How can internal auditors be effective in doing their functions in an organization
Show Editor’s Note: This is part three of a six-part series
we are doing on the Internal Audit Value Chain, which can act as a blueprint for building a successful internal audit function. Click here for the other articles in the series. There are few efforts company leaders love more than a little old-fashioned belt tightening. Well-run companies are on a constant campaign to trim the fat, cut out the dead wood, streamline operations, and get things humming along at a smoother pace. The textbook version of this concept is called “achieving operational efficiencies,” and like most initiatives worth pursuing, there is a big role for internal audit to play in helping the organization achieve a leaner, meaner, and better version of itself. In fact, what corporate function is more equipped to weed out operational inefficiency than internal audit? Internal auditors have the skills to expertly assess processes, the knowledge of the business to understand how things fit together, the distance to evaluate problems with an open mind, and the discipline to make recommendations in a thoughtful, organized way. Here’s another benefit that internal audit brings to the efficiency table: Trimming the fat can occasionally cut into bone, removing layers of needed redundancy or oversight; but internal auditors, with their expertise in controls and risk management, are better equipped than most to ensure that the pursuit of operational efficiency doesn’t leave a company exposed to potential fraud and abuse, or too thin to take advantage of opportunity. A key function of internal audit is to foster improved organizational processes and operations. Reviews are performed by internal auditors in line with the applicable Institute of Internal Auditors (IIA) standards to evaluate the effectiveness and efficiency of operations and programs. There is no other independent and qualified function within an organization to provide an objective opinion of an efficient or inefficient operation and promote continuous improvement than internal audit. This is part of the “new normal.” The push to do more with less is driven by expectations from customers for increased product and service quality and reliability and at competitive rates and reduced costs. Internal audit teams simply must do their part to achieve these goals. The Internal Audit Value Chain Indeed, technology is a frequently used tool to drive operational efficiencies. Process automation software and other applications, for example, are often used by big and small businesses globally. These products facilitate business communications, management of projects, and various initiatives in an effective and efficient manner. Yet automation is not always a silver bullet for increasing efficiency. I often consider this quote by Bill Gates when discussing operational efficiencies with clients: “The first rule of any technology used in business is that automation applied to an efficient operation will magnify the efficiency.” The best part of the quote follows: “The second is that automation applied to an inefficient operation will magnify the inefficiency.” Internal audit plays a critical role across all line-of-business (LOB) functions to help management magnify the impact of efficient operations—those that help the company meet customer’s needs, reduce costs, and increase profitability—and minimize impact of inefficient operations—those that are poorly designed, needlessly increase complexity, hinder decision making, and obscure performance. Such inefficient operations can be compounded by inept use of technology, resulting in fraud, waste, and abuse. In the article, “Optimizing Internal Audit” from the IIA’s Internal Auditor publication, I highlighted that internal auditors, armed with knowledge about the organization’s strategic direction and overall risks, have the capability to apply basic operational audit principles to drive results. Recommendations for cost-effective and sustainable solutions that reflect the context of the industry and issues unique to the organization (customer needs and mission-critical activities) should be foremost areas to drive operational efficiencies. Internal auditors should continuously perform reviews to determine required training and skills across functional areas and assess use of optimal processes and technologies across the organization to achieve and sustain operational efficiencies. Eight Steps to Drive Operational Efficiencies 1) Address customer needs and expectations This includes, but is not limited to, the following operational activities: product and service quality and reliability, including quality controls; product and service mix and pricing; responsiveness to customer complaints, product recalls, and service interruptions; protecting customer information and data; and adapting to changing customers’ needs and expectations. These are examples of mission-critical activities with significant risks and costs to the organization if not managed properly and should be at the top of the list of internal audit priorities. On one of these fronts, protecting customer data, the stakes have been raised recently. With the European Union’s General Data Protection Regulation (GDPR), which was designed to harmonize data privacy laws across Europe and reshape the way organizations approach data privacy, taking effect earlier this year, many internal audit teams are reevaluating how their organizations collect, store, and