The Chartered Institute of Internal Auditors has announced internal auditors are have a new code for best practice, enabling more accurate assessment of risk management, with a view to being the eyes and ears of a company's board.

The independent committee - chaired by Old Mutual audit committee chair and director at the FRC, Roger Marshall - will have a draft plan in place by December.

The committee will comprise one other banking sector non-executive director, a finance director, a chief risk officer, an academic, three heads of internal audit from across the banking and insurance sector, and observers from the FSA and the Bank of England. It expects to start its work in September and will be issuing a call for views early in the process.

Marshall said that analysis of the financial crisis and more recent problems in the banks emphasised the need for internal audit to be at the heart of corporate governance.

'To enable this, all parties with an interest in the governance of financial institutions need more specific guidance on the role of internal audit. Our aim is to balance the interests of executives, boards and regulators in addressing the challenge of improving internal audit's contribution to how risk is managed in banks and other financial institutions,' he said.

Andrew Bailey - managing director of the Prudential Business Unit for the Financial Services Authority, which has long stressed the importance of the role of the internal audit function at financial institutions - believes the new initiative is crucial in the drive to improve corporate governance in the financial services sector.

Internal auditors have previously focused their efforts at monitoring fraud within a company and are often relied upon by management, instead of having more independence associated with their reporting functions.

Corporate governance experts assessing this function at financial institutions have called for independence of the internal audit role, with the entrenchment of a direct line of communication between the internal auditor and the company's audit committee and board.

'Existing standards and guidelines do not set sufficiently robust expectations for internal audit functions in firms in terms of their role, scope of work, standing within the organisation and exercise of effective challenge. The Institute's initiative can go a long way to addressing these issues and help internal audit provide a better independent challenge to management's decisions and improve the effectiveness with which risk management and internal control are evaluated,' said Bailey.

Institute chief executive, Dr Ian Peters says that the Institute's own standards, which are used globally by 175,000 members, will form the basis of the new guidance.