Biennial conference on public internal audit and the investigative function

Internal auditing is defined as "an independent appraisal function established within an organisation to examine and evaluate its activities as a service to the organisation".

The broader scope of internal auditing, however, incorporates other aspects, such as the appraisal of internal control systems to determine whether:

a) financial and operating information is accurate and reliable;

b) risks to the enterprise are identified and minimised;

c) statutory regulations and procedures are followed;

d) satisfactory standards are met;

e) resources are used efficiently and economically; and

f) the organisation's objectives are effectively achieved.

Internal audit is, therefore, an important tool for management to put in place processes and internal control systems for the efficient, economic and effective operation of the organisation.

The need for more functionally independent and efficient internal audit in the public sector was the catalyst for the setting up of the Internal Audit and Investigations Directorate (IAID) within the Cabinet Office.

The IAID operates under the regulatory direction given by the Internal Audit and Investigations Board (IAIB). The purpose of the IAID is to establish policies, procedures and practices that enable an effective internal audit and investigative function within Government.

First biennial conference

To mark its second year in operation, the IAID recently organised its first biennial conference, titled 'Public Internal Audit and Investigative Function'. The conference was launched by Prime Minister Eddie Fenech Adami and the speakers included: Joseph R. Grima, head of the civil service; Joseph G. Galea, Auditor General; Pierre Pace, director, IAID; Mark Bugeja, partner, Grant Thornton; and Benjamin Rizzo, president of the Malta Institute of Accountants.

Chris Butler, head of Audit Policy and Advice at the UK Treasury, and Peter Kock, head of Cabinet for the Danish Member of the Court of Auditors, were the foreign guest speakers.

The conference was chaired by Alfred Fiorini Lowell, secretary to the Cabinet, and participants included permanent secretaries, directors general, directors and representatives of private audit firms.

PM's inaugural address

In his inaugural speech the Prime Minister referred to the reform process initiated in 1998. He stated that a "key aspect of this programme concerned the changes... in the financial control aspects of government".

When the Financial Management Reform Task Force was set up, it identified three main areas which needed to be addressed:

¤ the formulation of a new Public Financial Management Act;

¤ the introduction of a new accounting system; and

¤ the re-engineering of the public internal audit function.

The complete overhaul of the public internal audit function took place in 1999.

Drawing on the lessons learnt from the first attempt at internal audit, which was a decentralised function, the 1998 task force drew up a strategic framework aimed at ensuring the development of internal audit as a strong tool to help permanent secretaries and other senior public officers to improve the efficiency and effectiveness of their administrative systems and other processes.

Government accepted the key recommendations of the task force. These were:

¤ the centralisation of the service-wide internal audit effort;

¤ the establishment of a new professional class of internal auditors to be managed by a new directorate; and

¤ the creation of a regulatory board, which would deal with the internal Audit aspect of the function within Government.

To ensure functional independence, Government agreed to transfer responsibility for public internal audit from a line ministry, the Ministry of Finance, to the Cabinet Office.

Soon after its setting up, the designation of the directorate was changed to reflect the added responsibility for financial investigations. This change was necessitated since the directorate was given the added role of interlocutor of the EU Commission's anti-fraud office (OLAF).

In terms of the directorate's financial investigative function, the IAID's role is to ensure that, if criminal action is to be taken, the authorities would have tangible evidence in their possession for successful prosecution.

Dr Fenech Adami also referred to the Co-ordinating Committee, which was set up to serve as a forum where common issues relating to irregularities and fraud are discussed and as a means for the appropriate exchange of information.

The committee's members include officers from the Attorney General's Office, the Financial Intelligence and Analysis Unit and the Police Force. The functional aspect of the committee includes the adoption of common policies, the sharing of data and, when necessary, the carrying out of joint investigative actions.

The Prime Minister also highlighted the role that the directorate has played in international fora, in particular the directorate's significant EU contribution in the area of public internal audit, where some of the proposals have even been adopted as models for other candidate countries to enable them to formulate their own public internal financial control frameworks.

Other presentations

Mr Grima spoke on the clients' perspective of the IAID, that is ministries and government departments. The establishment of a centralised internal audit function was a step forward to ensure accountability within the various departments.

He emphasised the need for value for money, efficiency by managers, performance management and a risk-based approach. There is a move towards more client involvement, he added.

Decentralisation, the retention of public confidence, and accountability should be the means for a more customer-friendly public service. The IAID is, therefore, to be seen as an additional tool to assist public managers to fulfil their functions, detect weaknesses and recommend a remedy.

Mr Pace spoke on 'The Reformed Public Internal Audit and Financial Investigative Function'. He gave a detailed historical background to the setting up of the IAID and explained the responsibility of the IAID to provide Government with an appropriate appraisal, consulting and investigative function.

The IAID also has a very important role within the EU financial control system as it would be the responsible entity for certifying to the European Commission on the adequacy of those structures managing EU resources.

Mr Pace said the IAID would be further strengthened through the enactment of the Internal Audit and Investigations Act, which has already been approved by the Cabinet and should be adopted by Parliament by the third quarter of this year.

Mr Butler gave the perspective of the 'Public Internal Audit and the Management of Risk'. He said risk could either be an opportunity or a threat, depending on whether the outcome was positive or negative.

Risk management sought to strike a balance between freedom to manage and failure, between innovation and risk reduction, and between regulation and risk to the public. Mr Butler advocated that the audit methodology should change in a manner that allowed management rather than the internal auditor to perform risk assessment.

Private sector influence

Mr Bugeja spoke on 'The Private Sector Audit influence on the Public Internal Audit Function'. He said Government's initiative to introduce accrual accounting was a move towards more accountability and the promotion of a more results-oriented environment.

Private and public sector accountants and auditors needed to work more closely, in such areas as codes of professional conduct, cost-effective methodologies and techniques, technical material, automated audit tools, human resources, audit management and quality control, and internal office organisation systems.

In conclusion, Mr Bugeja said we are today experiencing more collaboration between the private and public sectors, and consequently both sectors stand to gain from this opportunity.

Mr Rizzo tackled the issue of future developments of the Maltese accountancy profession and the internal audit function. He said that international public sector accounting standards are the backbone of the accruals accounting procedures within Government reporting.

The internal audit function is gaining its standing in the accounting world and its interaction with external audit and the internal affairs of the organisation. Mr Rizzo referred to the COSO model, which looks at the organisation's internal control processes by addressing three key functions:

¤ effectiveness and efficiency of operations;

¤ reliability of financial reporting; and

¤ compliance with applicable laws and regulations.

This model provides a systems-based approach to internal auditing and is also adopted by the EU auditing institutions.

The Auditor General presented the external auditor's (National Audit Office - NAO) experience of the Public Internal Auditor (IAID). Mr Galea emphasised that it is important to have collaboration between the IAID and the NAO.

He put forward some recommendations for a better working relationship between the IAID and the NAO. These are:

a) the design of a code of practice which helps to guide the relations between the two bodies, to avoid duplication of work and to render the work of the two bodies more effective; and

b) promoting commitment, consultation, communication, confidence and assurance through agreed systems and processes.

Concluding, Mr Galea said that the IAID and the NAO should be seen as complementing each other rather than as threading on each other's toes.

The reform in internal auditing of the European Commission was presented by Mr Kock, who referred to the European Court of Auditors' main function, which to examine the accounts or revenue and expenditure and provide a Statement of Assurance as to the reliability of the accounts and the legality and regularity of the transactions.

The function of the internal auditor within the European Court of Auditors is to ensure compliance, quality of management, and efficient and effective operations.

Closing the conference, Mr Fiorini Lowell highlighted the salient points of each presentation.