The fifteenth agency in the community is the Audit Agency. The agency is part of the Regulatory Bureau, which also includes the Legal and IP Agencies. The Audit Agency’s primary role is to set up automated systems designed to strengthen community agencies’ and participants’ internal controls,[1] especially those that are financial in nature.

The automated systems are also able to provide additional verification of financial records and reports, as well as compliance reports, beyond what is offered by the community’s operating system.[2] The agency performs this by setting up audit processes and reviewing audits done by contractors.

The Audit Agency’s automated system is participant-centered. Through it, the participants can submit their audit reports, which are then vetted by the system for approval. Once approval has been granted, the audits reports can be used by other community agencies, such as the Commercial Bank to advance loans. The system uses algorithms to personalize the agency’s services to particular participants’ needs. Participants can also approach departmental agents for help, where the system is unable to help. Departmental agents also advise the agency president on how the system can be improved to better respond to participants’ needs.[3]

The system is based on blockchain technology, which secures data, preventing unauthorized or untraceable manipulation. Due to the large amounts of data in the community, cloud computing is utilized, helping process and provide easy access to information, as well as the capacity to handle big data.

The Audit Agency’s roles are either core, performed with little or no input from other agencies, or coordinated, in liaison with other agencies in the community. In both instances, the Audit Agency’s primary objective is to provide community agencies and participants with the infrastructure needed to have strong internal controls and compliance, while providing the sort of verification mechanisms which enable other agencies to perform their roles more satisfactorily.

Core Responsibilities

The Audit Agency’s core responsibilities revolve around internal and external audits and the roles these two functions play in ensuring proper governance as far as risk control and financial reporting are concerned. They include:

Review audit reports by contractors
Evaluate the adequacy of internal controls, and implement improvements to the automated system
Assess compliance with financial reporting guidelines and sound business practices
Train department agents to investigate financial malpractice

Review audit reports

Participants hire audit contractors to audit their operations and books of accounts. In many instances, the reports they hand in may require to be aligned with the community’s protocols to be applicable. For instance, auditors who have strong knowledge in financial reporting, but are not well versed in community policy may fail to the unique financial aspects of community-based businesses, such as the absence of fixed assets. The Audit agency uses its system to review these audit reports so as to ensure their correctness, and standardize them to a format that other community agencies can understand and apply.

Internal controls

The Audit Agency constantly monitors the automated internal controls employed by various community agencies and participants.[4] The agency’s system reviews audit reports to appraise the strength of internal controls, in line with industry best practice, and adherence to bylaws and other existing regulations. For instance, the community’s guidelines on expenditure are in the bylaws. The Audit Agency devises automated means to check whether these guidelines are observed and recommends how they can be improved. The Audit Agency employs the use of computer-assisted audit techniques, which are suitable for large volumes of data, and auditing a computer-based environment.[5] The agency also implements updates to the community’s operating system, which can make information more secure and traceable and make financial reporting more complete, accurate, and reliable. Such updates are also tailored to capture non-financial aspects of internal controls, but which could ultimately have an effect on businesses or community agencies’ performance.[6]

Compliance with financial reporting guidelines and sound business practices

The Audit Agency sets up systems for use by community agencies and participant businesses to ensure that financial regulations and laws are adhered to. The role also involves encouraging adherence to sound business practices. It is crucial that the community complies and is seen to comply with such regulations and best practices.[7] Failure to do so not only injures the community’s general reputation, but it also runs the risk of attracting sanctions from governmental authorities mandated to enforce particular regulations, including taxes. Financial regulations and guidelines enable the community to report its financial status, as well as that of participants’ businesses, in a manner understandable to the external world.

Compliance also means formulating and complying with financial risk management strategies and guidelines. The Audit Agency formulates such strategies and carries out regular checks through its automated system, as well as through the departmental agents’ services to the agency.[8]

Investigate financial malpractice

In the event that internal controls, as well as other community organizational functions, fail to work, financial malpractice is likely to occur.[9] In such circumstances, the Audit Agency performs an investigative audit, with the view of recommending further action to the relevant external authorities. It may seek the services of contractors to undertake rigorous investigative audits. Where crimes are determined to have taken place, such cases are referred to governmental authorities, which have the necessary infrastructure to resolve such matters. Issues of professional malpractice are handled internally, with reference to the relevant professional body if deemed necessary.[10] For instance, malpractice which shows that an accountant went against established professional tenets, in a way that would have negatively affected the whole profession’s reputation and caused material damage, will be referred to the community’s CPA Association for further action.

Coordinated Responsibilities

The Audit Agency coordinates with various agencies as part of its objective to provide internal and external audit services to the community. The coordination is:

Horizontal (within the Governance Department)
Vertical (within the General Community Support Vertical)
Diagonal (beyond both the vertical and the department)

Horizontal coordination

The Audit Agency liaises with Agency 13 – the Legal Services Agency to ensure compliance with community bylaws and other laws that guide financial prudence. The Audit Agency also assists the Legal Services with compliance matters beyond financial compliance. The Audit Agency works with Agency 14 – the IP Agency to create and manage systems that enable the development process for IP. The Audit Agency sets up automated audit systems, which participants use to appraise IP, and offer recommendations that, can enhance its commercial viability. The system also audits the community’s IP, in the process identifying ways through which the property can be preserved and its value enhanced. During the audit process, the Legal Services Agency provides legal direction and recommendations.[11]

Vertical coordination

The Audit Agency works with Agency 24 – Assets Management Agency to maintain an automated system for auditing the value of buildings and equipment. The Audit Agency system audits property to incorporate depreciation or appreciation of assets while community financial statements are made.[12] The Audit Agency system also audits property, in liaison with Agency 3 – the Leasing Agency, to identify how utilization of community assets can be optimized and advise on gaps that need to be bridged to better serve community demands. The Audit Agency provides the automated infrastructure through which Agency 9 – the Commercial Bank Agency can verify the authenticity of financial statements used for loan applications, beyond what the blockchain-based system provides.

