Continuous auditing in public sector and central banks: a framework to tackle implementation challenges
| DOI | https://doi.org/10.1108/JFRC-02-2022-0011 |
| Published date | 19 May 2022 |
| Date | 19 May 2022 |
| Pages | 40-59 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Salvatore Polizzi,Enzo Scannella |
Continuous auditing in public
sector and central banks: a
framework to tackle
implementation challenges
Salvatore Polizzi and Enzo Scannella
Department of Economics, Business and Statistics, University of Palermo,
Palermo, Italy
Abstract
Purpose –This paper aims to analyse the implementation challenges faced by internal audit
departments of public sector organisations and central banks when implementi ng continuous auditing
(CA) systems. CA aims to monitor internal control systems and risk levels on a continuous basis to
support the audit process. This study identifies the implementation challenges of CA systems and
proposes adequate countermeasures.
Design/methodology/approach –This study employs the design science information system
research and the design science research process methodologies to ensure the rigor of this analysis.
These research methodologies are adopted to tackle identified organisational problems and propose
solutions. This methodological approach consists in the following phases: identification of the problems
and motivation; definition of the objectives of the solution; research design and development;
evaluation; communication.
Findings –This study detects several implementation challenges for public sector organisations
and central banks and proposes adequate solutions. This study finds that these challenges are
related to organisations’complexity, institutional rigidity, potential threats to internal auditors’
independence and the issue of considering CA system as a “real time error correction”mechanism.
The solutions involve the development of a business process focussed audit approach to enable
internal auditors to analyse CA indicators, and the use of CA systems to support each phase of the
audit process.
Originality/value –This study contributes to the scant strand of literature on internal auditing in
central banks. Given the exceptional demand for guidance concerning internal auditi ng in the public
sector and in central banks, this paper provides guidelines for these organisations to impl ement CA
systems and to tackle implementation challenges. The analysis allows internal audit departments
within central banks to better support their organisations in the achievement of their important
regulatory and policy objectives.
Keywords Continuous auditing, Continuous monitoring, Internal audit, Central banks,
Public sector
Paper type Research paper
1. Introduction
Internal audit departmentsof public organisations face unique challenges,and therefore it is
crucial that their audit activities are configured appropriately to enable the organisation to
fulfil its duties in an effective and efficient fashion (MacRaeand Van Gils, 2014). This topic
has been put under the spotlight at international level by the Institute of Internal Auditors
(IIA) because of the exceptional demand for guidance concerning internal auditing in the
public sector [Institute of Internal Auditors (IIA), 2012]. The Institute of Internal Auditors
JFRC
31,1
40
Received2 February 2022
Revised26 April 2022
Accepted26 April 2022
Journalof Financial Regulation
andCompliance
Vol.31 No. 1, 2023
pp. 40-59
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-02-2022-0011
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1358-1988.htm
(IIA) (2012) remarks that internal audit is an indispensable element of good public sector
governance, as it provides objective and unbiased assessment of whether public resources
are managed effectively and responsibly. In this perspective, internal auditsupports public
sector organisations to achieve integrity and accountability and instil confidence among
stakeholders. The role of internal auditors is crucial in public sector organisations and
especially in centralbanks, as they are required to:
[...] provide insight to assist decision-makers by assessing which programs and policies are
working and which are not, sharing best practices and benchmarking information, [...] providing
ongoing feedback to adjust policies [Institute of Internal Auditors (IIA), 2012, p. 16].
Unfortunately, this ongoing and continuous perspective is not perfectly in line with the
traditional internalaudit techniques.
Traditional audit techniques rely on backward-looking tests and their main objective is
to evaluate the internal controlsystem and risk levels of the organisation on a point-in-time
basis. Unfortunately, these audit techniques cannot analyse internal control systems and
risk levels on a continuous basis, and therefore they do not allow the internal audit
department to provide a prompt risk assessment. Consequently, it is difficult to plan a
timely intervention when risk levels increase. In this regard, continuous auditing (CA)
serves as a support for traditional audit techniques, which should coexist and complement
each other, to improve the effectiveness and efficiency of the internal audit function
(Gonzalez, 2012;Gonzalez et al., 2018). More specifically, CA is extremely useful for
monitoring the organisation’sprocesses on a continuous basis, resulting in higher efficiency
and effectiveness levels. Furthermore, CA is a powerful detection technique and increases
the frequency and coverage of analysis of the activities performed by internal audit
functions (Gonzalezand Hoffman, 2018).
This paper aims to analyse the implementation challenges faced by internal audit
departments of public sector organisations and central banks when implementing CA
systems. We rely on the design science information system research(Hevner et al., 2004)
and on the design science research process methodologies (Peffers et al., 2007). These
research methodologies are suitable to tackle identified organisational problems and
propose adequate solutions. By examining the two strands of literature that study
internal auditing in public sector organisations and CA systems, this paper proposes a
framework to support public organisations in general and central banks in particular in
facing the various implementation challenges of CA systems. There are several reasons
why it is important to study the implementation of CA systems in central banks. Recent
analyses carried out by the International Monetary Fund (IMF) have shown that the
internal audit departments of several central banks throughout the globe are
characterised by serious vulnerabilities (International Monetary Fund (IMF), 2015,2017,
2019). Amongst the most severe issues that make internal audit functions not fully
effective, two of them deserve a particular attention:
(1) institutional rigidity; and
(2) the lack of a formal and structured follow-up process.
In this context, it is crucial to enhance and innovate the activities performed by central
banks’internal audit functions. CA would represent an important innovation [Institute of
Internal Auditors (IIA), 2005,2012], whichcan serve as a support for following-up on audit
recommendations and throughout the auditcycle. The aforementioned institutional rigidity
poses some challenges in the implementation phase of CA systems in central banks, which
need to be tackled. In this context, the outstanding importance of central banks’policyand
Continuous
auditing in
public sector
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