Internal vs External Audits in Corporate Accountability

Introduction

Auditing is an essential procedure in businesses, both big and small. Without it, policies would never be completely efficient and fraud would run rampant. Internal audits find whether the policies, systems, and procedures are performing up to par and offer accountability. External audits provide a report card for the financial statements of the company along with any mistakes, while providing suggestions for improvement. The choice of which type of audit: internal audit, external audits or both, is dependent on the company. Both provide excellent benefits to combat illegal activity while improving shareholder value. Corporate responsibility and ethics decide how effective the audit is and how the results can be used.

History

Auditing

It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.” (The Institute of Internal Auditors, 2009). Internal auditors are either employed by the company or outsourced from a different company. If employed by the company, internal auditors are less lenient because of their connection to their employer versus that of an external auditor. “External auditors are not embedded as deeply within clients” day to day as internal auditors.”(Stefanick, Houston and Cornell, 2012) Even though internal auditors are usually more objective, there are times when that is untrue depending on many factors. Employers are increasingly looking to meet the ever-changing regulations surrounding the practice of auditing. Therefore, the need to hire a dedicated internal employee is strong. However, in some instances, hiring is not feasible, which alludes to the reason of

“A strong internal control system which includes an independent and efficient internal audit function contributes to an efficient and reliable governance”. (Andrei, 2015). Corporate governance is defined as “the ways in which suppliers of finance to corporations assure themselves of getting a return on investment. (Hamza, T., & Mselmi, N.,2017) In an effort to accomplish a stronger system, the Institute of Internal Auditors created a new concept called the “three lines defense model.” (Andrei, 2015) With this model, the first line of defense consists of the management and support functions. The second line of defense is the control function. Finally, the third line of defense is the internal audit function, which “verifies all the other control functions and to give assurance over the internal control system in place.” (Andrei, 2015) The Institute of Internal Auditors or IIA regulate internal auditors with a set of standards called the International Standards for the Professional Practice of Internal Auditing. The IIA does not discriminate against companies who want to utilize outside sources to perform internal audits if it is done efficiently. “The IIA’s Code of Ethics requires internal auditors to evaluate information objectively, while not being unduly influenced by their own interests.” (Stefanick, Houston and Cornell, 2012) On the other hand, “the IIA believes that oversight and responsibility for the