View from the institute: Change – expect the pace to accelerate

The pandemic is not the only factor significantly changing the way we do business. The government’s consultation on audit reform, and the imperative to boost confidence in business and the UK economy post-Brexit are also clear indications that further developments are in the pipeline. While all organisations have been through a turbulent year, we cannot take our eyes off the ball now, or expect the pace of change to slow in the near future.

Nevertheless, I am encouraged by the government’s recent proposals for a strengthened Sarbanes-Oxley-style internal control framework for financial reporting, which will make company directors personally responsible for the effectiveness of financial controls. We now need the discussion to turn to whether this should also apply to non-financial controls on a phased and incremental basis.

I also welcome the government’s plans to establish a new audit regulator funded by a mandatory levy. We have been calling on the government to do this for a long time, arguing that real reform will be achievable only if it is overseen by a regulator with sufficient powers to do its job properly.

However, it is disappointing that the white paper which launched the government’s consultation on audit reform in March contains no detailed legislative timetable – we need to see a clear roadmap for reform or risk further corporate collapses.

Change breeds change, and internal auditors should also be watching closely the ethical and corporate challenges that develop as a consequence of shifts in our working habits and behaviour over the past year. These will inevitably affect our values and our corporate, local and even national culture. Many people are re-examining the way they live and work and reassessing what they see as important in their lives.

One concern is climate change and this has the potential to transform the way we run our businesses even more significantly than COVID-19.

Larry Fink, CEO of investment managers BlackRock, wrote in his 2021 letter to CEOs: “The pandemic has also accelerated deeper trends, from the growing retirement crisis to systemic inequalities”. He went on to say that the existential threat of COVID-19 has “driven us to confront the global threat of climate change more forcefully and to consider how, like the pandemic, it will alter our lives”.

Fink believes that no organisations will be unaffected by the transition to a zero-carbon economy – and, as a consequence, issued a warning: investors will not put money into businesses that fail to commit enough resources to combating climate change.

This is one of many warning signs. Shareholders generally are indicating that they will act on ethical values and seek companies that demonstrate good practice in areas that concern their stakeholders and society more generally.

Internal auditors should be asking how these challenges will affect their businesses. How diverse is your organisation and how competent and effective is the board? Is the board fully aware of, and on top of, the new issues and risks that the changing environment creates? Does it have the information it needs to make decisions that reflect new and emerging circumstances?

These changes, including proposals in the white paper, are relevant to all organisations, not just to those that are listed – shifts in best practice set a common standard. This is why we have launched an ESG (Environmental, Social and Governance) initiative, which includes projects on culture and on climate change and will issue reports and guidance on these themes over the coming year. In addition, the Audit & Risk Awards 2020 shortlist highlights the ways in which organisations are finding innovative ways to meet new demands and tackle emerging challenges.

Those lucky enough to be in a sector that is increasing its focus on audit need to maintain their relevance and prove their value just as much as those in organisations where budgets are squeezed. We must all keep on top of global trends, replace “busy” work with “real” work, use our time more effectively and improve and build our relationships with stakeholders. Collaboration is vital to share experiences and solutions. The past year has shown us how we can transform rapidly in a crisis. We must build on these lessons to meet the challenges ahead. 

This article was published in May 2021.