Internal audit of the future: environmental, social and governance issues

A new agenda: how environmental, social and governance issues will become firmly embedded in the way internal audit works

In a series of articles, we are looking at how we believe internal audit (IA) will change in the next five years. We have previously examined the importance of the team and how data analytics and artificial intelligence will drive the digital agenda. Looking forward, we will examine the increasingly creative uses of technology to increase engagement, together with a regulatory reset that will push greater responsibilities on to the board.

But here, we will focus on how IA will be at the forefront as boards seek to embed the new ESG agenda.

And what will be on this new agenda:

• Increasing scope and breadth of audits
• Expanding knowledge base to incorporate ESG risks
• Greater use of integrated reports
• Increasing advisory role
• New sustainability reporting requirements

In many ways, ESG represents the next wave of IA expertise. We have seen the incredible growth in IT skills that have become an absolutely necessity as digital demands on the role have increased. In the same way, we believe that in the coming years, IA will need to become equally comfortable operating in an ESG-driven assurance environment.

As ESG settles at the top of the boardroom agenda, IA will find that the scope and breadth of their work as they are required to provide crucial validation of the organisation’s activities.

Transparency will be the key watchword. As accusations of corporate ‘greenwashing’ increase, IA will be well-placed to ensure there is real substance behind the organisation’s ESG activities.

But as we are only too aware, environment, social and governance covers a wide range of subjects – so IA’s knowledge base will need to expand accordingly. This could lead to greater use of co-sourced resources, where external teams are brought in for specific assurance and advice.

However, this will need to be implemented in an integrated way so that boards are given a joined-up account of risks and how they can be reported and mitigated. The growth of integrated reporting at a corporate level will help drive this model of working, so that in five years’ time it will be second nature to IA.

Advisory role

As this new agenda evolves, so too will the role of IA. Yes, it will be there to provide assurance over the myriad reports that will feed into the organisation’s integrated reporting systems, but it will also be there to proactively provide advice to senior management and the board. While this will not be without its challenges, it will further help attract new talent into the profession with a growing appreciation of the real value that can be added.

This role will be further enhanced by impending regulatory change. One of the most relevant outcomes of last year’s COP26 meeting was the launch of the International Sustainability Standards Board, which will set recommendations for ESG reporting.

As such, boards will be turning to their advisers as they grapple with the implications of new reporting requirements, so IA can push themselves to the front of this advisory queue – the pace of regulatory change will only accelerate, so IA will need to be agile in the way they adapt to this changing environment, staying one step ahead of the risks and mitigations that boards need to understand.

By seizing these advisory opportunities, IA will act as catalysts for change, helping an organisation realise its ESG goals while evaluating potential risks. But if they wait five years before embarking on this journey of transformation, it will be too late.

Read the other articles in our internal audit series here.