Businesses today operate in an environment where governance, risk, and compliance have come to the fore as priorities warranting attention. Such aspects help ensure an organisation is operating within the acceptable limits of undertaking business. Compliance and internal audit are two functions that have relevance from the risk and governance perspective.
A business may assume that these two terms can be used interchangeably, however, they have their differences. Every Internal Audit firm in the UK is with the distinctions, however, most businesses are not aware of them.
What is Compliance?
A business is bound by a multitude of laws, regulations and policies at both the global and national scope. Compliance is the term used to capture the processes and activities put in place in relation to the legislation an organisation is bound to.
Policies applicable to a business can include tax compliance alongside employment policies to data protection laws such as General Data Protection Regulations (GDPR). A business has an obligation to ensure that during the undertaking of its activities, it does not infringe on the legal and ethical expectations which are set by industry, various regulatory bodies, and society on a much broader view.
A compliance function is inherently proactive. It is designed to prevent breaches or violations before they happen.
What Is An Internal Audit?
Internal audit differs from compliance due to the nature of focus. Unlike compliance that revolves around following external “to-do” lists, internal audit is concerned with the internal workings of the organisation and whether they are working as intended.
Unlike external audits, internal audits are retrospective and investigative functions. An internal auditor critiques an organisation’s existing systems and protocols to determine the presence of any weaknesses, inefficiencies, or looming risks. Examples can include ascertaining if a company is successfully managing its payroll process, validating its financial reporting, and checking if procurement policies are set and followed.
As with any type of audit, internal duties are performed periodically to be filed in reports for senior management or the board. Internal audits reports often contain recommendations to improve or take corrective steps towards the issue at hand.
How Are They Different?
While compliance and internal audit functions are two spokes of the same wheel, “safeguard the business,” their approaches and scopes differ greatly.
Compliance is about ensuring rules are followed. It is a preventive side embedded into daily organisational practice. Put differently, compliance can be ensured by implementing policies. A simple example is a compliance officer guaranteeing all staff undergo anti-money laundering procedures and have proper documentation in place. An example of internal audit is evaluating procedures after implementation. For instance, an internal auditor may evaluate the effectiveness of anti-money laundering training. They may also consider whether the steps taken to control cash flow are sufficient and whether there are potential risks that may be harmful to the business.
In other, simpler terms, rules are set by compliance, and internal audit monitors the adherence to those rules and measures effectiveness.
Why Are Both Important for Businesses in the UK
Compliance and internal audits are equally vital, which is contradictory to a popular belief. Compliance keeps the business safe from legal repercussions and harm to its image. On the other hand, internal audit works to guarantee the efficiency of operations, risk management, and resource usage.
The existence of both functions enables stakeholders, investors, and other business entities to easily identify the accountability that the organisation embraces. Such a notion is critical in the UK since there are high expectations concerning regulations and corporate governance quality.
The Responsibilities of External Partners
A good portion of small and mid-sized businesses in the UK lack internal support to manage compliance alongside an internal audit. In such situations, employing an external contractor for internal audit services or even compliance advisory services may prove useful as well as affordable.
Outsourced services bring in specialised knowledge, objective analysis, and information on changing regulations. This allows internal teams to concentrate on the primary business functions without compromising control and governance.
Conclusion
The difference between compliance and internal audit is not about wording only. It is essential to effectively managing and creating an organisation that is deeply sustainable, transparent, and trustworthy. Businesses that develop both functions not only manage risk but also gain a competitive edge through superior decision-making and operational strength.
If you need to improve your organisation’s internal controls or are looking for assistance to remain compliant with UK regulations, HMR Accountancy can prove beneficial for you and your business needs.