THE STRATEGIC ROLE OF INTERNAL AUDIT IN IMPROVING
CORPORATE GOVERNANCE: A CASE STUDY ON FINANCIAL
SECTOR COMPANIES
Introduction
Corporate governance is a key cornerstone in ensuring that a company is run
effectively and transparently. In the financial sector, where risk and complexity are
high, the importance of corporate governance cannot be understated. The strategic role
of internal audit in this context is essential to ensure that companies can operate with
high reliability and integrity.
Changing business dynamics, changing regulatory policies, and technological
developments have pushed financial-sector companies to face new challenges in
maintaining a balance between business growth and compliance with evolving
corporate governance standards. Therefore, this study aims to detail the strategic role of
internal audit in improving corporate governance, by examining a concrete case of a
financial sector company.
The financial sector is faced with a high level of complexity, including rapid
changes in markets, financial risks, and increasingly stringent regulatory demands. In
this context, internal audit is not only a compliance checking function, but also a
strategic partner that helps companies to manage risks wisely, improve operational
efficiency, and ensure compliance with applicable regulations.
It is important to understand that internal audit is not just a compliance check,
but also a valuable source of insight for the board of directors and executive
management. With deeper involvement in the company's strategy, internal audit can
provide proactive recommendations to improve internal control systems, increase
accountability, and identify opportunities for improvement.
This research is expected to contribute to further understanding of how internal
audit's strategic role can be effectively applied to improve corporate governance in the
financial sector. The results are expected to provide practical guidance for practitioners,
corporate management, and regulators to strengthen the role of internal audit as a
strategic partner in achieving the goal of better corporate governance.
Theoretical Study
Definition of Corporate Governance
Corporate governance, or in English "corporate governance," refers to a set of
systems, processes, and policies that govern and control a company with the aim of
achieving corporate objectives, protecting shareholder rights, and ensuring the balance
of interests of all parties involved. Corporate governance is a framework that involves
interactions between various parties who have an interest in the company, such as
shareholders, the board of directors, executive management, employees, creditors, and
other parties who play a role in the sustainability and success of the company.
Evolution of the Internal Audit Role
Initially, the role of internal audit focused more on checking compliance with
company policies, procedures, and regulations. These checks aim to ensure that the
entity operates in accordance with applicable standards and regulations.
Internal audit began to expand its role into operational examinations. The focus
is not only limited to compliance, but also includes operational efficiency, information
reliability, and risk management. At this stage, internal audit becomes a partner to
management to improve operational efficiency and effectiveness.
As the complexity of the business environment increases, internal audit is
beginning to play a greater role in identifying, assessing, and managing risk. This
includes examining operational, financial, and strategic risks to help companies meet
evolving business challenges.
The role of internal audit has evolved to become a strategic partner to the board
of directors and executive management. Internal audit engages in strategic reviews that
support the formulation and implementation of corporate strategy. This includes the
evaluation of potential strategic risks and recommendations for achieving long-term
goals.
As technology advances, internal audit is beginning to integrate information
technology and data analytics into the audit process. This allows internal audit to be
more efficient in data collection and analysis, and provide deeper insights into risk and
performance.
Internal audit has accelerated to become the guardian of corporate governance.
Its focus involves assessing the effectiveness of internal control systems, regulatory
compliance, and providing assurance to the board of directors and stakeholders that the
company is well run.
Internal audit not only inspects, but also provides proactive advice to improve
performance and manage risk. Internal audit can serve as a strategic advisor that helps
companies deal with market changes and achieve strategic goals.
Corporate Governance Framework
A corporate governance framework is a structure that guides companies in
designing, managing and monitoring effective governance systems. The following are
the common components that make up a corporate governance framework:
Shareholders:
o Definition of Stakeholders: Identify all parties that have an interest in
the company, including shareholders, employees, customers, suppliers,
and communities.
Stakeholder Roles and Responsibilities:
o Engagement and Communication: Describes how the company interacts
with stakeholders and meets their needs through open communication
and active engagement.
Board of Directors:
o Composition and Skills: Establish the structure of the board of directors,
including the number of members, independent composition, and
required skills.
o Responsibilities and Authorities: Outlines the responsibilities and
authority of the board in overseeing management, assessing risk, and
formulating strategy.
