James Low Jr. is a partner at Marcum LLP's Providence office and is in charge of the accounting firm's New England internal audit services. Low has been with Marcum for a year, and he says companies –
and government and not-for-profit entities, for that matter –
often overlook the value of internal controls and audits versus the cost when things don't go as expected.
PBN: Why might companies question the necessity of internal audits and internal controls?
LOW: Companies might question the necessity of internal audits and internal controls for several reasons, including cost concerns, perceived lack of immediate benefit, lack of understanding risks, overconfidence in existing processes, resistance to oversight, cultural attitudes, and the complexity of developing a system of internal controls.
Conducting internal audits and maintaining internal controls can be costly. Smaller companies may be particularly concerned about investing the resources required for supporting an audit function and the implementation of controls, which include hiring internal auditors or external consultants, investing in internal control systems and dedicating staff to these processes.
PBN: How do internal audits benefit businesses that are rapidly growing or undergoing significant changes?
LOW: Internal audits not only protect assets but also suggest ways to make a business more innovative, efficient and profitable during periods of change and growth. Internal audits offer several benefits for businesses that are rapidly growing or undergoing significant changes, including improvements to risk management, processes, compliance assurance, financial integrity, the control environments, fraud prevention protocols, corporate governance, operational efficiencies, strategic alignment, and mergers and acquisitions.
For example, internal audits help identify and assess new risks associated with growth and change, providing management with the insight needed to implement proper controls and risk mitigation strategies.
PBN: What are the potential consequences of neglecting internal controls within a company?
LOW: Internal controls are not just a compliance requirement but a vital component of a well-managed organization. Neglecting them can jeopardize the integrity, stability and success of a business in both the short- and long-term.
Neglecting internal controls within a company can lead to a range of significant consequences, including financial loss, regulatory penalties, reputational damage, operational inefficiency, strategic risk, reduced investor confidence, auditing issues and corporate governance weaknesses.
PBN: What value does an internal audit department add to an organization?
LOW: An internal audit department serves as a vital tool for enhancing transparency, promoting accountability and driving continuous improvement within an organization.
Internal audits, when deployed properly, can add value by identifying inefficiencies, optimizing operations, reducing costs, managing risks, enhancing controls, ensuring compliance, improving operational efficiency, protecting assets, detecting and preventing fraud, improving quality, providing knowledge and increasing stakeholder confidence.
PBN: In what ways does an internal audit contribute to an organization's long-term success?
LOW: Internal audits and internal controls are critical for the healthy functioning of companies. They provide assurance on the effectiveness and efficiency of operations, the reliability of financial reporting, compliance with laws and regulations, and the safeguarding of assets. Over the long term, these functions help prevent fraud, detect errors, improve processes and ensure the integrity of financial statements, which is beneficial to the organization's stakeholders, including shareholders, creditors and customers.
