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Regulators must consider internal audit: IIA

An investigation by UK regulators into the role and scope of external audit in relation to the regulation of financial services companies should also consider the role played by internal auditors, according to the UK chapter of the Institute of Internal Auditors (IIA).

A consultation by the UK Financial Services Authority (FSA) and the Financial Reporting Council (FRC) criticised external auditors for falling short of expectations for professional scepticism. It also questioned how their contribution to prudential regulation could be enhanced.

IIA chief executive Ian Peters said that while the discussion paper focuses on external audit, the context of the consultation should focus more on the role of internal auditors.

“Internal audit is, like external audit, a key component of good governance,” Peters said. “If this latest consultation is not also mindful of the role and scope of internal audit, opportunities for the regulator to drive and monitor good governance could be missed.” 

The role of internal audit is to provide the board with ongoing assessment of the effectiveness of controls in place to identify and manage a range of risks, including financial reporting risks.

Peters said external auditors alone cannot deliver ongoing assurance to support good corporate governance.

“The regulator, as part of its prudential regulatory function, should also consider the extent to which the firm’s internal audit function is engaged and utilised across all functional areas of the firm, including in the area of financial control, when making their assessments on the effectiveness of a firm's risk management and governance activity,” Peters said.

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