Ethics and Organizational Culture:
o Code of Ethics: Establish a code of conduct that provides guidance on
ethical behavior for all members of the organization.
o Organizational Culture: Build a culture that supports values such as
integrity, responsibility, and honesty.
Disclosure and Transparency:
o Financial and Non-Financial Reports: Ensure transparency through the
provision of accurate and complete information, including financial and
non-financial reports.
o Shareholder Relations: Establish shareholder disclosure and engagement
practices.
Risk Management:
o Risk Identification: Identify risks that may affect the achievement of
company goals.
o Risk Evaluation and Control: Assess risks and develop control strategies
to manage them.
Internal Control System:
o Internal Control Design: Establish an effective internal control system to
ensure reporting reliability and policy compliance.
o Evaluation and Monitoring: Conduct periodic evaluation and monitoring
to ensure the effectiveness of the internal control system.
Executive Leadership and Management:
o Organizational Structure: Establish an organizational structure that
supports strategy execution and goal achievement.
o Performance Evaluation: Assess executive management performance
and ensure effective leadership.
Compliance and Regulation:
o Regulations and Compliance: Establish a framework to ensure that the
company complies with all applicable regulations and standards.
Performance Measurement and Evaluation:
o Key Performance Indicators (KPIs): Establish and measure KPIs that
reflect the achievement of company goals.
o Periodic Evaluation: Conduct regular evaluations to assess the
performance and effectiveness of corporate governance.
Internal and External Audit
o Internal Audit: Establish an internal audit function to examine and
assess the effectiveness of internal controls.
o External Audit: Engaging an external auditor to provide independent
assurance on the financial statements.
Continuous Improvement
o Improvement Cycle: Establish a continuous cycle of evaluation and
improvement to identify opportunities for improvement and address
existing weaknesses.
A good corporate governance framework helps a company to achieve its
business objectives, protect shareholders' interests and maintain long-term
sustainability.
Internal Audit Best Practices
Internal audit best practices in improving corporate governance involve
effective strategies, processes, and approaches to ensure organizational sustainability,
security, and success. Internal audit should engage in the risk management process to
understand and identify significant risks by using a risk-based approach in planning and
performing audits. Internal audit must have an in-depth understanding of business
operations to add value to align audit activities with the organization's business
objectives and strategies. Internal audit works closely with other functions such as
finance, compliance, and risk management to ensure an integrated audit and ensure
effective risk management by examining the effectiveness of the company's overall risk
management system. Internal audit ensures compliance with good corporate
governance principles by auditing the performance of the board of directors and related
committees.
Internal audit should integrate technologies such as data analytics, artificial
intelligence, and automated audit tools to improve audit efficiency and effectiveness by
examining the organization's cybersecurity and resilience to technological threats.
Internal audit provides clear, impactful, and understandable audit reports to all
stakeholders and presents constructive recommendations for improvement and
development. Internal audit proactively monitors the implementation of
recommendations and proposed improvements and regularly assesses internal audit
performance and continuous improvement. Internal audit engages in open dialog with
key stakeholders, including the board of directors and executive management, and
measures and understands the level of stakeholder satisfaction with internal audit
performance. Internal audit provides continuous training and development for internal
audit members to stay relevant to business and technological developments and
establishes a diverse internal audit team to face challenges with a broader perspective.
Internal audit must align audit practices with high ethical principles and integrity by
setting high ethical standards and acting as a role model for the entire organization.
Internal Audit's Contribution to Governance Effectiveness:
Internal audit's contribution to the effectiveness of corporate governance can be
seen through various aspects that include understanding risks, checking compliance,
and providing recommendations for improvement. There are several key contributions
of internal audit to governance effectiveness. Internal audit helps identify potential risks
This involves a risk assessment process to understand the impact and probability of
these risks occurring, examining and assessing the effectiveness of the company's
internal control system and providing assurance to the board of directors and executive
management that the internal control system can effectively mitigate risks, ensuring
that the company complies with applicable internal policy regulations and industry
standards and providing assurance to stakeholders that the company operates in
accordance with applicable norms and regulations, conduct operational audits to
evaluate the efficiency and effectiveness of the company's operations and present
recommendations for improvement of operational processes and resource management,
contribute to strategic audits by evaluating the company's business policies and
strategies and support the formulation and implementation of business strategies by
providing insights based on audit results,
After internal audit provides concrete recommendations for improvement and
these recommendations are designed to increase efficiency, reduce risk, and improve
corporate governance, internal audit monitors the implementation of the
recommendations that have been put forward, ensures that management takes
appropriate action to correct the findings and recommendations, presents periodic audit
reports to the board of directors and management, This report provides a clear picture
of the effectiveness of corporate governance and recommendations for improvement,
identifies opportunities to improve the performance and efficiency of the company,
contributes to continuous improvement efforts to ensure the sustainability and growth
of the organization, provides consultation to management regarding governance and
risk issues, assists management in identifying solutions to challenges faced by the
company.
