Lord Smith, chair of SSE and Weir Group, has hardened his stance and feels that all companies would benefit from in-house audits
Rebuilding trust and integrity is critical to Scotland’s economic future, according to Lord Smith of Kelvin, the chairman of Scottish & Southern Energy and Weir Group.
Lord Smith will tell a conference of the Institute of Internal Auditors (IAA) in Cumbernauld that internal auditors have a pivotal role to play in rebuilding market confidence.
“I have great confidence in internal auditors,” said Lord Smith. “They are better at risk assessment than external auditors. They’re more likely to spot excesses and to notice when a culture of sloppiness becomes endemic in an organisation. They’re also in a terrific position to become whistleblowers.
“It’s much harder for external auditors to get into the guts of a company, or probe as deeply. If you’re actually inside an organisation it’s much easier to detect when things are starting to go awry.”
“Integrity is absolutely paramount. If they lack integrity then we don’t have much chance.
“They have to be strong people, because from time to time they will come across difficult situations and you have to be strong enough and able to stand up to top management and even the board.”
A former president of the Institute of Chartered Accountants of Scotland, Lord Smith, 64, is a member of the Scottish government’s Council of Economic Advisers and a non-executive director of Aegon UK, 3i and South Africa’s Standard Bank.
In the Smith Report on corporate governance, commissioned and published by the UK government in 2003, he stopped short of insisting that all listed companies should have an internal audit function. But he has now hardened his stance.
“I would now be more prescriptive. Today you really ought to have an internal audit department. All FTSE 250 companies should now have an internal audit function.”
He said external audit firms are incapable of providing the same in-depth review of and assurance over risk and controls across the spectrum of financial and non-financial aspects of an organisation.
Lord Smith made clear he was not commenting specifically on “meltdown Monday” when Scotland’s two largest banks, RBS and HBOS, were effectively nationalised.
This article was published in The Sunday Times on 19 October 2008