Making Internal Audit Work For You
As a profession and a discipline, internal audit has had a longstanding objective of adding value and improving an organization’s operations through a systematic, disciplined approach to evaluating and improving the effectiveness of risk management, control and governance processes. Unfortunately, many internal audit functions fall short of this objective.
Change is the order of the day, and internal audit must keep pace. According to a recent Protiviti survey report, chief audit executives (CAEs) are striving to become more anticipatory, change-oriented and adaptive. Such behaviors are in great demand because internal audit functions must anticipate and respond to a constant stream of new challenges—from emerging technologies and new auditing requirements and standards to rapidly evolving business conditions. Many of these challenges deliver uncertain and still-unfolding risk implications for organizations.
The future auditor is a CAE who is positioned to be objective with regard to operating units, business processes, and shared functions, and is vested with a direct reporting line to the board of directors. That person is able to contribute more value to the board because they understand the organization’s business objectives and strategy and can identify risks that create barriers to the successful achievement of critical business objectives.
In addition, the future auditor is authorized to evaluate and challenge the design and operating effectiveness of the governance, risk management, and internal control processes that address the organization’s critical operational, compliance, and reporting risks. The future auditor also creates value by making recommendations to strengthen those processes and by keeping appropriate parties apprised of unaddressed matters.
Given these responsibilities positioning within the organization, the future auditor stands to serve the board as an agent of positive change and valued sounding board in safeguarding the adequacy and effectiveness of activities that matter most to the organization’s success. To illustrate, here are 10 ways the future auditor can contribute value:
- Think more strategically when analyzing risk and framing audit plans. Although internal auditors have traditionally focused on operational, compliance, and reporting issues, the future auditor thinks more strategically when evaluating risk and formulating audit plans. For example, the auditor identifies and anticipates barriers to successful execution of the strategy, facilitates the risk appetite dialogue at the highest levels of the organization, updates the company’s risk profile to reflect changing conditions, and understands how new technological trends are having an impact on the company.
- Provide early warning on emerging risks. While it is universally accepted that risk assessments must be refreshed periodically, the future auditor’s line of sight is directed to timely recognition of emerging risks. For example, contrarian analysis can be used to identify emerging strategic risks and scenarios that could disrupt the company’s business model.
- Broaden the focus on operations, compliance, and nonfinancial reporting issues. In terms of demonstrating sustained value to stakeholders over the long term, having a singular focus on financial controls is not enough. The future auditor’s focus touches significant aspects of business operations, including, but not limited to: information technology (IT) security and privacy, business continuity and crisis management, supply chain management, operating expenditures, talent management, and compliance management.
- Strengthen the lines of defense that make risk management work. For internal audit to serve as a viable line of defense, the future auditor evaluates how the organization establishes the necessary discipline to ensure that risks are reduced to a manageable level as dictated by the organization’s risk appetite. The future auditor also determines whether the primary risk owners and independent risk management and compliance functions are fulfilling their respective responsibilities as separate lines of defense. These areas of emphasis, coupled with a focus on the effectiveness of escalation processes, provide a context for focusing the internal audit plan.
- Improve information for decision-making across the organization. The future auditor evaluates the reliability of the performance measures, monitoring systems, and analytic tools and techniques the organization has in place to ensure there is a family of lead and lag indicators and trending metrics to signal when disruptive risk events might be approaching or occurring. The future auditor’s emphasis on improving risk information across the organization can lead to better information for decision-making used in the business.
- Watch for signs of a deteriorating risk culture. The future auditor understands that a deteriorating risk culture presents a formidable hurdle to sustaining effective risk management. That is why they work with senior management and the board to ascertain whether there are any gaps in the desired risk culture, whether organizational changes are needed to rectify those gaps, and whether specific steps are necessary to implement those changes.
- Leverage technology-enabled auditing. Technology can help to automate ongoing monitoring of certain internal controls, track issues, and provide customized dashboards and exception-reporting capability. By using technology, the future auditor is able to devote more time and effort to building relationships and providing expertise in high-impact areas. A technology-focused audit approach facilitates the future auditor’s shift of emphasis to strategic issues and critical enterprise risks by gaining more coverage with less effort, providing more analytic insight and offering early warning capabilities.
- Improve the control structure, including the use of automated controls. The future auditor evaluates the control structure and identifies opportunities to eliminate, simplify, focus and automate controls. For example, the future auditor recognizes that automated controls provide opportunities for improving the transparency of the controls structure so that risk owners and independent risk management functions will have more insight as to how operating processes and critical controls are performing than when manual controls are in place. This emphasis is an important one because, according to a Protiviti study, nearly three times as many organizations plan to automate a broad range of processes and controls compared to 2014.
- Advise on improving and streamlining compliance. The future auditor applies a quality focus to managing compliance with the same fervor with which the organization often approaches the improvement of core operating processes. For example, the future auditor collaborates with the compliance management function to forge a more streamlined, end-to-end view of compliance management. This results in improved coordination across the organization of control requirements-setting, alignment of management and control activities, streamlining and integration of reporting around compliance and other risks, and a reduction in complexity and redundancy.
- Remain vigilant with respect to fraud. The future auditor understands the importance of a comprehensive enterprise-wide fraud and corruption risk assessment and evaluation of the robustness of the organization’s anti-fraud and corruption program. For example, the future auditor deploys data mining and analytics techniques to analyze transactional data, obtain insights into the operating effectiveness of internal controls, and identify patterns or other indicators of possible fraudulent activity requiring further investigation.
While directors may not expect their company’s CAE to contribute all of the above value points, they should periodically assess whether internal audit is doing what matters. CAEs who embrace the future auditor vision are better positioned to demonstrate to executive management and the board the value contributed by internal audit through their comprehensive risk focus and forward-looking, change-oriented, and highly adaptive behavior.
The board can facilitate this transition by articulating their expectations of the company’s CAE and ensuring that person is positioned within the organization with the requisite resources to deliver on those expectations.
Jim DeLoach is a managing director with Protiviti and works closely with companies to improve their board risk oversight, including the communications between management and the board. He is a member of Protiviti’s Executive Council to the CEO and was named to NACD Directorship’s 2012 list of the 100 most influential people in corporate governance. Protiviti is a global consulting firm that assists board members, and the companies on which they serve, in protecting and enhancing their enterprise value by solving critical business problems in the areas of finance, technology, operations, risk and internal audit.