Internal Audit for SMEs in India- Assuring of long-term sustainability

Internal audit function has potential to improve operating efficiency and improving the health of the organisation for achieving long-term sustainability for SMEs in India

Recently I was interacting with one eminent Internal Auditor who has a presence in India and middle- east in undertaking internal audit assignments for SMEs. He was explaining the case of the auto dealer making decent earning from the sale of vehicles whereas the cash cow of such businesses, servicing unit was incurring the loss. Dismayed at the poor performance, management had requested him to undertake an internal audit to identify the gaps and fix the problems. He assisted the firm to fix the issues and that resulted in the turnaround of services division.

In the course of the discussion, he was explaining that many SMEs initially think that internal audit is just a burden and not having any value to them. However many of them were able to experience better discipline by a thorough analysis of costs, processes, assets and liabilities. This exercise has been helping them to become better aware of ground realities within their own firm and act.

What is Internal Audit?

Internal auditing as an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations.

It is needless to emphasise that profit making is the primary motive of any entity in the business. Internal auditing helps an organisation accomplish this objective by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.

Every entrepreneur aspires to see that his firm remain healthy and growing. However,  rising concerns for business failure among SMEs have been prompting the promoters to appreciate the need for appropriate risk management and internal audit.

Why Internal Audit for SMEs?

Investment in internal auditing can add value to an organisation via operating efficiencies, safeguarding assets, more reliable financial statements, and realizing an organisation’s goals and objectives leading to reward to stakeholders.

It is obvious that in the SME space, the stakeholders are closely associated with the business. Promoters are largely focussing on the targets and performance.

All entrepreneurs are so obsessed with such a continuous routine that they remain oblivious to certain vital elements that have a positive impact on a firm’s operational performance and sustainability.

Further, SMEs tend to have particular characteristics such as fewer financial controls, more related-party transactions,  lower accuracy of accruals and provisions, etc. People within the organisation tend to avoid examination of such issues for obvious reasons.

The scope of Internal Audit:

There is no structured scope to deliver internal audit. Organisations need to be free to choose what works for them according to the nature of what they do, how the organisation is structured, the way processes operate, their financial circumstances and the risks to their strategic objectives. The scope of internal auditing within an organization cover:

• Effectiveness and efficiency of operations.
• Reliability of financial and management reporting.
• Compliance with laws and regulations.
• Safeguarding of Assets

Some of the roles an auditor can play are as follows

1. Act as a bouncing board to the management on key risk management decisions
2. Assist in identifying areas of cost and manpower optimization.
3. Keeps track of key developments in the field of economy, commerce and legislation and tracks its potential impact on the company
4. Bring pragmatic approach to implementing systems and processes
5. Help in deploying tailor-made best practices that are suitable to the needs of the organisation.

Outsourcing Internal audit function:

Large organisations have a separate department for internal audit. But SMEs cannot afford to have one.

Internal auditor function can be outsourced to experts who have deep expertise in the process and have industry knowledge. This will help to keep the costs low and achieve the desired results. Since they work on multiple assignments across the industries/geographies, they can help in improving the benchmarks and risk controls than an internal candidate. Further, SMEs can be assured of their independence.

Internal Audit and Managing Risks:

With a risk management focus, internal audit can move beyond its monitoring role to help influence and improve how risks are managed before they become challenges. Businesses today are knowledge-intensive and such orientation creates processes and theme that is very complex. So is the gamut of risks and magnitude of impact.

The success of SMEs in overcoming these challenges has been achieved largely due to the overwhelming spirit of entrepreneurship displayed by the promoters of these organizations. However, often during adverse economic crises or situations beyond comprehensions of these promoters, the organisation fail in risk mitigation and lose the considerable value of the business.

During times of such distress, an internal auditor who got a better view of the business can chip in with valuable advice.

Independence – Critical to the success of Internal Audit:

Independence is the freedom from conditions that threaten the ability of the internal audit activity to carry out internal audit responsibilities in an unbiased manner.

Business Owners should encourage the internal auditor to engage in the job fearlessly and it is necessary to effectively carry out the responsibilities of the internal audit activity.

It is very important for SMEs because many a time the employees in SMEs are somehow related to promoters or may be associated with them for a long time. Thus there could be chances of embarrassment or at least he may find difficult to bring all the employees on board. Promoters should prevail upon the employees & partners and make them understand that such an examination is important for the sustainability of firm and brings common good.

Conclusion:

All SMEs are spiritedly focussing on increasing the business. Even then they are all carrying an unspoken desire that their firm remains sustainable and that effective controls are in place and operating properly.

Internal Audit can help them to attain this goal. There are studies that have argued that the effective internal audit functions improve the overall health of the organisations.