10 th European Academic Conference on Internal Audit and Corporate Governance Effect of Financial Crisis in the Internal Audit Profession in Greece Dr. Andreas G. Koutoupis CMIIA, CIA, CICA, CCSA Lecturer of Accounting and Auditing, University of The Aegean Business School Dr. Michail Bekiaris, Assistant Professor of Accounting and Auditing University of The Aegean Business School 1 Introduction The current financial crisis is affecting the entire operations of the Greek modern enterprise. The main objective of this study is to identify and evaluate whether the current trend of downsizing impacts Internal Controls, Internal Auditors and Internal Audit departments. We will evaluate whether downsizing may lead to less compliance with corporate governance best practices, as well as laws and regulations or excessive risk-taking due to elimination of important controls. 2 1
Objectives of this study The main objective of this study is to identify and evaluate downsizing implications on Internal Controls, Internal Auditors and Internal Audit department in general. It consists of four main parts: Downsizing Overview; Downsizing Impact on Internal Controls; Internal Auditors Role in downsizing projects; Downsizing impact on Internal Audit department. 3 Our research objectives are the following: Identify, Examine and Evaluate the Impact of downsizing due to financial crisis on Internal Controls - Understand the importance of Internal Controls in the downsized environment; Identify and Evaluate Internal Audit s role in downsizing; Examine and Evaluate ways that downsizing can impact directly the Internal Audit department; Identify what was the impact of current financial crisis in the Internal Audit Profession in Greece. 4 2
Literature Review Benefits of Downsizing Bureaucracy reduced by adopting the use of Advanced Information Systems and eliminate the unnecessary steps within company s processes; As a direct effect from the above, costs are also reduced; Provides the opportunity to incorporate new technologies on the organization s network; It also provides employees the opportunity to learn or develop new skills and adopt new roles within organization as a result of various operations/functions being downsized. 5 Literature Review Risks of Downsizing(1/2) It may create unrealistic management expectations; Downsizing in employees terms, carries the inherent risk for the organization to fire some of its best performers; Staff reductions cause low morale and may also diminish employee commitment to their company. Organizational difficulty in retaining the right staff; Employees loss of trust in management. Some employees may react badly when certain co-workers are let go. They may probably become self served and defensive, rather than loyal to the company; The above is also enhanced by employees actual or perceived loss of responsibility, authority, or status within their peer group, function, or organization; Firing employees carries the risk of losing useful institutional knowledge; Corporate fraud is associated with downsizing according to field experts. 6 3
Literature Review Risk of Downsizing(2/2) Very high outplacement costs, such as early retirement packages and other forms of buyout; Adverse impact on productivity; Tendency of the affected areas of the business toward re-staffing themselves; It usually requires great amount of time, so sometimes long term benefit never materializes; It may also delay the implementation of other beneficial changes; Stakeholders, such as customers and suppliers may become aware of difficulties in the business and lose confidence in it. We may not able to say the same for company s shareholders which are always looking for profit maximization; Downsized systems may not meet Internal Control standards as easy as nondownsized ones. Authorization controls and segregation of duties are critical controls within downsized systems. The above controls, as well as the whole organizational security, might be at risk within downsized systems. The above consequences for organizations can be both damaging and embarrassing; Downsizing may cause an increase in training costs associated with learning to operate in a new environment; External Consultants fees may be also high. 7 Downsizing Internal Audit Considerations Downsizing is about change systems, processes and approaches in order to achieve dramatic changes. After the implementation of downsizing programme, there is a number of issues that should be taken into account by the Internal Audit function. These have as follows: The organizational culture will have changed significantly as a result of downsizing. Now, the organization focuses on customer and processes, rather than on production and functions; The organization will have a flatter structure, with more authority delegated to line management, clearer accountability, more scope for management discretion and reduced levels and frequency of checking 8 4
As a response to the new environment the following suggestions can be given: Internal Audit should adopt a consultation/advisory role to management as far as it concerns business risks. Their work should be in a form of a partnership with management; They should be able to continuously provide assurance to the Audit Committee of the Board of Directors, Management and their other clients, that the organization s system of Internal Controls in the reengineered processes is sound, appropriate and effective. These clients have the main responsibility for the efficiency end effectiveness of Internal Controls, as well as risk management; External Auditors may also be considered as Internal Audit clients. In the new environment Internal and External Audit should be able to co-operate in order to achieve their targets more economically, efficiently and effectively. In the new environment any conflicts between them should not exist. 9 Impact of the current Financial Crisis in the Internal Audit profession in Greece: Although Internal Audit for a certain number of organizations was targeted for downsizing purposes, the vast majority of organizations (governmental & private) do try to enhance their assurance processes in order to ensure safeguarding of assets (mainly against fraud events) and compliance with laws and regulations. Moreover, new laws imposed by the European Union ask for compulsory Internal Audit departments in the Central Government, Local Government, as well as the National Health System open the market for hundreds of new Internal Auditors. New Insurance Act which adopts the main principles of Solvency II requires compulsory Internal audit department for all insurance companies. Banks try to maintain their current Internal Audit structures to ensure adequate assurance and consulting activities take place under their scope. Moreover, due to financial crisis, fraud related events increase therefore there is a need to strengthen their assurance role. 10 5
Conclusions As a result of downsizing initiatives, the Internal Audit function may have to change its role within organizations. Internal Auditors may view downsizing either as an opportunity, or as a threat. Internal Audit should get involved in downsizing in order to ensure that the new processes have taken Internal Control considerations into account. Their role is to ensure that the organizational system of Internal Controls works in the most economic, efficient and effective manner. Internal Auditors must be proactive and they should also get involved in downsizing projects from the beginning in order to prevent deficiencies, as well as to incorporate changes into their departmental plans. By no meaning should always be control-oriented. Management is going to determine which controls will stay and which, will go. Internal Auditors should be in the position to suggest adequate controls that should be retained or built into the new downsized environment. 11 Thank You for Your Attention Questions? 12 6