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Internal Audit in Changing Times

Change doesn't come easily to any well-established business function -- and internal audit is no exception. Traditionally, its role has focused on well-defined issues revolving around control and compliance. As a result, many internal audit groups have only limited experience in managing risk or offering business consulting advice on improving processes or best practices. This once-narrow focus is now changing.

To deliver value, internal audit resources and skills must be aligned with the expectations of major stakeholders and with business strategy

New technology, e-Business, and the relentless drive to do more with less have all converged to bring internal audit to the forefront of corporate risk management and process redesign. As a result, more and more companies are challenging their internal audit departments to move beyond compliance and control -- and embrace a broader, more consultative agenda.

The top priorities on that new value-based agenda: improving business processes, managing risk, and unlocking new sources of profitability.

 For many internal auditors, assuming the role of change agent is a huge and unsettling leap. The path to a successful transition can be summed up in one word:
To deliver value, internal audit resources and skills must be aligned with the expectations of major stakeholders and with business strategy. Equally important, internal audit must be able to demonstrate results. Many companies are pouring millions of dollars into their audit departments but have no way to measure the payback. There is a widespread need for performance measurement systems tied to corporate objectives.

Are companies making any progress on these fronts? Yes, but slowly. I find many untapped opportunities for exploiting internal audit's value. All this change also opens up new avenues for internal auditors to enrich their skills, gain exposure, and enhance their marketability by delivering bottom-line business improvements.  

A skilled internal auditor is multifaceted: part business advisor, part psychologist, part facilitator and part technician
 All too often, internal auditing isn't viewed as a fast-track function or a stepping-stone to a dynamic corporate career. Yet a skilled internal auditor is multifaceted: Part business advisor, part psychologist, part facilitator, and part technician -- he or she must draw on a range of talents to be successful. This varied role also offers many privileges. It gives auditors the freedom to operate anywhere inside a company. No other position offers this kind of access and visibility -- or such abundant opportunity to create value and synergy.  

What Innovative Companies Do? Innovative companies attach great importance to this broad knowledge. They use their internal audit departments, not just to improve business, but as a training ground for management talent. This approach is unusual, however. More often, we find a mismatch between the skills that internal audit teams offer and their companies' strategic goals and marketplace needs.  

What new methods or approaches do internal auditing departments need? And how do "world class" audit functions achieve outstanding results? We have found that strong audit programs share eight key attributes:

1) Clearly Defined Expectations
: The expectations of key stakeholders -- management, audit committees and boards of   directors -- are well defined and prioritized.

2)  Strategic Alignment: The internal audit department's resources, skills, and investments are fully aligned with the vision and goals of major stakeholders.

3) Strong Communication: Internal audit is adept at conveying the results of its findings, building support, and promoting cross- functional interchange.  

4) Risk Focus: Resources are applied to areas that promise maximum return on investment.  

5) Effective Audit Technology: Advanced systems and processes are deployed and continually upgraded.

6) Knowledge Management: There is a strong commitment to sharing best practices internally, across functional boundaries, and with external alliance partners.  

7) Skill Development
: Innovative departments consistently produce professionals who possess a broad range of skills and are well trained for advancement.  8) Performance Measurement: A clearly defined system exists for measuring goals achieved and value delivered.  

Most internal audit departments haven’t spent much time helping companies maximize their revenues but the opportunities for improvement on this front are significant
Spurring Change, Adding Value – How and where, can a revitalized internal audit department add value? There are a host of opportunities for internal audit to make solid contributions. Outlined below are some high-impact areas we've worked with clients to identify and mine:

Maximizing Revenues: Historically, most internal audit departments haven't spent much time helping companies maximize their revenues, but the opportunities for improvement on this front are significant. Controlling and preventing revenue leakage—whether from billing errors, fraud or poor technology—is an area ripe for internal audit.
Ensuring that technology and customer relationship management programs meet intended objectives are two other key areas.  

Controlling Costs: While internal audit traditionally focuses on cost management, new opportunities for significant savings have emerged in areas such as telecommunications, e-Business processes, and supply chain management. Internal audit should be at the forefront in reviewing and assessing these areas.  

Assessing Risk
: Managing risk and evaluating investment options are currently high priorities for CFOs at most corporations. Who better than internal audit to assist the CFO in assessing these critical concerns?  

Technology & Related Business Processes: Internal audit should have (or acquire) the skills to be at the forefront of technology planning. Any significant business process enabled by technology should be reviewed by internal audit to ensure that intended objectives are being met.
Safeguarding Information Assets: The integrity of corporate information, its quality and timeliness, and the controls and security required to safeguard its usage -- all offer rich opportunities for internal auditing to add value.  

Refocusing Your Resources:  As we've seen, a proactive, dynamic internal audit function has a great deal to offer: increased revenues, improved business processes, greater cross-functional efficiency, and better risk management -- all of which can have real bottom-line impact. 

 But reaping benefits like these requires a major cultural shift at every level, including top management and boards of directors. In many companies, internal audit is still seen as a necessary evil rather than a lever for competitive advantage. Positioning internal audit as a change agent can be a demanding process.  

When transforming your internal auditing resources, the right strategy is critical. Here's a quick look at a comprehensive approach that we've developed for our clients. It can make the transformation easier: 

Phase 1 - Strategy Development:  Determine internal audit's core value to stakeholders. Highlight significant changes, issues, and concerns. Align internal audit's resources and mission with corporate goals.  

Phase 2 - Opportunity Analysis:  Evaluate current resources, capabilities, and practices in light of goals established in Phase 1. Identify gaps between current skills/capabilities and projected corporate needs. Create a detailed tactical plan to close gaps quickly and efficiently.

Phase 3 - Value Realization:  Focus on project management to ensure timely implementation. Develop an internal audit performance measurement system aligned to corporate value drivers. Remember that the process is dynamic and must be continually fine-tuned.

Internal Audit departments will need to attract people who are creative, understand risk, communicate well and are motivated to assume a proactive, contributory role.
Short-circuiting Success: Top Ten Pitfalls to Avoid As with any change program, there are a number of obstacles to success. We have found that many internal audit departments run into 10 common stumbling blocks during the transformation process:

Pitfall #1: They decide to tinker with existing resources instead of committing to a full-scale change program.

Pitfall #2: They decide to proceed slowly hoping to avoid mistakes; instead, they lose focus and momentum.

Pitfall #3: They let technology drive change instead of enabling it.  

Pitfall #4: They tinker some more when results prove elusive or disappointing.

Pitfall #5: They assume they know what stakeholders want and fail to solicit their views or address their expectations.

Pitfall #6: They try to implement major change while carrying on their regular activities.

Pitfall #7: They assume they have all the expertise and skills they need.  

Pitfall #8: They implement best practices gleaned from other companies rather than developing them internally.

Pitfall #9: They assume that their activities can't be measured.  

Pitfall #10: They tinker some more.  

What's Ahead? Companies shall continue to look for areas where they can tap greater value -- and internal audit should come under increased scrutiny. This situation creates significant upside opportunities for internal audit to expand its role and increase its impact. Leadership is emerging as a key issue. Internal audit departments will need to attract people who are creative, understand risk, communicate well, and are motivated to assume a proactive, contributory role.

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