Roles Of Internal Auditors In Corporate Governance Accounting Essay

A good administration system in an organisation begins with holding internal audit map. The value and the demand to concentrate on bettering strong corporate administration have increased due to a series of failure ( bankruptcy and fraud ) and fiscal dirts like net incomes restatement to guarantee fiscal coverage quality ( Zeleke Belay, 2007 ) . These corporate turbulences have driven external regulators to happen ways of advancing greater answerability, revelation and transparence. The chief function of corporate administration is to reconstruct the trust and market assurance every bit good ; stockholders. ( Carl Rosen, 2010 )

It has been widely recognised that the function of the internal hearer becomes a go oning subscriber in footings of developing good corporate administration patterns and construction. It is said that an effectual internal audit map enables the board to execute its corporate administration responsibilities through organisational engagement, appraisal, preparation, professional counsel and communicating at all degrees within the organisation. Effective administration includes systems, procedure and controls that promote moralss, values, public presentation, answerability, hazard communicating, coordination and communicating among the board, external and internal hearers and direction ( Gramling et al, 2004 )

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Audit commission, directors, internal hearers and external hearers play a critical function in effectual control and appropriate leading within the organisation to move in the involvement of the stockholders. To accomplish consequences, practising good corporate administration with clear standards is an indispensable tool in an organisation.

Most companies recognised and valued internal auditing as doing an independent part to corporate administration patterns in their administrations particularly in the country of hazard direction, administration and control. The outlooks of the function of internal hearer have increased and are being relied on to lend significantly.


Harmonizing to Cadbury study ( 1992 ) , corporate administration is the system by which companies are directed and controlled. It is the relationships between directors, managers and stockholders. UK Corporate Governance codification is a voluntary codification for listed companies in the UK which was foremost published in 1992, with “ comply or explain ” rule. Listed companies must follow with the listing regulations to describe on the manner they complied or explicate why it does non in their one-year studies. It will supply more transparence and answerability of the board of managers which contributed to the development of the UK corporate administration codification ( Keay, Andrew R, 2012 ) .

Corporate administration includes the jurisprudence, ordinances, naming regulations and patterns that enable the organisation to execute expeditiously and generating net income but yet run intoing both legal duties and society outlooks.

It is indispensable that the board understands the importance of corporate administration. The quality of corporate administration will hold a profound impact on the efficiency of corporate assets use, ability to pull low-priced capital, ability to run into social outlooks and overall public presentation. Investor is prepared to pay more for a company with good corporate administration because investor believes that the company will execute better in the hereafter and hazard is reduced.

During the early yearss internal auditor function is merely related to internal accounting control and security over assets. However, internal hearer function has now expanded to be involved in runing systems and the accomplishment of houses ‘ aims and regulating. Traditionally the internal hearers were moving as ‘policemen ‘ that cheque and supervise the company ‘s processs and degree of conformities with the regulations ( Skinner and Spira, 2003 ) .


The aims of this study were attained by analyzing different literature and theoretical background of internal audit and corporate administration model. The two instance surveies used in this study is an illustration of companies who have already see corporate dirts. Both companies are in different industry but both failures pointed out were similar. Internal control and dishonesty were chiefly missing in both organisations. In this study, we will discourse on how the failure of corporate administration arises in both organisation and how these failures affect the companies in different ways.


This research is carried out based on many research workers ‘ plants in the value of internal auditing in UK corporate administration model. The factors chosen are those identified issue by the Institute of Internal Auditors ( IIA ) together with other related articles chiefly from old surveies.


Section 1 is of this study includes debut of corporate administration and internal auditing and methodological analysis of the research.

Section 2 is literature reappraisal in position of the function of internal hearers in UK corporate administration model and the theoretical background of corporate administration and internal auditing.

Section 3 is the instance survey dirt on Royal Dutch Shell and Royal bank of Scotland.

Section 4 discusses on how both companies failed to follow with the criterions taking to beliing the histories.

Section 5 is what the restrictions of findings and decisions and recommendations are.

Literature reappraisal

Ibrahim El ‘ Sayed Ebaid ( 2011, pg, 171-183 ) says traditionally, the internal audit map was designed to safeguard house ‘s assets and aid in bring forthing dependable accounting information for decision-making intents. Now, the function of hearer has expanded to implement effectual administration and controls ; and measure the effectivity of direction ‘s control patterns. They are the eyes and ears of the direction, which is critical in the system of cheques and balances ( Deloitte, 2010 ) . In a literature reappraisal of Sarens and De Beelde ( 2006 ) says internal hearers are presently expected to do things go on instead than waiting to react to it.