Diagonal coordination

The Audit Agency coordinates with Agency 17 – the Accounting Agency to maintain the automated system’s preparation of financial statements. The Audit Agency system audits the statements for accuracy and completeness of information prepared. The Audit Agency works with Agency 22 – the Public Facilities Management and Agency 23 – Land, to set up automated ways through which community assets under the agencies’ management can be optimized for the greater community good.

Conclusion

The Audit Agency’s role as part of the Governance Department enables community agencies to perform optimally. The agency has the infrastructure at hand to be an independent external auditor—all community agencies are, after all, independent, and the agency does not have oversight impediments to its work. At the same time, it has an intimate knowledge of the community in such a way that it can set up systems to advice agencies and participants’ businesses alike on how they can improve their internal controls and improve financial performance.

[1] Internal controls go beyond the reliability of financial reporting. They include ensuring that an entity’s operations are performed optimally and that the entity complies with financial and operational guidelines and laws (Fadzil, F. “Internal auditing practices, and internal control system.” Managerial Auditing Journal 20.8 (2000): 844-866. Electronic).

[2] External audit is an independent examination of an entity’s financial statements. While done by an external auditor, the Audit Agency set up automated mechanisms which will perform the role, with departmental agents handling those aspects which need personal attention, since the agency has a better grasp of community bylaws and accounting practices than a normal audit firm would offer. Both forms of auditing are critical to proper corporate governance (Rezaee, Z. Corporate Governance and Ethics. Danvers, MA: John Wiley and Sons, 2008).

[3] Audit algorithms are today used by auditors to randomly sample material entries in financial statements. Using pre-programmed criteria, the algorithms assess their correctness and completeness. Algorithms are therefore sensitive to particular needs of the auditor, and are able to tailor their reports based on industry and customer expectations/ needs (IBM. Audit Algorithm. 2019. 20 07 2019).

[4] Internal controls need to be continually reviewed to ensure they adequately respond to current and future threats. The Audit Agency works to strengthen the community’s controls, such that they do not need the Audit Agency to constantly run internal audit exercises and investigations unless there is a need to do so. This because of the Audit Agency’s automated audit system is able to highlight weaknesses, while the Audit Agency may not have sufficient resources for such an exercise anyway – working four hours a week (Cascarino, R. Corporate Fraud and Internal Control Workbook: A Framework for Prevention. Hoboken: John Wiley and Sons Inc., 2013).

[5] Computer-assisted audit techniques (CAATS) are increasingly popular in audit circles, especially when auditing large organizations. Such tools include trend analysis, parallel simulation, Benford’s Law, among others (Bourke, J. Computer Assisted Audit Techniques or CAATS. 25 01 2010. 01 06 2019).

[6] Non-financial reporting and internal controls are necessary to augment what financial reporting shows. Non-financial controls are meant to enhance integrity, and enable the community develop in a sustainable way (Manganiello, C. and R. Hofsetter. COSO for non-financial reporting: more transparency, more trust. 2019. 02 06 2019).

[7] Regulations and guidelines affecting financial reporting and industry best practice are constantly evolving. Some may be internal to the community, while professional and governmental authorities impose others. Compliance audits help organizations harmonize their practice with such guidelines, and draw up strategies to be better positioned to handle future changes more adequately. In the community, they will also enable the agency to identify and resolve weaknesses in compliance strategies and practices (Chorafas, D. IT Auditing and Sarbanes-Oxley Compliance: Key Strategies for Business Improvement. Boca Raton, FL: CRC Press, 2009).

[8] Financial risks are in many cases managed through strategies that reduce or eliminate the chance of their occurrence. This management is a function of internal audit. The Audit Agency will provide guidelines, informed by the community’s needs and industry best practice, to manage such risks (Ciunci, M. How Do Internal Audits Work? 26 04 2019. electronic. 19 05 2019).

[9] Weak internal controls usually lead to fraud. Organizational vulnerability to fraud must be constantly checked, since fraudsters and professional neglect will likely occur when there is a lapse in enforcement, rather than the absence of such controls at all (Marks, J. Combating Fraud Through Effective Internal Controls. Philadelphia: Baker Tilly, 2019. electronic).

[10] Investigative audits set out to discover the whole extent of suspected fraud or other forms of financial impropriety. The audit covers identifying the persons responsible, and their role, the damages incurred, and recommendations to strengthen controls, such that similar issues do not recur (Barley. Investigative Auditing. 2019. electronic. 19 05 2019).

[11] The IP audit process is essentially a legal process, necessitating the input of legal minds conversant with IP. The process can be general in scope, or can be targeted at a particular item for different reasons (McCann. IP Audits: What are they? Why are they important? What do they cost? 15 07 2018. electronic. 19 05 2019).

[12] The internal audit process also includes verifying the status of assets, fixed or not, and advising on future acquisition and utilization. The Audit Agency performs this role to advise the Leasing, and Housing and Equipment Management Agencies on how to better manage assets, and on more community – beneficial acquisition practices. Asset audit centers around asset availability, suitability for use and value (Hastings, N. Physical Asset Management: With an Introduction to ISO55000. New York: Springer, 2015. electronic).