Corporate Governance Mechanism: Firms outsource internal audits

NEW DELHI: Financial Express reported that the aftermath of Satyam scam has seen companies increasingly outsourcing their internal audit to specialised

firms to strengthen the corporate governance mechanism.

Corporate GovernanceMajor companies which have done so are the Tata group, the diversified Essar Group, real estate major DLF Ltd and Ranbaxy. The Bharti group and Hindustan Unilever

have traditionally followed the policy of outsourcing internal audits.

Unlike statutory audits, internal audit refers to the practice of overseeing whether the

broad policies outlined in board meetings are being followed. It covers areas like marketing strategies, client relationships and pricing policy. Typically, the internal auditor reports to the head

of the audit panel, which is then communicated to the board.

Explaining the recent trend, Mritunjay Kapur, MD of consulting firm Protiviti, said internal audits

have traditionally been a rubber-stamp exercise, where corporate houses would set up an internal audit team within the organisation.

“This practice is now

changing for the better. The Satyam scam proved to be a watershed. Now we are seeing a large number of companies outsourcing a part of their internal audits to expCoporate Governance erts,” he


The practice of co-sourcing, as it is called, of internal audits gained popularity in the US following the Enron scam. Outsourcing internal audit practice

served several purposes for corporate houses, including enhancing the brand value of the company.

“Sound internal audits would suggest that there is a sync

between the company board and the policies followed by its employees, which also makes it an attractive investment option for a foreign firm.” Earlier, at the time of investing in a firm, private

equity investors only looked at the statutory audit records. However an increasing emphasis is also being given to internal audits now.

Over the last 18 months

volume of internal audits have jumped almost three fold. “Outsouring of internal audit work provides companies an independent opinion on policy matters, which is integral,” said Sunil R

Chandiramani, partner & national director (advisory services), Ernst & Young. He added internal auditors were responsible for overseeing whether company policies were in sync with its

broad risk appetite.

Agreed KPMG director (governance, risk & compliance services) Ganesh Ramamurthy. Companies are reluctant to invest significantly in

their own internal audit practice hence prefer to outsource it, he said, adding, “Usually audits referred mainly to statutory audits, that impression is changing now. Specialised people would bring

in a fresh perspective to the working of an organisation.”

Taking a cue, the corporate affairs ministry has inserted a new clause 122A in the new Companies Bill

that states that mandates all large companies to appoint an internal auditor who is either a chartered accountant or cost accountant to conduct internal audits.

(Financial Express, Oct

31, 2010)



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