Internal audit's contribution involves a thorough evaluation of various
operational and strategic aspects of the company, providing assurance to stakeholders
that corporate governance is sound, and providing recommendations for improvements
that may be needed.
Research Methods
This research uses a descriptive qualitative analysis method. This research aims
to understand and explain phenomena or events in a detailed and in-depth manner. To
analyze the strategic role of internal audit in improving corporate governance,
especially in case studies of financial sector companies, there are several approaches
used.
The research was conducted through document analysis by examining internal
audit reports related to financial sector companies, identifying audit findings,
recommendations, and follow-up actions taken. The research was also conducted
through a review of existing audit and corporate governance policies and procedures by
evaluating the extent to which they support internal audit's strategic role.
This research was also conducted through strategic risk analysis by identifying
strategic risks that could affect company objectives and evaluating whether internal
audit has contributed to mitigating these risks. It also conducted a work measurement
analysis by establishing key performance indicators to measure internal audit's
contribution to corporate governance, such as the rate of implementation of
recommendations or their impact on risk.
Results And Discussion
In this study, researchers took a sample of companies engaged in the financial
sector, namely Bank BNI.
Company Overview
Bank BNI is one of the companies engaged in the financial sector, where this
company is a government-owned company or a state-owned company. The company
was first established on July 5, 1946. This financial sector company has a variety of
products and services provided to its customers. Not only that, this company is also
increasingly innovating in developing various existing products and increasingly
adding programs and expanding its reach. In this financial sector company (BNI) there
are several products that are in great demand by consumers, one of which is the young
taplus savings which is intended for young children, not only that there are also savings
for children who are still underage in this savings clip card can be installed with a
child's photo, so it looks attractive and fun for its users.
The Strategic Role of Internal Audit at BNI Bank Company
Carry out periodic audits both at the head office and at branch offices which are
supporting actions in the existing operational process, the method of
implementation is as follows;
o Manage data results on monitoring processes that occur in
branch/central operations that are the obligation of each related party.
o Exchange information related to supporting data both with branches to
the center, or center to branches.
o Reporting the results of the inspection data that has been carried out.
o Conduct a gradual review and evaluation of ongoing audit activities to
avoid/prevent risks that will occur.
Organize reports on the results of all data and draw conclusions on the BIC
(Branch Internal Control) checklist periodically in supporting the operational
supervision process in the office and is their responsibility by means of:
o Exchange information related to reports for control with regional/branch
offices.
o Organize reports on the conclusions of the BIC checklist and report the
conclusions periodically.
Conduct periodic checks and then complete the follow-up on the results of the
branch office audit by means of :
o Checking the stage of completion of follow-up on audit results in branch
offices that are assigned.
o Make an analysis or review according to the audit results and provide
solutions or input to the board of directors on policies or processes that
have been made by internal management.
The role of internal audit is a strategic way of governance because the
examination supports the formulation and implementation of company strategy as well
as the evaluation of potential strategic risks and recommendations for achieving long-
term goals. Internal audit not only serves as an observer, but also provides advice which
is a solution to problems that exist in the company in order to improve performance and
manage risk. Internal audit also serves as a strategic advisor that helps companies deal
with market changes and achieve strategic goals.
The implementation and enforcement of guidelines on good corporate
governance on a permanent and sustainable basis which has a positive impact on value
creation and BNI's business sustainability. This is reflected in BNI's best achievements
in various aspects.
BNI places GCG as an important foundation in creating sustainable business
growth through strengthening GCG structures and mechanisms as well as
implementing bni cultural values, commitment to implementing corporate governance
in a sustainable manner sustainable, namely Amanah, Competent, Harmonious, Loyal,
Adaptive, and Collaborative (AKHLAK).
