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April 30, 2008

Internal audit requires new focus

PricewaterhouseCoopers Czech Republic has appointed a new director in its advisory services business. Roman Pavloušek tells Carolyn Canham about the challenges facing the internal audit profession and the need for change in the Central and Eastern European region and globally.

Roman Pavloušek has been in charge of PricewaterhouseCoopers (PwC) Czech Republic’s internal audit services (IAS) practice for a little over two years. He was recently appointed as a director within the firm’s advisory services line, a promotion he says will lead to more independence and responsibility for regional matters. “I think this is more recognition of what I have been doing so far, but it also gives more stature and more importance to the practice here in the Czech Republic and within the region,” the 36-year-old says.

Pavloušek joined PwC Czech Republic in 1996, working initially in external audit before moving to the firm’s consulting branch where he focused on risk management and consulting projects. “I finally landed in internal audit, which was closer to where I saw myself,” he says, adding that internal audit allows him to combine consulting and audit skills.

In 2003, Pavloušek went on secondment to the US for two years where he worked with the PwC US internal audit services group based in Detroit. He then returned to the Czech Republic to head the IAS practice. Pavloušek’s role includes further developing the IAS practice in the Czech Republic and the Central and Eastern Europe (CEE) region. He also represents the CEE within PwC’s global IAS leadership team.

Active profession Speaking about internal audit (IA) in the Czech Republic, Pavloušek says the country has a very active chapter of the Institute of Internal Auditors (IIA) and IIA professional standards are considered to be a benchmark at the professional level.

In terms of regulatory standards, the IA profession has regulation related to government bodies and industries, and regulation from the country’s central bank. The third level of regulation comes from the EU’s Eighth Directive. “So far it has had limited impact, but obviously now there are discussions to amend that and to update that so we are looking towards what will be the final outcome and to what extent it will [have an] impact,” Pavloušek says.

The global challenge for IA is to “move a little bit further beyond what it has been doing so far”, Pavloušek says. “So far with a lot of [Sarbanes-Oxley] emphasis, a lot of focus on financial control, the perceptions is that is has gone too much that way and some important areas were put aside.”

These important areas are the strategic and operational aspects. “We focus so much on financial controls, financial processes and so on, but we haven’t focused that much on these other two areas,” Pavloušek says.

Strategy focus important It is important to realise that value to shareholders is created more from reporting on strategic and operational areas rather than financial controls, Pavloušek says.

“It’s important to shift the focus on internal audit activity the right way so it looks at the activities that actually have to do with how strategy is shaped, what pressure is on the core businesses and how business is coping on an operational level,” he explains, adding that financial controls are still important. “What we are trying to advocate is that internal auditors should actually look at it from the perspective of here is the company and here are the attributes that contribute to value creation, so we should look at the controls and the risks that are directly related to those and link our internal auditing to these areas.”

Pavloušek says that in the Czech Republic and CEE the corporate community has been slow to fully embrace the internal audit function and the value it can add to business. “Obviously the focus is a lot on profitability and operations and how to make things profitable. The corporate governance issues are kind of put aside to a certain extent,” he explains. “In the Czech Republic you see less awareness about corporate governance and what internal audit can do for companies than in the US and in the West generally. There are different priorities – a lot of these guys are under extreme pressure to perform, to deliver. I’m not saying that the people in the West are not, but here the expectations are even higher.

“So from that regard there is not sufficient investment in these types of activities, the setting of proper internal control structures, internal audit and so on. To a certain extent, internal audit is still viewed as a necessary overhead, as a cost to be managed, as a necessary evil and not always as something that can bring value. And if you don’t invest enough in this activity and you don’t get quality people, they don’t give quality results. So it becomes kind of a vicious circle that needs to be cut.”

Rethink needed Pavloušek says observers from both within and outside of the IA profession warn that if the internal audit profession doesn’t change in the next five years, it risks becoming irrelevant, because other compliance and regulatory functions could take on parts of the activities and scope of internal auditors.

He says: “It needs to rethink itself, it needs to readjust itself… because when you argue to your management, to your C-Suite, when you are trying to convince them about the purpose of internal audit… you need to focus on strategic and operational as well [as financial controls] because that’s where your shareholder value is and managers are concerned with shareholders and shareholders with value creation.”

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