LGT's Profit Sense

An internal audit uses resources within the company to critically evaluate the functionality of the company to produce growth and progress. These audits are often continuous in nature, but they can be performed on a specific schedule as well.

Unlike external auditors, internal auditors likely will not provide an opinion about financial statements or functionality. Instead, they suggest improvements or question areas of concern and use the outcome of the internal audit as a teaching tool to educate and evaluate the understanding of processes and procedures. Such information is more actionable than an audit opinion in many cases. Ultimately, internal audits provide immense value to companies by helping them control risk and improve accounting functions.

Many companies realize the importance of audits generally, but they do not make the jump to performing internal audits. However, once a company understands the true value of an internal audit on a more granular level, it will often see that the benefits significantly outweigh any drawbacks of performing this type of analysis.

1. Address new challenges created by COVID-19.

COVID-19 has forced companies to do a lot of things differently. Changing just a few areas within a company can greatly impact unexpected areas. For instance, allowing workers to log in and work from anywhere has created new risks associated with cyber security and securing company (and client) information.

Methods and rules for remote work had to be developed quickly within many companies to ensure that businesses kept their doors open. However, as the dust settles, some businesses realize inherent problems with the rules they developed.

Internal auditing tests these new methods and tools developed because of COVID-19. It not only spots problem areas but can also suggest areas that can be improved to increase efficiencies.

2. Spot redundancies to increase efficiencies.

Comprehensive internal audits will review a company’s whole financial picture. When a business steps back to look at information across the entire company rather than just in particular departments or sectors, it can often reveal very helpful information about efficiencies.

For instance, imagine a purchasing department consistently purchases supplies at a particular level for the sales department. However, the sales department consistently reports throwing out supplies before they can be used. Companies might not realize this over-purchasing problem if the business were to look at just one department or the other.

Internal audits allow companies to review potential redundancies and inadequacies at a larger scale. They can then use this information to make suggestions on how to improve efficiencies, which often results in lower expenses.

3. Provide an unbiased report of information.

Every manager wants their team to do well, which can color their opinions and the information they provide to a company’s owner or executive team. By having internal auditors, companies can get unbiased information from a team whose success does not depend on the results of the analysis.

When the internal audit team does not have any underlying agenda or goals, the executive team is more likely to receive satisfactory data about the internal controls in the company. They can also provide helpful insight into how to improve these controls in a way that focuses on efficiencies instead of favoring one department over another or unevenly distributing workloads.

4. Reduce the occurrence and impact of fraud.

The Association of Certified Fraud Examiners issues a report biannually. The 2022 report looked at the issue of fraud in the context of companies that have internal audit teams and those that did not. They found the following key statistics:

• Roughly 16% of all fraud found was detected by an internal audit team.
• Anti-fraud controls were more likely to be in place in companies that had an internal audit team.
• When a company had an internal audit team, the median loss from fraud was $100,000, compared to $150,000 in companies that did not have internal auditing.
• The duration of fraud was reduced by about six months in companies that had internal auditing compared with companies that did not.

All in all, those companies that had internal auditing protocols reduced the average loss and duration of fraud by about 33%.

5. Ensure compliance with legal requirements.

Perhaps the most important benefit of an internal audit is that it provides insight into whether a company meets legal requirements. Many industries have specific laws and regulations requiring compliance related to books and records, client information, medical records and much more.

Failing to comply with applicable laws and regulations can result in hefty fines and other undesirable consequences. An internal audit can help businesses spot problem areas and address them—long before an external audit occurs.

Internal audits are also occasionally required to ensure compliance with certain legal standards. For instance, in some circumstances, data privacy and financial protection laws require internal audits.

The Value of Internal Auditing

Internal audits add a lot of value for companies across a wide variety of sectors. They help ensure certain controls are in place, identify opportunities for growth and improvement and much more. Ultimately, the value often heavily outweighs the time and effort to establish an internal auditing program.

Have questions? We would love to help!

If you have any questions or would like additional information about anything mentioned, please comment below or email us at askus@lgt-cpa.com.