Lack of Internal Audit Function an underlying risk

While larger listed companies are increasingly introducing an Internal Audit Function (IAF), this position rarely exists within smaller listed companies. The main reason cited is that these firms believe they are too small for such a role. This is one of the conclusions of the Internal Audit Monitor 2017 study carried out by FSV Risk Advisory on behalf of the Stichting Vaktechnisch Onderzoek IIA in collaboration with Nyenrode Business Universiteit.

An IAF conducts independent research on the effectiveness of governance, risk management and internal control. On 16 January 2018, the seminar on the IAFs within all Dutch listed companies was held at Nyenrode Business Universiteit. This seminar was organized by IIA Netherlands together with LIO-NBA and the Nyenrode Corporate Governance Institute. The research report was issued to Jaap van Manen (outgoing Chairman of the Dutch Corporate Governance Monitoring Committee) by John Bendermacher (Chairman of IIA Netherlands).

In small companies’ annual reports, the quality of the explanation given for why they do not have an IAF is often inadequate. “Organizations without an Internal Audit Function are missing a key element of good corporate governance. They often lack complete and objective insight into the effectiveness of their risk management, internal control and governance processes, as well as the evaluation and improvement thereof. Supervisory and Executive Boards in turn lack independent and expert insight, and miss opportunities for organizational improvement.” This is according to researchers Robert Bogtstra of FSV Risk Advisory and Remko Renes of the Nyenrode Corporate Governance Institute, based on their research findings.

Bogtstra goes on: “Precisely at a time when it has come to light that proper internal control is often lacking within controlled companies, an IAF can be highly valuable. Cutting spending with respect to appointing a fully-fledged IAF can therefore turn out to be ‘penny wise, pound foolish’ in the long term.” The researchers argue that organizations are never too small for an Internal Audit Function. An IAF can also be of considerable added value for smaller organizations specifically. “The challenge for professionals is to clearly show where this value lies and identify the possibilities for a cost-effective approach. The lack of an IAF can lead to underlying risks and have far-reaching consequences for a company,” Renes adds.