use customer data. 2) Evaluate and improve human capital requirements An understanding of the enterprise-wide hiring and retention processes in the context of organizational goals and strategies is important for internal auditors to evaluate operational effectiveness. This includes assessments to determine if current tasks can be performed better, faster, and cheaper without compromising customer and public expectations, quality, and regulatory requirements. Such reviews provide internal audit with visibility to staff and management skills (including strengths, weaknesses, and gaps) throughout the organization. Internal audit independence should never be compromised by performing core management activities. Internal audit can, however, leverage enterprise-wide knowledge to provide management with recommendations to improve resource strategy by evaluating critical skill requirements of the organization, how it finds qualified employees and managers to fill needs, and how to get the highest-quality work by providing the right incentives, work environment, and tools with the goal of meeting the organization’s objectives. Investment in a skilled work force that can function within the dynamic nature of the organization’s operations is critical. 3) Continuously identify and mitigate evolving risks Besides identifying and mitigating risks, internal audit must understand the evolving regulatory landscape that could impact operations and provide guidance for management to implement adequate compliance steps to prevent the following: (a) regulatory violations that could result in fines, (b) enforcement disruptions, (c) reputational damage, and (d) class action lawsuits. 4) Provide a
platform to execute consistently and deliver sustained profitability Examples of such initiatives include those that focus on: improving inventory management, reducing cycle times, increasing speed and accuracy of transaction processing, and minimizing human intervention by automating efficient operations. They also include asset management reviews, information technology assessments, and reviews to reduce product defects and improve quality controls. Such activities have the benefits of reducing customer complaints, improving productivity, reducing cost, and increasing profitability. 5)
Achieve and sustain market dominance I must stress internal audit independence should never be compromised by performing management tasks. Internal audit can, however, assist management in achieving market dominance through operational efficiencies without compromising its independence. 6) Challenge the status quo and continuously innovate According to the PwC 2018 State of the Internal Audit Profession Study: Moving at the Speed of Innovation, internal auditors can serve in this valuable capacity only if they themselves are innovating. Internal audit must acquire new skills to perform operation effectiveness reviews and test controls mitigating risks related to new technology implementation and technology-driven processes. Without innovation, internal audit might fail at creating value for the organization through operational efficiencies. 7) Create a culture of operational efficiency and continuous
improvement 8) Continuously evaluate and monitor marketing and advertising investments The New Normal The reality of coping with the “new normal–doing more with less” means internal audit must do more to address the fundamental aspects of the organization, such as customer service, human resources, and marketing, rather than just focusing on the traditional, financial-based internal audit tasks. Executives and managers should empower business unit leaders and internal audit teams to continuously challenge the status quo, starting with mission critical activities to drive and sustain operational efficiencies. Click here for the other articles in the series. Jonathan Ngah, CISA, CIA, CFE, CGFM, is a Principal at Synergy Integration Advisors, a consulting firm providing audit and governance, risk, and compliance (GRC) solutions to federal government agencies and private-sector and not-for-profit organizations. Did you enjoy this article? Consider making a small donation to support independent business journalism at Internal Audit 360°. Click Here! And much thanks to those who have already donated. Our success depends on it.How can an Internal Auditor be effective?They must be able to plan, organize, and prioritize their time and schedule to ensure the scope of the audit is covered within the identified duration of the audit. As they go through the internal audit process they must understand how to obtain sufficient evidence, record this information, and verify their findings.
How does internal audit helps an organization?It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.
How internal audit should contribute to the effectiveness of internal control?The internal audit function works from within, serving as watchdogs over your organization's integrity and accountability, scrutinizing your financial reporting, guarding against fraud, errors, and risks and providing objective assurance that your entity is following the regulations and standards that it should.
How do internal audits improve the efficiency of operations?How Do Internal Audits Improve the Efficiency of Operations? By objectively reviewing your organization's policies and procedures, you can receive assurance that you are doing what your policies and procedures say you are doing and that these processes are adequate in mitigating your unique risks.
|