It is essential for internal audit to be staffed with personnel who have the necessary skills and experience to report on the degree of compliance with an entity’s policies and procedures. Internal audit should test transactions to validate that business lines are complying with the firm’s standards and should report the results of that testing to the board or the audit committee, as appropriate.
Although I have referred to internal audit, the key point is that strong internal controls, sound corporate governance, and effective disclosure practices require that periodic assessments of overall effectiveness be performed by an independent group. Then, as corporate disclosure practices evolve, market analysts must do their part to understand the information, while recognizing both its value and its limitations.