Tag Archive: audit

Is Internal Audit Meeting the Board’s Expectations?

Published by
Jim DeLoach

Jim DeLoach

Recently, the world’s largest ongoing study of the internal audit profession—the Global Internal Audit Common Body of Knowledge (CBOK)—was completed by the Institute of Internal Auditors (IIA) and Protiviti to ascertain expectations from key stakeholders regarding internal audit performance at organizations of varying operational models and sizes. The study sought input from members of audit committees all over the world about their expectations of the internal auditor’s role in the organization. We think all directors will find the results of the study applicable to their work in the coming year and beyond.

Below are six imperatives for internal auditors from the CBOK study based on feedback from audit committee members.

1. Focus more on strategic risks. According to the CBOK study, two out of three board members believe internal audit should have a more active role in evaluating the organization’s strategic risks. Study respondents indicated that internal audit should focus on strategic risks (as well as operational, financial and compliance risks) during audit projects (86 percent) and periodically evaluate and communicate key risks to the board and executive management (76 percent). Accordingly, chief audit executives (CAE) must focus their function sufficiently on the bigger picture to think more strategically when evaluating risks, proposing risk-based audit plans, and formulating audit findings. By understanding the organization’s business objectives and strategy, and identifying risks that create barriers to the organization achieving its objectives and executing its strategy successfully, the CAE increases internal audit’s value proposition.

2. Think beyond the scope. The call for internal auditors to think strategically leads to another challenge: thinking beyond the scope of the audit plan. Thinking beyond scope means, for example, that the auditor should:

  • “Connect the dots” when considering enterprisewide implications of the findings of multiple audits, particularly findings with significant business model underpinnings;
  • Broaden the focus on operations, compliance, and nonfinancial reporting issues; and
  • Watch for patterns or signs indicating a deteriorating risk culture.

By focusing more broadly on the implications of audit findings, and thinking beyond the expressed or implied boundaries set by the audit plan, internal audit is better positioned to deliver stronger, more practical, and harder-hitting recommendations aligned with what directors are seeking.

3. Add more value through consulting. In today’s era of slower economic growth, a high premium is placed on operational effectiveness and efficiency. The CBOK study respondents picked up on this point, as 73 percent of respondents recommended that internal audit advise on business process improvements. For example, consulting activities by internal audit can result in: strengthening of the lines of defense that make risk management work; more effective collaboration with other independent functions focused on managing risk and compliance; improvements in the control structure, including greater use of automated controls; and suggestions for improving and streamlining compliance. These study findings underscore the benefit of investing in consulting services that will strengthen business processes.

4. Facilitate effective, high-quality communication. Board members generally rate internal audit’s communication at a high level of confidence. For example, a large majority of directors give high scores for the quality (83 percent) and frequency (81 percent) of internal audit’s communication. That’s good news and a great foundation on which to build the board’s satisfaction with the internal auditor’s role.

5. Elevate stature and perspective. Intentionally positioning the CAE and internal audit within the organization is vitally important to their ability to meet elevated expectations. Access and perspective have always been keys to positioning. Access has typically been attained through direct reporting to the audit committee, as well as to the C-suite. But beyond these reporting lines, the study reports that two out of three board members rank the CAE’s participation in board settings beyond the traditional audit committee meetings as an effective strategy for broadening the CAE’s perspective. The board settings that are relevant in this context must be defined by directors to fit the organization’s specific needs. However the goal is defined, increased access to and more frequent interaction with the board broadens the CAE’s perspective of the organization and elevates the stature and visibility of the internal audit function within it. It also enables the CAE to establish relationships with directors, understand their views on addressing competing audit priorities, and earn the right to be viewed as a valued source of insight for the board.

6. Align with stakeholder expectations. In most organizations, not all stakeholders see eye to eye or want the same value from internal audit. This reality creates a significant challenge for CAEs tasked with building consensus among stakeholders. While directors may not expect their company’s CAE to address all of the above imperatives, they should initially and periodically assess whether internal audit is doing what matters based on previously-established imperatives. The CAE bears the brunt of the responsibility for addressing this challenge by articulating the value that a top-down, risk-based audit plan contributes to each facet of the organization, and by providing an assurance and advisory perspective that the board, executive management, and other stakeholders can understand.

Following are some suggested questions that directors may consider based on the risks inherent in the entity’s operations.

  • Does the board periodically evaluate the scope of internal audit’s activities and discuss whether modifications are needed in view of changes in company operations and the business environment? Is the board getting the insights it needs?
  • Does internal audit provide adequate attention to strategic risk issues, including barriers to the organization’s execution of the strategy?
  • Does internal audit have an appropriate mix of consulting and assurance activities?
  • Does internal audit have the stature and access necessary to maximize its effectiveness?

