Furlough and internal audit

The Coronavirus Job Retention Scheme (known as furlough) is a temporary scheme open to all UK employers for at least three months starting from 1 March 2020. It is designed to support employers whose operations have been severely affected by coronavirus (COVID-19).

For detailed government guidance on the UK Government’s furlough rules, click here.

The Chartered Institute guidance looks at furlough from two perspectives – internal audit resource being furloughed and the role of internal audit in the furlough process.

Furlough of internal audit resource

Organisations will be facing harsh financial realities due to the measures in place to protect the country from the COVID-19 outbreak. For many organisations there will be issues of survival.

The Institute advises Chief Audit Executives (CAEs) to keep an open dialogue with the chair of the audit committee on the role of internal audit during the crisis, not only in its primary assurance capacity but equally important in these unprecedented times how internal audit can support the business.

Any decision to redeploy or furlough internal audit resource should be made in consultation with the audit committee or at the very least the chair of the audit committee. Where this is not possible, the Chief Executive Officer (CEO) should inform the audit committee of any and all action to reduce or curtail the work of internal audit and the consequences linked to such action as soon as it is practicable to do so.

The Internal Audit Code of Practice provides for this situation, as furloughing internal audit resource is in effect a temporary removal of the activity. Paragraph 23 of the Code states that ‘the audit committee should be responsible for appointing the chief internal auditor and removing him/her from post.’

CAEs should articulate, to the CEO and/or audit committee, the risks to the organisation if internal audit resource is furloughed or co/outsourced contracts suspended while the organisation continues to operate in a reduced capacity, include but are not limited to:

• absence of independent assurance at a time when the internal control environment is under intense pressure
• inability to observe and offer advice to senior management on governance, risk management and internal control issues
• failure to enable real time assurance by providing input to new processes, key controls and new and emerging risks as the organisation responds to challenges and opportunities
• lack of objective capture of lessons learnt during the crisis to improve processes as the organisation returns to stability
• non-compliance with the UK Corporate Governance Code 2018 and the potential reputational damage to the organisation in explaining the decision to stakeholders.

It is incumbent on CAEs to maintain relevance during any crisis situation. Continuing to progress the audit plan in its original format, may or may not be appropriate and should be discussed with the audit committee.

Internal audit’s role in the furlough process

The government expect the online system for organisations to use to be available by the end of April 2020. Internal audit has a finite window of opportunity to support their organisation in its preparations. Through the Institute’s Heads of Internal Audit COVID19 Virtual Forum, CAEs are sharing examples where without their input decisions may have been made to furlough a key worker that would have impacted significantly on the control environment in a key financial process.

The CAE and experienced members of the internal audit activity may be required to provide unplanned consultancy/advisory support during crisis meetings in respect of control design, risk management and governance arrangements.

Now is an opportunity for internal auditors to demonstrate commercial awareness, agility, relevance, as well as show that the profession is an intrinsic element of organisational sustainability.