Corporate India requires greater audit committee involvement

Online, April 21, 2010 (Newswire.com) - Key highlights:
• Audit Committee involvement in resolving audit issues and implementation of
recommendations happens in only 53% of the companies
• Mere 44% internal audit function heads report to Audit Committees
• Fraud and IT risk assessments not taken into account while creating annual audit plans in
51% and 36% companies surveyed respectively
• 33% companies do not have a clearly defined charter for internal audit
• Despite the downturn, 48% companies reported increase in internal audit budgets,

New Delhi/Mumbai June 25, 2009: The involvement of audit committees in overseeing the audit function, as well as in the implementation of audit recommendations, needs to undergo a significant change, highlights the Ernst & Young India Internal Audit Survey 2009. The survey captures views of audit committee members, heads of finance and internal audit functions representing a hundred companies on challenges faced and how they are meeting evolving and diverse expectations.

In the context of turbulent times facing world economies, rapidly changing business environment and increasing incidents of corporate wrongdoings, Ernst & Young conducted this survey with an aim to identify emerging trends in the Indian internal audit profession and to gain better understanding of governance issues concerning companies. The survey finding underscores the role of governance in preventing distressing corporate incidents and calls for the function of internal audit to evolve in order to meet today's dynamic assurance needs.

Survey findings showcase that while 78% of the companies confirmed that the audit committee approves the scope of the audit plan, only about a half (53%) affirmed that it was involved in monitoring the resolution of audit issues and the implementation of recommendations.

Leading practices now suggest that the Head of Internal Audit should report to the audit committee functionally. Survey findings indicate that the Head of Internal Audit reports to the audit committee in less than half of the companies (44%) surveyed, and a significant 57% report to the CEO or the CFO instead.

Ram Sarvepalli, Partner & National Director, Business Risk Services, Ernst & Young stated, "The audit committee is one of the key pillars of corporate governance and the oversight it provides is an important driver in the reservation of shareholder value. Deeper involvement of audit committees is essential to improve the perception of the importance and quality of work delivered by the internal audit function. The agreement and involvement of
audit committees in setting the scope of the internal audit function and other assurance functions is critical to ensure that there are no unaddressed assurance needs."

Less than 30% of the companies affirmed that their audit committees meet their internal auditors at every audit committee meeting. While 90% of the companies that responded confirmed that their internal audit function does interact with their statutory audit and other internal risk management functions, a significant number of organizations do not have a structured schedule for internal and external audit to liaise with each other.

Despite the increased focus on risk assessments, the report highlights that fraud risk assessments are not taken into account to create the annual audit plan in roughly half of the respondent companies. Findings show that 51% of the companies that responded stated that a fraud risk assessment was not taken into account while creating their audit plan, and 44% confirmed that fraud-detection procedures are not included in the work plan for most audits.

An area of concern, however, is that despite the increasing dependence of organizations on IT systems in today's world, over a third (36%) of the companies indicated that an IT risk assessment is not taken into account while creating their audit plan. Sophisticated IT systems now form the backbone of operations in most companies, yet the survey clearly shows a dearth of IT auditors and a low percentage of companies performing an IT risk assessment
before finalizing their internal audit plans.

A significant proportion of the organizations surveyed indicated that the internal audit charters covering their mission, objectives and scope have not been finalized while only 25% of companies confirmed that they have standard audit plans for all the processes reviewed in their organizations, highlighting a cause for concern as it could impact the consistency in the quality of audits.

Despite current economic realities, we found that almost 48% of the companies surveyed confirmed that their internal audit budgets have increased. These results are encouraging, as they indicate that assurance activities are not being reduced despite the slowdown in growth. The slowdown, as well as the current focus on governance, has also added more items to the already full agenda of internal audit, which is now expected to assist in cost reduction activities in over half (54%) the companies surveyed. Working capital management, counter party risk and CAPEX reassessments are other key areas that have been added to the focus areas of internal audit this year.

"Internal audit functions across the world are facing new challenges. Consistent and high quality audit work is a driving factor for internal audit to be seen as a value-adding function within organizations. The strategy, objectives and plans of the internal audit function need to be aligned to an organization's business objectives, overall approach to risk management, and the expectations of the audit committee and executive management" adds Ram
Sarvepalli.

The survey framework comprises key elements needed to create an effective internal audit function. Survey findings provide focused insights related to internal audit governance, people and infrastructure and operations.

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