Final answer:
The internal audit function is accountable to the Board of Directors and reports directly to them, providing independent assurance on the organization's processes. The goal is to ensure effective governance and oversight. Direct reporting is crucial to maintain unbiased communication between the internal audit and the BOD.
Step-by-step explanation:
The internal audit function plays a crucial role in the system of corporate governance within an organization. Reporting directly to the Board of Directors (BOD), the internal audit function's accountability is to provide independent assurance on the effectiveness of the organization's risk management, control, and governance processes.
This reporting structure supports the BOD in executing their oversight responsibilities, thus ensuring that management actions are subject to effective and independent review.
Functional reporting involves the way in which internal audit communicates with the BOD, which ideally should be a direct reporting relationship. This direct line of communication ensures that critical and unbiased information reaches the BOD without potential filtering or alteration by management.
This setup allows internal audits to fulfill their mandate to assist the board in maintaining efficient and effective governance over the organization.
Moreover, corporate governance mechanisms such as the internal audit, external auditing firms, and large shareholders are all part of a system designed to ensure accountability within a corporation. In the case of a failure, as seen with Lehman Brothers, it becomes evident that accurate and trustworthy information is paramount for the BOD, shareholders, and other stakeholders.