the past, internal audit had a reputation for focusing primarily on an organization’s financial statements and the internal controls directly affecting the financial statements. That is no longer the case. Modern internal audit groups are beginning to become more of a “risk-based” function. Governing bodies and management have been asking the question “What are our organization’s primary risks, and are we covered?” Obviously some of these risks are related to reporting accurate financial statements, but what about strategic, operational and financial risks? In other words, internal audit groups are beginning to focus more on what could truly “bring an organization down.”

So what exactly is the value that internal audit can provide? Consider your organization’s strategic and operational goals. One of the key roles of management is to ensure that an organization’s strategic and operational goals are clearly communicated to the organization and the appropriate tactics are taken to ensure these goals are met.In addition, management should be keenly aware of the risks the organization faces that may impede the accomplishment of these goals.

Internal audit’s role in this situation is to help management and the Board clearly articulate these risks and further rank these risks in order of impact to the organization and their likelihood of occurrence. One of the common problems faced by most organizations is the existence of “silos” or independently operating groups or divisions. Internal audit helps to break down some of these barriers within an organization around risk identification. In addition, given internal audit’s independent position within thecompany (typically, internal audit reports to the Board or audit committee), the Board can be assured that it is receiving an unbiased identification and ranking of its organization’s key risks.

In addition to simply identifying and ranking these risks, internal audit can help assure management and the Board that the key risks are appropriately controlled. For instance, a key risk of many private companies lies within its ability to obtain operating capital, especially in an economy in which capital is difficult to obtain. Internal audit could help ensure that the company has good controls around its treasury process so capital is available when needed. Internal audit also plays a significant role in organizations that are highly regulated. Internal audit can help ensure to management and the Board that the organization is taking the appropriate steps to ensure compliance. In the case of a non-profit, internal audit can help to ensure that the organization has not deviated away from its charter, thereby helping to ensure its tax-exempt status is not at risk.

A key to a successful internal audit function is the ability of the group to clearly understand the strategic goals and operations of the company or organization by possessing knowledge of the industry. In addition, most modern internal audit groups are multi-disciplinary in nature and include representatives from not only finance, but also information technology and operational experts.

As demonstrated above, a modern internal audit group can significantly benefit all organizations, including private companies and non-profits, and many have found success by outsourcing to a service provider in order to gain this balance. As the pace of business continues at its ever-increasing speed and as organizations continue to change and evolve, internal audit can help ensure your organization and its stakeholders that its key risks are appropriately identified and well controlled.

Baker Tilly refers to Baker Tilly Virchow Krause, LLP an independently owned and managed member of Baker Tilly International.