The Importance and Benefit of Good Internal Audit

What is internal audit and why is it important?

Internal audit is the process of examining and evaluating the activities, operations, and systems of an organization to provide assurance, advice, and insight on their effectiveness, efficiency, and compliance. Internal audit helps an organization achieve its objectives, manage its risks, and improve its performance.

Internal audit is especially important for the financial services industry, which faces various challenges and risks in a complex and dynamic environment. The financial services industry includes banks, insurance companies, investment firms, and other entities that provide financial products and services to customers. These entities are subject to strict regulations, high expectations, and intense scrutiny from various stakeholders, such as regulators, customers, investors, and the public. Therefore, they need to have a strong internal audit function that can help them ensure the quality and reliability of their financial reporting, governance, risk management, and internal controls.

What are some of the major red flags in the financial services industry?

• In our experience we have noted some of the red flags that indicate potential area for improvements in the financial services industry are:
• Inadequate or ineffective governance and oversight. This includes lack of clear roles and responsibilities, accountability, transparency, communication, and ethical standards among the board, management, and staff of the organization.
• Poor or inconsistent risk management and internal control practices. This includes lack of risk identification, assessment, mitigation, monitoring, and reporting, as well as insufficient or outdated policies, procedures, systems, and tools to support the risk management and internal control processes.
• Non-compliance with laws, regulations, standards, and contracts. This includes violations, breaches, fines, penalties, sanctions, or litigation arising from non-compliance with the applicable rules and requirements that govern the organization's activities and operations.
• Fraud, corruption, or misconduct. This includes intentional or unintentional acts of dishonesty, deception, or misappropriation of assets or information by the organization's employees, management, or third parties, such as vendors, customers, or partners.
• Unusual or suspicious transactions, activities, or relationships. This includes transactions or activities that are inconsistent with the organization's normal business operations, objectives, or strategies, or that involve unusual or complex structures, terms, or parties, such as offshore entities, shell companies, or related parties.

How to address the red flags in the financial services industry?

• To address the red flags in the financial services industry, the organization should take the following steps:
• Conduct a thorough and timely investigation of the red flags, using appropriate methods and techniques, such as interviews, document reviews, data analysis, or forensic audits, to determine the nature, extent, and root causes of the issues.
• Report the findings and recommendations of the investigation to the relevant stakeholders, such as the board, management, regulators, auditors, or law enforcement, depending on the severity and impact of the issues.
• mplement the corrective and preventive actions to resolve the issues and prevent their recurrence, such as strengthening the governance and oversight, improving the risk management and internal control practices, enhancing the compliance and ethics programs, or taking disciplinary or legal actions against the responsible parties.
• Monitor and evaluate the effectiveness and sustainability of the actions, using key performance indicators, metrics, or feedback, to ensure that the issues are adequately addressed and the organization's performance and reputation are restored and improved.
• Choose a skilled internal auditor who has related expertise to enable the organization to derive value from the internal audit.

Conclusion

Internal audit is a vital function that provides value and benefits, by helping the organization identify and address the red flags that may pose significant risks or challenges to its activities, operations, and objectives. By following the best practices and standards of internal audit, the organization can enhance its governance, risk management, internal control, compliance, and ethics, and ultimately achieve its goals and satisfy its stakeholders.