A PricewaterhouseCoopers (PwC) Czech Republic advisory services
director has warned that if internal audit (IA) does not change
within the next five years, it risks becoming irrelevant.

Roman Pavloušek, who leads the PwC Czech Republic internal audit
services practice, said other compliance and regulatory functions
could take on parts of the activities and scope of internal
auditors. He said this warning has also been suggested among
observers from both within and outside of the internal audit
profession.

Pavloušek told TA the global challenge for IA is to “move
a little bit further beyond what it has been doing so far”. “So far
with a lot of [US Sarbanes-Oxley Act] emphasis, [there has been] a
lot of focus on financial control, the perceptions is that is has
gone too much that way and some important areas were put aside,”
Pavloušek said.

These important areas are the strategic and operational aspects of
a business. “We focus so much on financial controls, financial
processes and so on, but we haven’t focused that much on these
other two areas,” he said.

The 36-year-old believes it is important to realise that more value
to shareholders is created from reporting on strategic and
operational areas rather than primarily focusing on financial
controls. “It’s important to shift the focus on internal audit
activity the right way so it looks at the activities that actually
have to do with how strategy is shaped, what pressure is on the
core businesses and how business is coping on an operational
level,” he said.

He suggests internal auditors should ascertain the attributes of a
company that contribute to value creation and then look at the
controls and the risks that are directly related to those and link
internal audit functions to these areas.

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“[The IA profession] needs to rethink itself, it needs to readjust
itself… because when you argue to your management to convince them
about the purpose of internal audit… you need to focus on strategic
and operational as well [as financial controls], because that’s
where your shareholder value is and managers are concerned with
shareholders and shareholders with value creation,” Pavloušek
said.

Pavloušek represents Central and Eastern Europe (CEE) within PwC’s
global internal audit services leadership team. He said that in the
Czech Republic and the CEE region, the corporate community has been
slow to fully embrace the internal audit function. “Obviously the
focus is a lot on profitability and operations and how to make
things profitable. The corporate governance issues are kind of put
aside to a certain extent,” he explained. “In the Czech Republic
you see less awareness about corporate governance and what internal
audit can do for companies than in the US and in the West
generally. There are different priorities – a lot of these guys are
under extreme pressure to perform, to deliver. I’m not saying that
the people in the West are not, but here the expectations are even
higher.

“So from that regard there is not sufficient investment in these
types of activities – on the setting of proper internal control
structures, internal audit and so on. To a certain extent, internal
audit is still viewed as a necessary overhead, as a cost to be
managed, as a necessary evil and not always as something that can
bring value. And if you don’t invest enough in this activity and
you don’t get quality people, they don’t give quality results. So
it becomes kind of a vicious circle that needs to be cut.”