80% of Internal Auditors Face Barriers while Getting Involved in Fraud Risks Management: Survey
A vast majority of internal auditors is facing barriers while getting involved in managing fraud risk, despite almost two-thirds saying they had seen an increase in fraud incidents over the past five years, reveals a survey.
The survey, conducted by Kroll and Internal Audit Foundation and presented in a new research report titled "Fraud Risk Management in Internal Audit", says, "80% of internal auditors face barriers to involvement in fraud risk management, while nearly half say internal audit not involved in strategic decision making. About 60% of respondents, who said they were extremely involved in enterprise-wide fraud risk management reported that the fraud risk management process was very effective or excellent, compared with 31% of those who were very involved."
According to Tarun Bhatia, managing director and head of South Asia at Kroll, "as the pandemic continues to affect and transform the way we do business, new risks and frauds are emerging, making it an ever more challenging environment for companies to operate."
"The current conditions where businesses are suffering, people are desperate, system and processes are compromised, can lead to a perfect platform for fraud to occur and go undetected. These extraordinary circumstances demand for a greater emphasis on fraud risk management," he says.
The report shows a clear disconnect between fraud risk assessment and resulting strategic plans. Almost half of survey respondents felt that internal audit teams were not part of enterprise-wide strategic decision making, even though 91% said that they had at least some role in assessing fraud risk.
"Following recent scrutiny of the external audit profession globally, the focus is turning to companies' internal defences against fraud, of which internal audit can be a key participant and India is no different," Mr Bhatia says, adding, "Traditionally internal audit as a function has been outsourced and lacked management focus. A stronger and specific mandate for internal audit and increased focus of boards towards strategic fraud risk management will add significant value and ultimately contribute to reducing incidents of fraud. Greater accountability on and support from internal audit will help companies to detect fraud earlier, and speedy investigation and remediation can be carried out when issues occur. To make this happen, there needs to be complete support from the senior management, adequate resource allocation, and recruitment of people with the necessary skillsets."
As per the survey, where internal audit was part of the strategic risk management of fraud, the process was perceived as more effective overall. Those who felt that their organisation's risk management process was 'very good' or 'excellent' increased from 31% to 60% between respondents who were 'very involved' and those who were 'extremely involved' in fraud risk management.
For those respondents who said they were 'minimally involved' or 'not involved' in the fraud risk management process, only 12% felt that their effectiveness was 'very good' or 'excellent', with over half stating that overall, the fraud risk management programme was fair or poor.
A third (33%) of respondents said a lack of resources was the biggest obstacle to internal audit being more involved in fraud risk management processes. A further one in four (23%) cited lack of mandate as the most significant barrier, followed by one in five (21%) who cited concerns over potential conflicts of interest.
In a webinar quick poll of 1,750 internal auditors conducted by Kroll and The IIA in July 2020, it was revealed that two-thirds (65%) of internal audit professionals felt that COVID-19, remote working, and financial strains would result in an increased risk of fraud. Over three quarters (77%) agreed that, if internal audit were more involved in strategic fraud risk management, the fraud risk management process would improve.
According to Richard F Chambers, president and chief executive (CEO) of The Institute of Internal Auditors, it is vital for organisations of all sizes and industries to have boards, executive management, and internal audit leaders who are well aligned in their approach to managing risk, including fraud.
"Internal audit plays a critical role, with other surveys supporting these findings that, when internal audit is involved, the impact of fraud is lessened. That is because internal audit is well-positioned due to its enterprise-wide view of an organization to identify vulnerabilities for potential fraud and, in some cases, even to investigate. What is clear is that internal auditors know how to follow the risks. But they must have the resources to assess the exposure to potential fraud, ensure internal controls are in place and effective to limit such risks, and to offer assurance that risk management processes are robust and appropriately implemented," he added.