Jim DeLoach is managing director with Protiviti, a global consulting firm. 

Managing Intellectual Property Through an IP Audit

Published by

Adam W. Sikich

According to a study by Ocean Tomo LLC, Intellectual Property (IP) accounts for as much as 84 percent of the market value of S&P 500 companies. With so much value at stake, companies often look to an IP audit to inform corporate directors, executives, and legal counsel about the status of the company’s IP and to educate these decision makers on strategies to improve protection, maintenance, and enforcement efforts against infringers.

Let’s examine what’s involved in an IP audit and how one could strengthen the governance of your enterprise.

What Is an IP Audit?

The two most common types of IP audits are an IP inventory audit and a comprehensive IP audit. The purpose of an IP inventory audit is to identify the IP assets of a company: patents, trademarks, copyrightable works, and trade secrets. The resulting list of assets is crucial because it may reveal IP that is outdated, underutilized, or that no longer has value. Companies may undergo an IP inventory audit prior to a merger or other corporate transaction, or simply when leadership wants an updated IP status report.

The comprehensive IP audit begins with the compilation of IP assets, but the real purpose is to review and analyze how the company utilizes its IP. Effective IP management requires careful attention to protecting, maintaining, and enforcing IP, and the comprehensive IP audit can be a powerful tool in this regard.

IP protection involves securing rights, and how this is done depends on the type of IP.

  • Trademark protection derives from use in the marketplace, and those rights can be enhanced upon registration at the U.S. Patent and Trademark Office (PTO).
  • Copyright protection exists when an original work of expression is fixed in a tangible form, e.g., a contemporaneous speech is not protected but an audio recording of it is.  Similar to trademarks, copyright protection can be enhanced through government registration (via the U.S. Copyright Office).
  • Patent rights exist only upon registration with the PTO.
  • Trade secret protection exists once the company has taken reasonable measures to safeguard the secrecy of information that gives it economic advantage, such as the formula to Coca-Cola.

The comprehensive IP audit can reveal gaps in protection and candidates for enhanced protection (e.g., trademarks or copyrightable works that the company uses but has not registered with the PTO or the U.S. Copyright Office). Also, if the company holds valuable trade secrets, the comprehensive IP audit helps determine whether the company has closely guarded them via employee nondisclosure agreements or other internal protocols.

The comprehensive IP audit will also reveal whether the company is meeting its periodic registration renewal deadlines, or, more formally, performing sound IP maintenance practices. It should also reveal whether the company is using its IP consistently and correctly (e.g., using a trademark as an adjective to describe a product or service rather than using it as the product name itself). In the case of trade secrets, the comprehensive IP audit should cover whether the company continues to adhere to whatever confidentiality protocols it used to establish trade secret protection in the first place.

A comprehensive IP audit can also help guide IP enforcement efforts. Effective IP enforcement includes policing against misuse and infringements and taking appropriate measures to stop violations.

A Comprehensive Report to Guide the Future

The comprehensive IP audit results in a written report that accompanies the list of IP. A good report will contain best practices and advice on ways the company can enhance, strengthen, and better protect the IP. This report acts as a roadmap for an effective long-term IP management strategy, and it can help the company proactively get in front of issues, implement changes in its IP policies and procedures, prioritize the company’s IP needs, and, importantly, budget for all of the above. This makes IP management more cost effective in the long term rather than waiting to put out fires when issues inevitably arise, and it is a positive risk management practice for boards to add to their oversight duties.

The written report can also provide insight into potential liabilities caused by the company’s current practices. Liability can occur for several reasons. For instance, a company can be held liable if it uses another’s IP without permission or beyond what may be permitted in a license agreement. Another common scenario that exposes a company to liability is if the company is not properly protecting itself when it allows users to post content to the company’s website. The audit report can highlight these issues and offer recommendations to curb and correct these behaviors.

Any time is a good time for a company to conduct an IP audit, especially if one has never been conducted or especially if new leadership has taken over and new strategies are being implemented. Preparing for an initial public offering, undergoing a merger or acquisition, or implementing a corporate restructuring are all prime situations that warrant an IP audit. An IP audit is a prudent next step in making sure that the company is doing everything it can to protect its valuable assets.

Adam W. Sikich, Esq. is senior counsel at Dunner Law PLLC in Washington, DC.  Sikich specializes in all aspects of counseling in the areas of trademark, copyright, trade secrets, and licensing. He can be reached at asikich@dunnerlaw.com.  

Making Internal Audit Work For You

Published by
Jim DeLoach

Jim DeLoach

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.

Key Considerations 

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.