Internal Audit

An Internal Audit function performs a valuable service and meets corporate needs that increase during economic downturns. These include the need to assess and mitigate risks, and increase operational efficiencies without compromising the system of internal controls. In today's economy, companies continue to reduce functions they deem non-essential. All too often, this includes the Internal Audit function.

Why is Internal Audit Important?

The Institute of Internal Auditors does a great job of defining the purpose and justification for an Internal Audit function.

A cornerstone of strong governance, internal auditing bridges the gap between management and the board, assesses the ethical climate and the effectiveness and efficiency of operations, and serves as an organization's safety net for compliance with rules, regulars, and overall best business practices.

If you have an Internal Audit function, are they fulfilling this charge? If you do not have an Internal Audit function, who is fulfilling this charge?

Consider the following statistics regarding risks:

• 2007 Perception versus 2009 Reality(i):
  • Asset Misappropriation: 13% in 2007 (perceived) vs. 20% in 2009 (actual)
  • Accounting Fraud: 6% in 2007 (perceived) vs. 11% in 2009 (actual)
  • Bribery & Corruption: 10% in 2007 (perceived) vs. 8% in 2009 (actual)
• Internal audit is usually the best method for detecting frauds(ii):
  • 2005 - 26% of frauds detected by IA (highest percentage)
  • 2007 - 19% of frauds detected by IA (2nd highest percentage)
  • 2009 - 17% of frauds detected by IA (highest percentage)
• 2/3 of respondents who experience economic crime believe they are at greater risk because of reduced resources working on internal controls(iii).

Premium Leakage (iv)

• In 2008, the private passenger auto insurance industry had a premium rating error rate of 9.8% of the total $161.7 billion in personal auto premium written or a 15.9 billion dollar loss.
• For carriers with average profits of 5%, every 1% reduction in error can result in a 20% profit gain. Likewise, every 1% of error left uncorrected results in a 20% profit loss.

Fraudulent Claims Statistics(v)

These are only a few examples of the types of risks that an Internal Audit function can address. Who in your organization is assessing risks and proactively recommending risk mitigation strategies?

What efficiencies and savings are you giving up?

In this economic downturn, companies are cutting headcount. This poses a risk of reduction in performance of key internal controls. An Internal Audit function risk assessment can identify key controls and reduce the risk of reducing in the wrong places. Operational audits can pinpoint the root cause of issues, not just the symptoms. The following is a true-life example of the results of an operational audit.

• Criteria - Obtain reimbursement from business partners for claims expense paid to service providers.
• Condition - Significant backlogs in claims errors, escalating accounts receivable, three months behind in accounts receive reconcilitations and continuing to get further behind. The symptom appeared to be a staffing shortage.
• Cause - The result of an operational audit by the Internal Audit function identified the root cause of the issue. The unit supervisor did not have the expertise to manage error correction procedures or handle day-to-day system issues.
• Effect - There were millions of dollars in unreimbursed claims expense with the accounts receiveable continuing to grow. There was a risk of uncorrected claims hitting the two-year threshold and not receiving reimbursement.
• Recommendation - Replace the existing unit supervisor with someone knowledgeable in the system and claims issues.
• Result - Within two months, the new supervisor cleared the backlog, reduced accounts receivable to an acceptable amount, and all reconcilitations were up to date. Ongoing the unit completed reconcilitations within three days of month end, and there was a 20% staffing reduction in the unit.

Why hire M&A?

McKonly & Asbury has staff with internal audit and business experience. We can assist you with the start up of an Internal Audit function or assist your existing internal audit function in areas requiring specialized expertise such as IT Audit, Enterprise Risk Management, Model Audit Rule or Sarbanes Oxley implementation as well as assist with ongoing testing, governance, and fraud risk assessments. We take pride in training your staff using classroom, on the job, or other agreed methods of knowledge transfer. We allow you to complete your audit plans and increase the knowledge of your staff at the same time.

Contact the M&A Risk Management Services Team at ENissley@macpas.com for more details, and subscribe to The RMC Advisors blog at www.theRMCadvisors.com to receive updates on relevant accounting and audit information!

(i)From "The Global Economic Crime Survey".
PriceWaterhouseCoopers, November 2009, Figure 20, page 18
(ii)From "The Global Economic Crime Survey".
PriceWaterhouseCoopers, November 2009, Figure 7, page 9
(iii)From "The Global Economic Crime Survey".
PriceWaterhouseCoopers, November 2009
(iv)A January 2010 report by Quality Planning, "Failure to Stem Premium Leakage Forces Good Drivers to Pay More"
(v) Insurance Research Council, November 2008