Cost of Undervaluing Internal Audit in Uzbekistan’s Companies
Internal auditing within companies is not just a formality; it is a strategic tool that directly impacts business performance and investor confidence. This is particularly crucial for Uzbekistan, where the state is the largest shareholder. If the country aims to attract significant investments and successfully privatise state-owned enterprises, the internal audit system must meet international standards. In this column, independent expert Rustam Mukhametshin discusses the obstacles hindering the development of this function and explains why removing these barriers is vital.
Who Oversees the Internal Audit
Internal audit is a department that answers to the company’s shareholders. It does not follow orders from management, and management cannot set its salaries, bonuses, or fire its members. The internal audit operates on behalf of the shareholders and reports its findings to them.
An Essential Function for Any Country
In any large organisation, whether in the US or Uzbekistan, internal audit is an essential department. Let’s explore why. Traditionally, internal audit is associated with reviewing the organisation’s operations: how money is spent, whether laws are being followed, and how effectively the organisation adheres to its own regulations designed to ensure the quality of its products and services. The core task of the function is to conduct systematic reviews of various processes within the organisation based on a schedule agreed upon with the shareholders.
What Does the Shareholder Want?
To better understand the purpose of the internal audit, we need to ask: “What does the shareholder want?” The answer is simple: they want their organisation to generate as much profit as possible. With this in mind, shareholders need to know two things: “What is being done to increase profit?” and “What could potentially hinder this?” The role of the audit is to provide clear and comprehensive answers to these questions, taking into account both the internal and external environment. When evaluating management performance, the question becomes: “How effectively is management managing the resources entrusted to it?”
Who Should Be Responsible for Auditing
To achieve this, it is crucial to hire highly qualified specialists with experience in the areas being audited—such as specific fields like IT—and allocate budgets for their professional development. It is also important to measure the workload within the department, such as how many audits one specialist can handle per year. The head of internal audit should be someone with business experience and strong personal qualities, enabling them to withstand pressure from management. However, this implies a higher cost for such a leader, which contradicts the current situation in Uzbekistan. In other words, shareholders in Uzbekistan are currently reluctant to invest adequately in the salary of the internal audit leader.
Why Uzbekistan Needs Internal Audit
Firstly, internal audit is one of the key tools for protecting and growing shareholder assets, with the government being the main shareholder in large companies in Uzbekistan.
Secondly, it is crucial for meeting ambitious development plans. The government’s key objectives include attracting foreign investment, particularly through the privatisation of state-owned enterprises. One requirement for publicly listing shares is the presence of an internal audit function that meets international standards.
Weaknesses and Solutions
From my experience working on projects in Uzbekistan, I have identified common trends in the weaknesses of internal audit functions: for example, departments are often influenced by organisational leadership, there is a lack of necessary staff and qualifications—typically, specialists are generalists without specific expertise—reports on audits are often uninformative, there is a lack of qualifications for investigating internal corporate fraud, absence of international certifications, and a lack of informal meetings between internal audit leaders and the Audit Committee.
These are all issues that can be resolved, especially now, when there is no other choice—developing the internal audit function in the country is necessary both to protect the interests of shareholders and to keep pace with Uzbekistan’s economic growth.
