Why an internal audit can set your business up for success

When a business gets busy, the risk of fraud and financial error rises.

You might have an employee who has forgotten to remove the corporate credit card from their online account.

You might have the finance team paying invoices for services that haven’t actually been supplied.

Or you might have something more sinister: a senior employee passing off school fees or personal payments as a legitimate business expense.

In my time as an auditor, I’ve seen all of these and more.

And if considerable time elapses before the issue is revealed, it can have serious consequences, including legal issues, financial loss and erosion of confidence in business leadership

Fortunately, there is a way to keep these risks under wraps through an internal audit.

Deep insights matter more than ever

The term audit can be intimidating for business leaders, but as a tool to manage risk it is one of the most effective that an owner or executive team can employ.

An internal audit can help strengthen the governance and transparency of an organisation, by identifying and addressing risks the business might not previously have recognised or prioritised.

It can allow the business to proactively manage these issues, while also acting as a prompt to improve operational controls.

As an internal audit is systematic, it requires existing processes to be reviewed and documented, which means it can shine a light on inefficiencies or duplication of effort.

This can allow for process improvements not only in finance operations but in other areas, like procurement, expense management, time allocation, resource choices and other areas.

Finally internal audits provide confidence for other stakeholders that the business is being well-managed.

For investors, shareholders or directors, an internal audit can provide a detailed guide to the financial and operational integrity of the organisation, while for outside stakeholders, such as banks, potential partners or prospective purchasers, it provides valuable insights and assurance.

Signs an internal audit is needed

For a business owner, there are a few red flags that indicate an internal audit is necessary — or at least a good idea.

A major business event like a merger or acquisition, or the decision to seek new investment, is best undertaken with a clear-eyed understanding of the financial and operational state of the business.

In these cases, an internal audit might be critical to the success of the initiative or investment, and provide assurance to other stakeholders that the business is in a robust state, with well-managed risks.

A change in ownership or leadership is another trigger, with an internal audit offering a comprehensive picture of the state of the business operations, as well as highlighting any legacy challenges that might need to be addressed.

If there is any suggestion of fraud, resource misuse or even unexplained losses or expenses, an internal audit is the primary investigative tool needed to uncover issues, prevent future abuse, and restore trust internally.

For those businesses that have experienced rapid growth, an internal audit can also be an opportunity to take stock — with an experienced third-party testing internal controls and probing risk management systems that could leave a business vulnerable.

Often our main recommendations from an internal audit are those that strengthen internal systems and financial reporting, and identify any processes that are no longer fit for purpose, secure or scalable.

The results become part of our clients’ continuous improvement cycle, going beyond simple compliance to support strategic growth.

How to get started

Yet despite all the advantages of an internal audit, many business owners can be reluctant to get started.

A key barrier can be nervousness about what the auditor might find — but like putting off going to the doctor, getting bad news in a calm and considered way is far better than waiting until a problem becomes impossible to ignore.

A second challenge is a lack of standard operating procedures in many small and mid-sized operations.

Without properly documented processes, employees may feel processes are more informal recommendations rather than a pattern for work — and leaders assume this will make analysis more complex.

While it is true that an absence of standard processes can be a challenge, the process of audit means we document steps as we go through our discussions with key management and relevant staff, which can itself provide valuable information for leaders.

Finally, for those businesses that lack a risk register, it can be a struggle to determine what should be included in an internal audit scope — where should it start and end?

To make it easier, we often work with business leaders to undertake an observational review of their business first, which can help identify those processes that deserve more scrutiny.

Armed with this information, leaders can then decide whether they need a full internal audit, while benefiting from insights into how their people are actually operating and what challenges might remain.

Being proactive is the first step to safeguarding the future of your business, ensuring that any red flags are fixed early, before they evolve into critical risks.

Working closely with an internal audit team to identify what might need to be reviewed and taking the advice and findings on board, is a key strategic step that can set your business up for improvement.

About Pitcher Partners

Pitcher Partners is a national association of six independent accounting, audit and business advisory practices. You’ll find us in Adelaide, Brisbane, Melbourne, Newcastle and Hunter, Perth and Sydney. Since day one we’ve been helping clients intelligently frame their goals and make the most of their potential. Today, we’re one of the largest firms in Australia. We work with middle market businesses, from family-run companies to renowned industry leaders and iconic brands. And help families and individuals manage their wealth across generations.