Internal Auditing
History of Internal Auditing
Internal auditing is a very respectable profession with many responsibilites. Internal auditing can be documented and traced as far back as to about 5000 B.C. A few civilized communites such as the Chaldaean Empire and the Babylonian Empire were the among the first to advance economically and politically and organize themselves into sovereign states. The two empires imposed many taxes on both individuals and businesses, and therefore they established an intricate system of checks and counterchecks. They designed internal control systems to help minimize errors and safeguard state property from taxpayers who were dishonest (Gupta).
In the United States, internal auditing has steadily grown and evolved ever since the end of World War II. Internal auditing today can be compared to financial auditing because of the many similarities associated with each, and “much of the theory underlying internal auditing is derived from management consulting and public accounting professions” (Internal Audit).
Internal Auditing
The profession of internal auditing helps companies by advising them on how to better achieve there short-term and long-term objectives. Internal auditors utilizing “systematic methodology for analyzing business processes or organizational problems and recommending solutions” (Internal Audit). Internal auditors are generally employed by companies to perform their internal auditing activities which may include internal controls such as efficacy of operactions, reliability of financial reporting, deterration and investigation of fraud, safeguarding assets, and compliance with laws and regulations (Internal Audit)
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Internal Controls
Improving internal controls is one of the main responsibilities of internal auditors. The management of a company is in charge of internal controls within the organization, but internal auditors test the controls to make sure they are working effectively. Internal controls can be defined as a process that is affected by the employees of the company as well as the information technology systems that are used to assist the company in achieving its objectives. Internal controls direct, monitor, and measure a company’s resources and help detect and prevent fraud from occuring within an organization (Internal Control).
Risk Management
Another responsibility of internal auditors is the monitoring and evaluation of the effectiveness of the risk management process of a company. In addition to management’s reponsibility of internal controls, they are also responsible for performing risk management activities as part of their ordinary course of business. How an organization sets their objectives and responds to the risks associated with their objective is part of the risk management process. Risk management is a way for companies to manage uncertainty through risk assessment. Developing strategies to manage risk and mitigating risk by using managerial resources is also involved in risk management. For companies, risks can usually be categorized into four groups: strategic risks, operational risks, financial reporting risk, and legal and regulatory risks (Risk).
Sarbanes Oxley Act
The Sarbanes-Oxley Act, also known as the Public Company Accounting Reform and Investor Protection Act, was implemented on July 30, 2002 by the United States Federal Government to help prevent corporate fraud scandals. All companies, both large and small, must comply with the rules and regulations of the Sarbanes-Oxley Act. Some cases that prompted the passing of this act were with companies such as Enron, Tyco International, and Adelphia that involved corporate and accounting fraud (Sarbanes). The Sarbanes-Oxley Act accelerated the growth of internal auditors profession because they possessed “the skills required to help companies meet the requirements of the law” (Internal Audit).
The Sarbanes-Oxley Act is comprised of eleven different sections for companies to reduce and eliminate fraud. Section 302 of the act establishes internal procedures that are designed to ensure accurate financial disclosure within organizations. The officers of companies must sign off on documents stating that they are “responsible for establishing and maintaining internal controls” (Sarbanes). The officers certifying this also says that the internal controls designed ensure that the material information significant to the company and its subsidiaries is known to the executive officers. In addition, section 404 of the Sarbanes-Oxley Act requres that management submit a report on the internal controls. The internal auditor is responsible for making sure that the company follows the guidelines established under the Sarbanes-Oxley Act (Sarbanes).
Example
Cases such as the Enron scandal was a reason why the Sarbanes-Oxley Act was put into effect. In as little as fifteen years, Enron grew from a little company to the seventh largest company in the country. At its financial peak, Enron employed more than 21,000 in staff and expanded into more than forty countries. Eventually, the company’s scam became known to the world. Enron had been lying about profits and was accused of many “shady” dealings including concealing debts, so they didn’t show up in the company’s accounts (Enron). If the Sarbanes-Oxley Act was being enforced at that time, the scam would never have come to be.
Salary
Internal auditing can be as rewarding as one makes it, depending on education and experience. According to swz.salary.com, the median expected starting salary for an Internal Auditor I in the United states is $46,041 as of February 2008. One’s salary can be greatly affected by factors such as employer size, industry, employee credentials, and years of experience though (Salary).
Other Opportunities
Everyone knows that accounting is a great subject to be knowledgable in. Charlie Munger, vice-chairman of the diversified investment corporation, Berkshire Hathaway Corporation, once said, “You have to know accounting. It’s the language of practical business life” (Accounting). Knowing accounting, especially internal auditing, can be very beneficial in the advancement of one’s career. Internal auditing encompasses many different areas of internal controls and risk management of companies. Internal auditors evaluate the adequacy and effectiveness of companies’ internal control systems and its overall performance and report back to top management. Internal auditors are required to solve problems within the company and are constantly perfecting their skills to make sure the company runs appropriately. Some would consider the internal auditors to be the key to the success of a company. Because of the broad spectrum of activities internal auditing involves, it gives one the opportunity to gain knowledge in many areas of the company, and therefore gives one enough experience to expand and advance their career. There are not only opportunities for internal auditors, but with the type of experience and knowledge gained from internal auditing, one can expand their experience to other careers as well. Some related careers in which internal auditing experience is extremely valuable include budget analysts, cost estimators, loan officers, financial analysts, personal financial adviors, tax examiners, and even computer programmers and such to name a few (Accountants).
Works Cited
“Accountants and Auditors.” U.S. Department of Labor. 18 Dec. 2007. 24 Feb. 2008
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“Accounting Quotes.” Woopidoo Quotations. 24 Feb. 2008 .
“Enron Scandal At-a-Glance.” BBC News. 22 Aug. 2002. 24 Feb. 2008 .
Gupta, Parveen P. “Spiraling Upward - History of Internal Auditing and the Institute of Internal
Auditors.” Bnet. June 1991. 24 Feb. 2008 .
“Internal Audit.” Wikipedia. 24 Feb. 2008 .
“Internal Control.” Wikipedia. 24 Feb. 2008 .
“Risk Management.” Wikipedia. 24 Feb. 2008 .
“Salary Wizard.” Salary.Com. Feb. 2008. 24 Feb. 2008 .
“Sarbanes-Oxley Act.” Wikipedia. 24 Feb. 2008 .
Tags: history of internal auditing, accounting professions, Auditing, Internal, financial auditing, world war ii
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