Where Angels Prey

Where Angels Prey is a novel by Ramesh S Arunachalam. Please refer to www.whereangelsprey.com for more information

Friday, April 29, 2011

Building The Internal Audit Function at MFIs: The Need For Independence, Authority and Competence For Internal Auditors…

Ramesh S Arunachalam
Rural Finance Practitioner  

Internal auditors (at MFIs as well as other entities) must be independent of the activities they audit so that they can carry out their work freely and objectively. They must render impartial and unbiased judgments. The internal auditor or the manager (director) of internal audit should report directly and regularly to the board of directors.

While many MFIs still have very nascent internal audit operations, in some large MFIs, the internal audit function is made a part of a group that manages or controls the MFI’s risk management activities. This arrangement may be satisfactory as long as the audit function functionally reports directly to the board and retains its independence. If the internal audit manager reports to a senior executive on day-to-day administrative issues, then, the board must take extra and special measures to ensure that the relationship does not impair the auditor’s independence or unduly influence the auditor’s work. And in micro-finance as well other fields, this has proved difficult and therefore ensuring that the internal audit department head reports directly to the board or a board sub-committee (like audit committee) is perhaps the best option.

In reality, the board should be and is responsible for delegating the authority necessary to effectively allow internal auditors to perform their job. Thus, internal auditors must have the power to act on their own initiative in all departments, functions and units in the MFI; to communicate directly with any MFI personnel; and to gain access to all records, files, or data necessary for the proper conduct of the audit. Clear communication between the board, the internal auditors, and management is critical to timely identification and correction of weaknesses in internal controls and operations.

Internal audit staff should also possess the necessary knowledge, skills, and disciplines to successfully implement the audit program at the MFI in a proficient and professional manner. The evolving roles of internal auditors require that they expand their skills in analysis, technology, decision-making, and communication. At a minimum, members of the audit staff should:
·         Have appropriate education and/or experience, relevant to micro-finance and social development
·         Have organizational and technical (financial) skills commensurate with the responsibilities assigned and they should be familiar with micro-finance models and operations
·         Be skilled in oral and written communication
·         Understand accounting and auditing standards, financial principles, and related techniques
·         Recognize and evaluate the materiality and significance of deviations from sound micro-finance practices, and 
·         Recognize existing or potential problems and expand procedures as applicable

Thus, it is important for each member of the internal audit staff, including the audit manager or director, to commit to a program of continuing education and development, especially in line with the new developments in micro-finance. Hence, deputing them to courses and seminars offered by special institutions like CGAP (and others), industry associations or audit industry groups is a must and should afford them the required opportunities for maintaining audit skills and proficiency, especially with regard to the evolving micro-finance industry. In-house training programs, work experience in various departments and field areas at the MFI, and reviewing current literature on auditing and micro-finance/banking are also means to maintain and enhance auditing skills.

To summarise, internal auditors play a very fundamental role in ensuring the integrity of the various systems at MFIs and therefore, it is important that they are given the necessary authority, independence and skills/knowledge to effectively perform their crucial tasks.

Have a Nice Day!

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