Piet Eenkhoorn, Johan Graafland ( 1998 ) reference that one of the grounds taking to corporate dirts was originative accounting ( for illustration, Shell ) . Fiscal statements presented to stakeholders may non be in fact “ true ” . Dishonesty of managers plays a critical function in corporate dirts ; it can be in many ways such as cognizing the histories may non be done decently and intentionally concealing the jobs from stockholder that the company is executing good. Some others says it is besides due to personal greed ( for illustration, employees at RBS Libor dirt ) , ethical laxness, failing in working country, hearer inadvertence or systemic factor as a chief cause of fraudulence ( Piet Eenkhoorn, Johan Graaflandal, 1998 ) .

UK corporate administration stresses the importance of beef uping fiscal controls and answerability of the boards of managers to stockholders. The Combined Code besides recommends that non-executive managers should be independent, underscoring the of import function that the non-executive managers play in lending to and heightening corporate administration ( Gramling et al, 2004 ) .

The UK ‘s Turnbull study provides some suggestions that have to be taken into consideration when set uping internal audit map. Some factors like figure of employees might bespeak hazards straight ; with more employees complexness of paysheet may increase. Some companies which indicate the boards neglecting to implement hazard appraisal and reacting to hazard might hold merely implied the demand for an internal audit section ( Amanda Williams, 2012 ) .

The likeliness of the organisation non accomplishing its ends is extremely possible if there is a major internal control failure for illustration in the instance of RBS ( Amanda Williams, 2012 ) . 4news ( 2013 ) reference that ethical misbehavior leads to countenances which RBS needs to screen it out ( 4news, 2013 ) .

So, without a quality activity, transparence and duty of the internal audit ca n’t guarantee good corporate administration. A quandary, internal hearers frequently find themselves in an anomalous place in a coverage construction. Most Internal hearer study to senior direction but yet are expected to reexamine direction behavior and effectivity objectively. To forestall struggle of involvement, internal hearer should describe chiefly and straight to the board and its audit commission instead than to senior direction. ( Amanda Williams, 2012 ) .

Theoretical background

Internal auditing

Internal audit is critical for an organisation ‘s administration mechanisms. Institute of Internal Auditors ( IIA, 2012 ) defines internal scrutinizing function in administration procedures as advancing appropriate moralss and values within the organisation, guarantee effectivity and answerability, efficaciously communicate hazard and control information suitably and organizing activities among the board, external and internal hearers and direction in assorted countries.

The criterions are besides to mensurate at board degree ; the effectivity of internal auditing patterns in administrations of all sizes and sectors in many states. IIA frameworks include definition of internal auditing, codifications of moralss, attributable, public presentation and execution criterions, pattern advisories and place ( Kenneth D’Silva, Jeffrey Ridley, 2007 ) .

Some of the IIA criterions includes in subdivision 2110.AI criterions, the map of an internal hearer should measure, design, implement and reappraisal on the effectivity of the organisation moralss, aims and activities. Internal hearer helps organisation in observing and forestalling fraud, proving internal control and proctor conformity with company policy and authorities ordinance ( IIA, 2012 ) .

Internal Auditor plays like a frontline participant in both administration activities which are supervising of hazards and supplying confidence sing controls. The internal hearer ‘s risk-driven attempts supply critical inputs to other administration participants, including the audit commission and direction. N To heighten organisation effectivity or efficiency, internal hearer may pass some clip on confer withing or operational orientated work. ( Dana R. Hermanson, Larry E. Rittenberg. 2003 ) .

UK corporate administration model

Sir Adrian Cadbury defined corporate administration as the system by which companies are directed and controlled ( Cadbury study, 1992 )

Cadbury study was peculiarly concerned with the ‘perceived ‘ low degree of assurance in fiscal coverage and is by and large believed to be the first basis of modern corporate administration. Its findings and recommendations taking to the present twenty-four hours developments of corporate administration worldwide had rather an consequence on the corporate universe. The three basic rules included: openness, unity and answerability ( Jan Cattrysse, 2005 )

The Cadbury Report included a figure of fiscal facets of corporate administration which includes the function of the board ; scrutinizing and coverage of fiscal information to stockholders. The study was structured in a mode that administrations can easy follow it. The Cadbury study Section 4 trades with the construction of board, and there should be executive managers and independent non-executive managers. Section 4.11 explains the intent of holding non-executive managers. The duties of managers which are mentioned in subdivision 4.28. Internal control is discussed in subdivision 4.31 provide counsel on maintaining records of histories and cut downing the opportunity of fraud. Section 4.33 explains about Audit commission and their relationship with the board members and the assignment of external hearers ( Cadbury Report, 1992 ) .