Barriers and Challenges
From the results of the research analysis, it can be concluded that the obstacles
and challenges faced by BNI in internal audit in corporate governance are:
In today's global economy which is experiencing a decline, regulations in bank
crediting are one of the new innovations that BNI has. So in this case, the
management is also a challenge in the future in dealing with and serving
customers on the crediting system properly and in accordance with the rules
applied.
Products in the form of services to customers are not yet fully efficient and
effective. This will refer to the future how the internal audit in the governance
of the company so as not to harm or disappoint consumers.
In the current era of increasing globalization, many human resource standards
are getting higher.
The problem of cases that make mistakes in internal irregularities (internal
fraud). This is an important focus in the implementation of the system carried
out by BNI using the GCG method.
Perceptions and views of stakeholders
This state-owned company has GCG implementation standards at BNI which
refer to the Regulation of the Minister of State-Owned Enterprises No. PER-
01/MBU/2011 on the Implementation of Good Corporate Governance in State-Owned
Enterprises, which has been amended to the Regulation of the Minister of State-Owned
Enterprises No. PER-09/MBU/2012 on the Amendment to the Regulation of the
Minister of State-Owned Enterprises No. PER-01/MBU/2011 on the Implementation of
Good Corporate Governance in State-Owned Enterprises and the Decree of the
Secretary of the Ministry of State-Owned Enterprises No. SK-16/S.MBU/2012 dated
June 6, 2012 on Indicators/Parameters for Assessment of Good Corporate Governance
in State-Owned Enterprises. PER-01/MBU/2011 on the Implementation of Good
Corporate Governance in State-Owned Enterprises and Decree of the Secretary of the
Ministry of State-Owned Enterprises No. SK-16/S.MBU/2012 dated June 6, 2012 on
Indicators/Parameters for Assessment and Evaluation of the Implementation of Good
Corporate Governance in SOEs. The regulation explains that GCG principles consist of
many aspects, among others:
Aspects of good corporate governance and on an ongoing basis going forward
and commitment to its implementation.
Shareholder and GMS/Capital Owner Aspects;
Aspects of the Board of Commissioners/Supervisory Board;
Board of Directors aspect;
Aspects of Transparency in Information Disclosure
Reporting Aspects related to the expertise of the company in the benchmark as
its field
Board of Commissioners/Supervisory Board Aspects
According to the BNI GCG annual report for the Board of Commissioners
aspect of the role of internal audit, namely being able to carry out its role and role
properly and responsibly in accordance with the authority given by PT Bank Negara
Indonesia (Persero) Tbk and comply with BNI Core Values (AKHLAK), Principle 46,
BNI Code of Ethics, BNI internal regulations, applicable laws and regulations as well
as the principles of Good Corporate Governance, and the principles of healthy bank
management.
And in this case the Board of Commissioners makes every effort to play an
active role in fraud prevention. So that with this the possibility of occurrence can be
avoided and willing to report anything suspected as a precursor to fraud (both within
the environment / or outside the environment) through the reporting media available at
BNI.
Management
According to BNI's GCG annual report, the management aspect is to be able to
consistently implement the application of AKHLAK, Principle 46, and BNI Code of
Ethics, carry out duties in accordance with the principles of Good Corporate
Governance, and play an active role in preventing and eradicating fraud and violations
and creating a work environment that is free from Corruption, Collusion and Nepotism
(KKN) and also the application of anti-bribery performance by avoiding gratuities,
bribes, and extortion.
Conclusions
From the results of the analysis that researchers conducted, the conclusions that can be
drawn are:
The strategic role of internal audit is a strategic way of governance because its
examination supports the formulation and implementation of corporate
strategy as well as the evaluation of potential strategic risks and
recommendations to achieve long-term goals by implementing and enforcing
the principles of good corporate governance (GCG).
Obstacles and challenges in implementing internal audit are greatly influenced
by globalization and the level of progress of the times as well as the efficiency
and effectiveness of management performance in implementing or applying
GCG principles during field implementation.
According to the perceptions and views of related stakeholders, the strategic
role of internal audit in corporate governance can be created by implementing
GCG principles properly by carrying out its duties and roles properly and
responsibly, and doing so in accordance with the regulations that have been
regulated and in accordance with GCG concepts.
