For the better part of a decade, corporate scandals have emerged with embarrassing regularity. Whether involving circumventing regulations, financial misstatements, or executive misbehavior, each is a reflection of something gone terribly wrong.
Unfortunately, the natural inclination when such a scandal occurs is to seek out someone to blame. I have written often about my angst at hearing the question, “Where were the internal auditors?” as part of the blame game. I addressed that very question in a 2016 blog post.
Jumping to the conclusion that internal audit could have prevented a failure is often akin to blaming a quarterback for being sacked or a goalie for giving up a score without examining the performance of the rest of the team.
The reality is that even the most outstanding internal audit functions in the world cannot provide absolute assurance that all risks are effectively managed and all internal controls are effectively designed and implemented. We cannot assess every risk, and we cannot be everywhere at once.
The bottom line is that internal audit, no matter how effective, cannot guarantee an organization’s financial success, long-term sustainability, or ethical and cultural health. It must be part of a broad corporate governance mechanism that defines risk appetite, articulates operational strategies, sets ethical boundaries, and supports independent and objective assurance.
I raise this issue today because The IIA will soon release results of our inaugural American Corporate Governance Index (ACGI). The annual Index, developed in partnership with the University of Tennessee’s Neel Corporate Governance Center, will offer the first true examination and rating of corporate governance among publicly traded companies in the United States.
I have long worried that the value of sound corporate governance is not appreciated, and I believe the scandals that shock our sensibilities and erode our confidence in companies and public markets are simply symptoms of a greater problem. The ACGI presents valuable insights and perspectives that will address whether my concerns are valid.
While we will have to wait until next month to learn details of the first ACGI’s findings, I can reveal the foundation upon which the Index is built. It is the Guiding Principles of Corporate Governance, also developed in collaboration with the Neel Corporate Governance Center and based on a compendium of expert viewpoints not only in the United States but around the world. These eight Principles were used to develop a core survey for the Index, with companies “graded” overall based on their performance around elements of each principle. The eight Guiding Principles of Corporate Governance:
The ACGI was designed specifically to be principles-based to make achieving sound corporate governance aspirational. In other words, every organization should strive to meet each of the principles at the highest levels, because it is the right thing to do, not because it is on a list to be checked off. Just as important, these principles must be taken as a whole. The root cause of many of the scandals we see today is that organizations focus on one area at the expense of another.
From an internal audit perspective, these Guiding Principles eloquently address a fundamental truth about sound corporate governance. It is a truth that all practitioners should take to heart and promote in their work and in their advocacy for the profession.
Corporate governance is incomplete without the independent, objective, and enterprisewide assurance that only internal audit can provide.
As always, I look forward to your comments. And look for the “Board Perspectives” column in the December issue of Internal Auditor magazine for further insight into the Guiding Principles.