The UK Corporate administration model sets out the demands associating to the composing and maps of the audit commission. Management must supervise the fiscal coverage procedure ; monitor the effectivity of the company ‘s internal control, internal audit, and hazard direction systems. Where there is no internal audit map, the audit commission should see yearly whether there is a demand for an internal audit map and do a recommendation to the board. Where there is no internal audit map, the grounds for the absence of such a map should be explained in the relevant subdivision of the one-year study.

Turnbull study ( September 1999 ) has the most important deductions on corporate administration and besides on internal scrutinizing urging a few of import guidelines which includes the followers. Listed companies are expected to hold a sound system of internal control to safeguard stockholders ‘ investing and company ‘s assets. Management needs to reexamine effectivity of internal control on an one-year footing. Business hazard should be evaluated on a regular basis. Board is responsible for internal control and the demand for internal audit section needs to be kept under reappraisal ( FRC, 2005 ) .

In position of the corporate dirts one can non assist but inquire how long this ‘comply or explain ‘ rule will still last. There seems to be a turning demand for ‘compliance ‘ and less involvement in the ‘explanation ‘ . Surely, the more accent is being placed on conformity, the more demand for control and for independent audits in general. Merely conformity provides proper confidence for good corporate administration.

Case surveies – Administration Problem

Introduction of company

The Royal Dutch Shell has been around for more than a century and is still lasting really strongly as the 2nd largest oil geographic expedition and production company in the universe in footings of gross. Shell central office is in Netherlands with its registered office in London, United Kingdom. Shell is a planetary group of energy and petrochemical companies taking to run into the energy demands of society in an economically, socially and environmentally feasible now and in future. ( Shell, 2013 )

Corporate dirt of Shell

In 2004 Shell announced that it fiscal statements overstated its oil militias ensuing a immense reclassification of 4.47 billion ( about 23 per cent of antecedently report prove militias ) barrels of oil in April 2004 which originally reported as proved oil and gas militias in 2002. In February 2005, about 1.37 billion barrels of oil were removed which was originally reported as proven militias in 2003. Fiscal statements were restated consequently. Militias are an oil company ‘s most valuable plus, and any reclassification into less certain classs is a major concern for investors ( ICMR, 2005 ) .

Introduction of company

The Royal Bank of Scotland group PLC ( RBS ) was founded in 1727 is headquartered in Edinburgh, the United Kingdom. It provides banking and fiscal merchandises to personal, commercial, corporate and institutional client worldwide. RBS has about 700 subdivisions chiefly in Scotland and throughout England and Wales. ( RBS, 2013 )

Corporate dirt of RBS

London interbank offered rate ( Libor ) is an international benchmark for which Bankss are required to utilize to supervise fiscal minutess between other Bankss and clients. A dirt was uncovered when it was found that a figure of Bankss like Barclay, UBS and RBS have been repairing the involvement rate during the fiscal crisis as a agency of doing higher net incomes. It was found that 20 employees of RBS had been pull stringsing the Libor rate specially Nipponese Yen and Swiss Franc Libor entry from 2006 and up until 2010, after the U.S Commodity hereafter trading committee probes into the bank ‘s behavior had already begun. The U.S. Commodity Futures Trading Commission ( CFTC ) says RBS submitted false informations on involvement rates to profit its trading places.

The fiscal services bureau ( FSA ) found that one bargainer approached co-workers responsible for puting these involvement rates and these ‘submitters ‘ manipulate the rate to set up stakes made by the bargainer on complex fiscal instruments known as derived functions. RBS bank ‘s failed to halt this error, which persisted for four old ages, showed ‘serious lacks ‘ in its ‘internal controls ‘ ( CFTC, 2013 ) .

RBS was fined ?390million by US and UK regulators for pull stringsing a cardinal planetary involvement rate.

Application of theory

Dechow, et Al. ( 1995 ) find that houses with weak corporate administration are more likely to pull strings net incomes. If the internal audit section is to be effectual in supplying confidence it needs to be: sufficiently resourced, both financially and in footings of qualified, experient staff ; good organised, so that it has good developed work patterns ; and independent and nonsubjective ( IIA, 2013 )

Shell: No segregation of responsibilities and unequal preparation

Agrawal and Chadha ( 2005 ) find that the chance of repeating net incomes is lower when boards and audit commissions have fiscal expertness.

In the instance of Shell, a retired Shell applied scientist moving as Group Reserve Auditor was engaged to execute this map which he was an experience applied scientist but he does non hold equal preparation or expertness on how to carry on his plants and the regulations and criterions on which his sentiments should be based. He reported to the direction of Shell ‘s geographic expedition and production division which were the same people he audited ( David Gwilliam, et Al. 2009 ) which clearly shows a struggle of involvement.

