Internal audit is believed to be only necessary in larger, more complex organizations, and that the cost/benefit of an internal audit function would simply not be available to them. However, given the high volume of transactions and the regulatory compliance issues that insurance companies face, this can be a very short-sighted conclusion. Before dismissing the need for internal audit, I believe that the management of these entities should consider three critical risk management and internal control factors: management's responsibility for internal control, the role of Internal Audit in fulfilling that responsibility, and the benefits of Internal Audit.
Management’s Responsibility for Internal Control
What is Internal Control?
Internal control, also known as management controls, encompasses management's organisational plan, methods, and procedures for meeting its missions, goals, and objectives in the broadest sense. Internal controls are also the first line of defence against fraud and violations of laws, regulations, and contract and agreement terms.
The Role of Internal Audit
What is Internal Auditing?
The Institute of Internal Auditors says that "Internal auditing is an independent objective assurance and advice activity designed to add value and improve the operations of an organisation." It helps an organisation to achieve its goals by systematically evaluate and enhance risk management, control and governance processes with a disciplined approach." In other words, an internal audit monitors the efficiency of management's internal control procedures.
Benefits of Internal Audit
The scope of the internal audit shall be established by management or the board of directors (not an outside agency or adversarial entity)
"Reports" to the Board and/or the Management Board (not an outside agency or adversarial entity)
Improve the "control environment" of the organization
This makes the organization more dependent on the process than on the person.
Identifies and makes recommendations for improving the efficiency and effectiveness of operational and control procedures.
serves as an early warning system to identify and remedy deficiencies as quickly as possible (i.e. prior to external, regulatory or compliance audits)
Enhances long-term corporate accountability.
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