View from the top: Proportionality | focus on internal controls

I’m sure it will come as no surprise that, in my first few months in the role of CEO of the FRC, the recent update to the UK Corporate Governance Code has been my main focus. With the updates to the code centered on internal controls, it’s a helpful reminder of how internal auditors can demonstrate their value as trusted advisors to the board. 

A key focus of the updated code is proportionality, ensuring well-run UK companies can thrive without additional burdens or reporting complexity. I saw firsthand from our consultation on the code – the largest FRC consultation ever – the consensus that setting our focus on internal controls was the way to achieve this.

While appropriate actions must support growth and competitiveness, investors and other stakeholders demand assurance that companies have good internal controls on the things that really matter. No one can argue these aren’t vital to a well-run company, giving stakeholders confidence through transparent and ethical operations. 

In my role as CEO, I have always looked to internal audit for insights on optimising controls and avoiding unnecessary red tape based on their inside view of risks and operations.

Internal auditors are key when companies look at their internal controls because of their position in, and knowledge of, their companies. As part of the team, they can build partnerships across departments, becoming a pragmatic ally in implementing governance frameworks tailored to business objectives. With an inside view of risks and operations, internal auditors can help to optimise controls.

As a CEO who has always seen internal audit as a business-improvement function, I know not only the opportunities that lie in enhancing the focus on internal controls, but the valuable role our internal audit colleagues have in achieving it. 

The culture of adaptability is also key in today’s rapidly changing risk landscape. By continuously updating knowledge on industry trends, technology and regulations, internal auditors can provide dynamic risk assessments and improvement recommendations.

Identifying control weaknesses, assuring compliance, and promoting data-driven improvements, they can be the eyes and ears of the audit committee across the business and a value-added capability for the CEO and executive team.   

In my past experience at other regulators, and now at the FRC, I have always wanted internal auditors to provide pragmatic recommendations that balance governance oversight and business objectives. I’ve personally found the insights that have come from internal audit invaluable for helping the organisation to stay nimble. Proportionality is the watchword.

Boards need good oversight across financial, operational and emerging risks, and the role of internal audit is embedded in this. Innovative internal audit leaders should position themselves as vital strategic advisers who support good governance and resilience, enhancing perceptions at the board level, rather than internal audit being viewed as a check-box function.    

Within organisations, forward-thinking internal audit leaders can implement pragmatic solutions to mitigate compliance costs and friction. By advising management on avoiding unnecessary governance procedures, they become an ally in balancing oversight with business objectives.

Business leaders should recognise the advantages of building a robust internal audit function tailored to the company’s needs. Beyond financial oversight, internal auditors’ continuous inside view across operations provides assurance and helps to support a performance and ethical culture.   

With the updated code, progressive internal audit leaders will continue to play a role in improving corporate governance. For boards seeking to enhance governance, now is a good time to consider how they invest in their internal audit programmes as a strategic priority and resource. Progressive audit committees should see this as an opportunity to review their approach to how they rely on internal audit.

With a continuous view across the business, internal auditors can provide assurance against blind spots in governance oversight. By embracing an enhanced strategic role, they become a valued management partner in navigating today’s risk environment. I encourage them to seize this opportunity with gusto.

This article was published in March 2024.