For an internal auditor to be objective and independent he must report administratively to the MD/CEO and functionally to the board of directors (which is assumed to be independent of the daily operations of the Bank), specifically to the audit committee of the board of directors.
The audit committee should be responsible for the hiring and firing of the chief internal auditor or director of internal audit. For instance, In the U.S. the Chief Audit Executives (CAE) of all public companies derive their independence from the audit committee. Having such independence will enhance objectivity. Similarly, the external auditors earn their independence and objectivity by being appointed by the audit committee of the board of directors with recommendation from the CAE. As defined and interpreted by the Institute of Internal Auditor (IIA): Independence is the freedom from conditions that threaten the ability of the internal audit activity or the chief audit executive to carry out internal audit responsibilities in an unbiased manner. To achieve the degree of independence necessary to effectively carry out the responsibilities of the internal audit activity, the chief audit executive has direct and unrestricted access to senior management and the board. This can be achieved through a dual-reporting relationship. Threats to independence must be managed at the individual auditor, engagement, functional, and organizational levels.
According to the IIA, Objectivity is an unbiased mental attitude that allows internal auditors to perform engagements in such a manner that they believe in their work product and that no quality compromises are made. Objectivity requires that internal auditors do not subordinate their judgment on audit matters to others. Threats to objectivity must be managed at the individual auditor, engagement, functional, and organizational levels. Thus, due to lack of independence and objectivity, Nigerian banks have been known with so much corruption that the Chief Internal Auditors doctor the internal audit reports to appease the MD/CEO and deceive the regulatory authorities (e.g., CBN, SEC and NDIC). The recent shame currently going-on in the industry is rooted in the lack of independence and objectivity by both the internal and external auditors.
Most internal audit shops in the U.S. have internal audit charter that defines their authority. As defined by the Institute of Internal Auditor, The internal audit charter is a formal document that defines the internal audit activity's purpose, authority, and responsibility. The internal audit charter establishes the internal audit activity's position within the organization; authorizes access to records, personnel, and physical properties relevant to the performance of engagements; and defines the scope of internal audit activities. Final approval of the internal audit charter resides with the board. To ensure a sound financial system in Nigeria and promote strong ethical culture, the internal auditors should be given adequate authority and responsibility to call “spade a spade.” This can be achieved by developing an internal audit charter that defines the authority and responsibility. This charter should be approved by the board of directors. The board of directors should be independent of the daily operations of the bank and annually disclose their asset and liability in the bank. There should be strong internal controls over the award of loans and credit to the board of directors.
According to the mission of the Institute of Chartered Accountant of Nigeria (ICAN), to produce world class accountants, regulate and continuously enhance their ethical standards and technical competence in the public interest. To enhance public interest and promote sound financial industry in Nigeria, ICAN, CBN, NDIC, and SEC have a lot of work to do by promoting independence and objectivity of auditors.
Idris Jamiu, MS, CIA, CISA
Senior Auditor
American Red Cross, Washington, DC
[email protected]
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