Internal Audit Reporting Relationships: the Analysis of Reporting Lines
Internal Audit Reporting Relationships: the Analysis of Reporting Lines

Summary/Abstract: Initially created as an accounting oriented function internal auditing has been transformed into management oriented profession. If at the beginning internal auditors were seen just as assistants of accountants and external auditors, nowadays it is certainly an independent profession, which is playing a significant role in the management of organizations. Internal auditing evolved to satisfy the needs of a management of organizations. Private companies as well as government institutions have become so difficult, large and complex that their managerial line became concerned about monitoring and controlling activities that are in their responsibility. Internal auditors may assist management in many areas. Broad scope of internal audit functions and roles emerged year by year. Initially internal auditing was basically concerned with accounting and financial matters. Although first Statement of Responsibilities published in 1947 by the Institute of Internal Auditors challenged to tap operating matters, however it emphasized the role of internal auditing in accounting and financial issues. Statements of Responsibilities issued later by the Institute of Internal Auditors help to track the development of internal auditing profession: from accounting oriented function up to management oriented, sophisticated and value added discipline. Obviously reporting relationships of internal auditing has changed and developed together with the progress of internal audit discipline. At the beginning (when internal auditors mostly were dealing with accounting and financial issues) reporting lines of internal auditors went to the accounting level and external auditors, who saw internal auditors mainly as assistant in financial audits. Accordingly as functions and roles of internal auditing expanded, changed and shifted more to management oriented matters than accounting matters, reporting lines have also been transformed. Moreover, if at the beginning reporting lines of internal auditing were generally simple and straightforward, together with changed functions of internal audit they have made a shift to more complex and difficult relationships. Of course, due to the fact that internal auditing is internal function of organizations, most constituents (customers) of internal audit services are members of companies or institutions, such as senior and operating management or audit committees. Because interests and needs of these customers differ, internal auditing frequently faces potential conflicts of internal audit concerns and reporting. One customer usually is interested mainly in assurance services (i.e. audit committee), another group is concerned about consulting services and recommendations (i.e. operating management) and the third group may be paying attention to both services of assurance and consulting (i.e. senior management). Of course these interests of the customers of internal audit services may interfere and one group of customers may shift their concern from one service to another. Internal audit reporting lines usually are classified to administrative or functional. According to the Practice Advisories of International Standards for the Professional Practice of Internal Auditing, ideally the chief audit executive should report functionally to the board or audit committee and administratively to the chief executive officer of the organization. However as the results of the research provided in this article show reporting lines of internal audit activity are not always organized as they should be ideally.

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