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Investors in supermarkets and internal audit – what’s the connection?

Technical blog by Liz Sandwith, chief professional practice advisor |  27 January 2017

In 2015, Morrison's found itself responding to increased investor interest in the nature and impact of commercial income, following similar issues identified at Tesco plc.

The Financial Reporting Council’s Reporting Lab (The Financial Reporting Lab was launched in 2011 to provide an environment where investors and companies can come together to develop pragmatic solutions to today’s reporting needs) has just published a case study on Morrison’s Supermarket focusing on disclosures of supplier relationships and commercial Income.  In the company’s 2014/15 annual report, Morrisons' disclosures on commercial income was more comprehensive than others in the sector. Morrison’s sought to provide more comfort over commercial income by describing the controls and processes in place around commercial income and describing the audit committee’s work around what they did to gain comfort in this area. Internal audit is, of course, key to providing this assurance. 

The greater level of disclosure about commercial income provided investors with some reassurance about the processes and procedures which mitigate risk in this area. The FRC reporting lab suggested that it may not be necessary to include this level of reporting every year but that companies could consider doing so when faced with a significant emergent disclosure theme or sector-wide issue.

Investors tend to look mostly at the quality of the board of directors, as well as the track record of the CEO and management team. Perhaps they should also look for the presence of an internal audit function. This is not to say that having an internal audit function guarantees success in companies, but not having one does perhaps indicate how much the leadership values or indeed doesn’t value strong, effective risk management, internal control, and governance.

When a publicly traded company does not have an internal audit function, one must ask, who is providing the board with independent and objective assurance and insight on how well risk and the mitigating controls are being managed? 

Having an internal audit function is not mandatory for listed companies. However, as more investors seek to increase their level of understanding and ultimately assurance around who is providing the board with independent and objective assurance and insight on how well risk management, governance and internal controls are being managed the value of and need for an internal audit function has never been greater.

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Content reviewed: 1 February 2023