Ernst & Young Insight For Internal Audit Transformation

The last post – ‘Coal Gate Scam – Should Auditors Comment on Policy Decisions’ ignited a thought-provoking discussion on LinkedIn. The major debate was on role of internal auditors on evaluating strategic decisions and strategy per se. The message is – transform the internal audit department and leave behind the old thinking of verifying compliance to existing processes. Hence, I thought of sharing some great insights from the Ernst & Young report – The Future of Internal Audit is Now.

Before we discuss the details, check out transformation process depiction below.

The key aspects of the transformation process are:

1.      Align with organization strategy

According to the study, 61% of the internal audit departments did not have a documented mandate aligned to business. One can question then, exactly what are they working on. The way forward is to understand the business strategy – sales, operations, human resources, products, etc. and identify the strategic and business risks of the same.

2.      Formulate the internal audit strategy

Based on the understanding of business strategy and strategic risks, devise an internal audit strategy. Developing an internal audit annual plan isn’t sufficient. Take the time period of the business strategy, and formulate the internal audit strategy for the same period or a three to five year period.

3.      Acquire the right talent

Execution of a strategy is as good as the people deployed to the task. Upgrading skills is a must. Besides technical and functional knowledge, auditors now need business acumen. Rotate resources from operations to get in-depth business knowledge. To highlight the importance of business skills, according to the report just 47% of the IA departments have a training plan for leadership and business management.

4.      Operate as a business function

Internal audit should stop viewing itself as a support function and take a leaf out of line functions. It should measure itself against the same standards as business functions. Have the right strategy, execute it effectively, provide value add and measure against key performance indicators. As it is mostly a cost centre, it doesn’t mean it should let itself go.

Closing thoughts

Survival of business in this global economic crisis is hugely dependent on effective risk management. Internal audit plays a vital role in improving the financial performance of the organization. Hence, transforming the department functioning from old mind-set to fit the 21st century requirements is must.

Before closing, here is something to start your week on a good note. An old man for the first time saw moving walls. While he was standing in front of them, he saw an old woman enter the walls, and in a second a young woman came out. He said to his grandson – Son, hurry home and get your grandmother.

References:

The Future of Internal Audit is Now – Ernst & Young report

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