Worth repeating: Sometimes, it's valuable to look at what has been said in the past to get an idea of just how far internal auditing has progressed

Internal Auditor, Dec, 2001 by Jeffery Ridley

ERROLL J. YATES, CHAIRMAN and managing director of Kodak Limited, U.K., died last year. For most of my working internal audit career with Erroll -- from the 1960s to the 19905 -- he promoted and supported the development of professional internal auditing. During the 12 years I was the manager of internal auditing for Kodak and reported directly to him, I found that his vision of internal auditing as a consultancy in business, and as a profession, was in advance of the practice in many organizations of the day. Even now, with a new definition of professional internal auditing, his thoughts still represent a paradigm shift for many practitioners.

In the June 1977 issue of InternalAuditor, Erroll wrote of the need for internal auditors to think like managers, to be "... an important part of the management team... to contribute to an organization's objectives, to focus attention on both efficiency and effectiveness." His words are worth repeating as a tribute to his memory and forward thinking. They still have many years of life in 21st century internal auditing.

On the coming pages, you'll find a reprint of Erroll's article, along with some of my personal insights into the man and the profession as it has evolved since then.

RELATED ARTICLE: INTERNAL AUDIT

A Managerial Control

Erroll J. Yates

MANAGEMENT TODAY HAS TO PAY increasing attention -- and rightly so -- to ever declining operating profit margins. These margins become even lower if measured by the more accurate current purchasing power accounting or current cost accounting methods recently put forth by the Sandilands Committee [the U.K. body that made recommendations on inflation accounting]. Internal audit is one tool which can, if used effectively, help management in its day-to-day control function.

Modern management needs something more than confirmation of the true and fair state of company business and the knowledge that money was spent as reported by statutory auditors. Management needs to know that efficient controls are operating, helping to ensure that people and assets are safeguarded and well-directed.

It is time for management to entrust independent appraisal activity to the internal auditor. The internal auditor should review managerial and other controls that relate to efficiency as well as to data. To review these efficiently, internal auditors must think like management. They must shake off the stereotyped image of the cash-counting, stamp-counting, or stock-checking role that, unfortunately, still lingers.

The Institute of Internal Auditors has published aims for the development of internal auditing. Its plans for education and research clearly demonstrate a growth in status. Considering its short life -- some 35 years -- and relatively small number of members. The Institute can be justly proud of the standard of its Code of Ethics and the vision behind the concepts in its Statement of Responsibilities of Internal Auditors.

All professions need such a foundation of technical excellence if they are to grow. But technical excellence is in itself not sufficient to guarantee growth. Those whom the profession serves must also support it. And that support should come from the highest level.

Internal auditing is no exception. While it takes time to develop the support necessary for growth, it is becoming obvious that there is an increasing acceptance of the internal auditor's role in most organizations. And this role is not merely part of the internal checking system but as an important part of the management team. Today's internal auditor appraises controls rather than acting as the control. I wonder if IIA members, as a body, have done all they can to ensure that the internal auditor's responsibilities are understood and practiced. Lip service to the modern concepts of internal audit is one thing. Putting it into practice is another.

My own company, Kodak Limited, has used internal auditing as an independent appraisal since the early 1930's Active acceptance and support at the highest levels of the company have marked the transition from traditional internal check to the present accepted concepts of modern internal auditing. Such progress has, of course, also stemmed from the imaginative service of the auditors. No doubt similar patterns of progress are occurring in other organizations throughout the United Kingdom. Although management attitudes may differ, the fact that an internal audit department exists is proof that a growing and necessary service for management is developing.

The Institute's Statement of Responsibilities defines internal auditing as a managerial control, which functions by measuring and evaluating the effectiveness of other controls. To identify the challenges and opportunities available to internal auditors, one must first define control and examine how it fits into the key functions of management today.

Control, in this paper, concerns the managerial function of setting targets and plans and ensuring that performance conforms to them as nearly as possible. I presume this is what is meant in The Institute's Statement of Responsibilities when it refers to the measurement and evaluation of the effectiveness of controls, key management functions usually delegated to the internal auditor. In any company, management has the tasks of: