Focus of IA departments on strategic risks of listed companies

Abstract

Since 2000 various companies including Enron and Tyco, have ended up throwing in the proverbial towel as major accounting fraud has led to their downfall. A diversity of other companies has followed suit due to the global financial crisis since 2008, and the escalating U.S. federal debt and deficit. This has merely intensified global pressure for the adoption of a risk focussed approach to internal audit (IA), especially when reviewing strategic risks. Strategic decision making and the implementation of those decisions during the still stuttering economic recovery is vital and will determine any firm’s success or failure for many years to come. The global pressure for a risk focussed approach to IA has highlighted the fact that some of the most important risks that a company faces are strategic risks. In this paper, the involvement of IA functions in the context of strategic risk management is explored. The alignment of the IA function’s strategy with the business’s strategy is investigated, including the extent of IA’s participation in strategic risk identification and management. The results of the research reported in this paper suggest that IA departments of Johannesburg Stock Exchange Limited (JSE) listed entities, whose chief audit executives (CAE) are members of the Institute of Internal Auditors, exclude strategic risk from their audit scope.