Shell structured its organisation with two boards and a Committee of Managing Directors which resulted in lower answerability. Absence of clearly defined functions and duties of the top direction made deceit easier. ( David Gwilliam, et Al. 2009 ) .

The failure of Shell ‘s internal militias appraisal and describing guidelines to conform to applicable ordinances. The deficiency of effectual internal controls over the militias appraisal and coverage procedures. As reference in subdivision 2 literature reappraisal, originative accounting dirts happened due to the desirability in making and keeping strong visual aspect of fiscal statements. Shell established their modesty figure was lacking both in footings of over-optimism and in neglecting to follow with SEC regulations and interpretive counsel ( Stephen J. Korotash. 2004 ) .

An internal reappraisal of the administration construction of the group was carried out in 2004 whereby, they merge two parent companies Royal Dutch Petroleum and Shell Transport and trading company into individual new parent company. The direction have concluded that in order to win back investor assurance, guarantee greater transparence and avoid accounting failures was to pass its corporate administration system. ( Shell, 2004 )

Shell ‘s decentralised system required an effectual internal militias audit map. ( David Gwilliam, et Al. 2009. )

RBS – deficiency of internal control

Failure to follow internal control with the guidelines reference in Turnbull study ( FRC, 2005 ) leads to the failure of RBS. Turnbull study ( 2005 ) reference that reappraisal should cover all stuff controls, including fiscal, operational and conformity controls and hazard direction systems.

The CFTC reported ( 2013 ) that RBS has deficiency of internal controls, failure to implement controls for doing Libor entry which allows struggle of involvement to go on in the organisation. No equate preparation, systems, controls, policies regulating the process for doing Libor entries.

Mr Hester told the Commission that an internal audit study that gave the bank ‘s Libor-setting procedure a clean measure of wellness was “ deceptive ” , the group had later taken “ disciplinary action ” against some of those involved and insisted the papers did non amount to a “ confederacy ” ( Telegraphy, 2013 )

The fiscal authorization services ( 2013 ) and US Commodity Futures Trading Commission reference that RBS sought to pull strings Libor in order to better the profitableness of its trading books. RBS failed to adequately oversee its trading desks and bargainers. By leting derived functions bargainers and submitters to portion a desk, the CFTC said this made it much easier for RBS to prosecute in Libor uses. RBS Group internal hearer has reference that there was a deficiency of treatment of scheme and hazard and hence, failed to place the hazard and forestalling it from go oning ( Risk Business, 2008 ; CFCT, 2013 )

CFTC ( 2013 ) study besides mentions that carry oning of internal audit of samples of its entry should be done sporadically every six months to verify the unity and dependability of the procedure. RBS must now implement better internal controls and compose up clear entry processs and policies on involvement rates including Libor in order to guarantee that any entries are dependable ( CFCT, 2013 ) .


Internal hearer plays an of import function in corporate administration in an organisation to get the better of fiscal crisis, reconstructing stakeholders assurance for the hereafter. The grounds presented in this paper based on survey of two major corporate cause celebres – provides at best hushed support for the point of view that seeking to reenforce the bing corporate administration construction along the lines advocated in the UK will needfully move to forestall any such future failure of corporate administration.

Internal hearers are ( by and large ) employed by the company they are describing on and are frequently managed as portion of the finance map. They will hence hold to describe upon the effectivity of fiscal systems that they form a portion of. It is hence hard for internal audit to stay genuinely nonsubjective. However, acceptable degrees of independency can be achieved through one, or more, of the undermentioned schemes: Reporting channels separate from the direction of the chief fiscal coverage map, such as an audit commission ; Reviews of internal audit work by directors independent of the map under examination ; and Outsourcing the internal audit map to a professional 3rd party

The addition in costs is already with organisation in footings of increased outgo on internal audit and burgeoning fees for audit houses ( chiefly linked to advice on internal control ) and non-executive managers.

Restrictions of Hearer

The describing systems construction whereby, the main internal hearer studies to the finance manager. This limits the effectivity of the internal audit studies as the finance manager will besides be responsible for some of the fiscal systems that the internal hearer is describing on. Similarly, the main internal hearer may soften or restrict unfavorable judgment in studies to avoid confrontation with the finance manager. To guarantee independency, the internal audit should describe to an audit commission.


One of the major job realised with this subject was, there was ample sum of literature available and that it is really hard to choose the most appropriate one. But job was solved by concentrating on academic literature, which is mentioned in brief in this assignment.


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