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Increasing the Influence Relevance and Value of Internal Audit
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STEPPING UP / IIA NZ Conference 2013 STEPPING UP / IIA NZ Conference 2013
Internal Audit andOrganisational Strategy
Increasing the Influence, Relevance and Value of
Internal Audit
David MallardCornerstone Integral
Melbourne
STEPPING UP / IIA NZ Conference 2013
Topic
1 The impact of strategic risk
2 Are we doing enough?
3 Recent research into the profession
4 The standards
5 Three common strategy failure points
6 Auditing strategy development
7 Strategy execution risk
8 Strategy execution audit
9 Insight over the journey
10 Audit people capability
11 Optimising technical with non-technical
12 Implications of auditing strategy
13 Conclusion
WHAT WE WILL SHARE
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Strategic risks pose a much more significant threat to companies
than more easily auditable risk areas
Strategic risks cause 68% of severe market capitalisation decline
THE IMPACT OF STRATEGIC RISK
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Strategic risks account for 68% of severe market
declinesRisk Categories
Strategic
Legal and Compliance
Financial
Operational
68%
7%
12%
13%
Percentage of Risk Failures Leading to Significant Market Decline
6%
13%
49%
32%
Percentage of Time Spent By Audit Departments on these Risk types
Audit departments
report spending only 6% of their
time auditing strategic risks
ARE WE DOING ENOUGH?
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RECENT RESEARCH
To deliver real value, audit plan’s must be responsive, flexible
and aligned with company strategy
61% of survey respondents said
Internal Audit did not have a mandate
aligned to business strategy
Top Priority - be more relevant to achieving
the organisation’s objectives
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RECENT RESEARCH
# 1 PRIORITY:BE MORE RELEVANT
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2130. A1 – The internal audit activity must evaluate the adequacy and effectiveness of controls in responding to risks within the organisation’s governance, operations, and information systems regarding the:
1. Achievement of the organisation’s strategic objectives
2. ..3. ..
INTERNATIONAL STANDARDS OCTOBER 2012
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THREE COMMON STRATEGY FAILURE POINTS
Flawed Business Assumptions: Management assumptions may not be rigorously tested resulting in organisational objectives that are inconsistent with the enterprise’s capabilities or the realities of the business environment.
Business Unit Misalignment: Lack of communication or a strategy development framework for business units can result in business unit objectives and operating plans that fail to align to enterprise objectives.
Employee Understanding: Poor communication of strategic priorities throughout the organisation can lead to a lack of understanding and belief in the future direction of the company.
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1. Strategic Planning Process Audit: Review the strategic planning process to ensure there is a common framework for the development of business unit strategic plans and assess the alignment between business unit, department, and corporate level strategic plans.
Are enterprise level strategic
objectives documented
and measurable?
Does the company have a documented process for strategic planning? Has the
process been complied with?
Are Business Unit objectives
reasonably related to enterprise objectives?
Is there alignment between
enterprise and business level
strategies?
SIMPLE STEPS TO AUDIT STRATEGY
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2. Audit of Assumptions: Identify and validate assumptions about the internal and external
environment made at the enterprise, business unit, and project level.
Are key assumptions underpinning the plan
for achieving objectives documented?
Are key assumptions reasonable given all the
evidence?
SIMPLE STEPS TO AUDIT STRATEGY
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3. Strategy Communication and Awareness Audit: Assess the effectiveness of strategy communication to all levels of the organisation.
Do incentives and/or performance criteria link to strategic objectives ?
To what extent do employees believe in the
strategy?
What level of awareness do employees have in
the strategy?
SIMPLE STEPS TO AUDIT STRATEGY
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Kaplan and Norton (developers of the balanced scorecard) report
that 90 per cent of organisations fail to execute their strategies
successfully.
STRATEGY EXECUTION IS THE CHALLENGE
Fortune Magazine famously stated that organisations fail to
successfully implement strategy, not because of bad strategy, but because of bad
execution.
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Strategy Execution
STRATEGY EXECUTION RISK
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In the 2013 State of the Profession study, PwC highlighted that
management is least satisfied with Internal Audit’s contribution in
less-traditional audit areas such as ‘large change program’
assessment.
STRATEGY EXECUTION RISK
This suggest Internal Audit’s approach to large strategic change
programs requires a rethink.
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My experience at Australia Post
AUDITING STRATEGY EXECUTION
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Regularly polled senior executives and Board members about their perception of Internal
Audit VALUE and effectiveness
AUDITING STRATEGY EXECUTION
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AUDITING STRATEGY EXECUTION
Stakeholder feedback resulted in
the question:
How does Internal Audit address
strategic risk more effectively?
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1. We viewed the organisation's strategic plan as an ‘inventory’ of organisational change programs
2. Ranked each program by importance to company objectives, complexity, scale etc.
3. Diagnosed history of previous investments, where they had succeeded or failed, and considered organisational capability challenges
HOW WE TACKLED STRATEGIC RISK AUDITING STRATEGY EXECUTION
4. Developed new Audit tactics to assess strategic program investments
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FOUNDATIONAL THINKING- THE INTEGRAL FRAMEWORK
INTENTIONAL (I)
Personal Mastery
Attitudes
Engagement
Perspectives
CULTURE (WE)
Cultural Mastery
Relationships
Politics
Leadership
BEHAVIOURAL (IT)
Capability Mastery
Performance
Accountability
Results
SYSTEMS (ITS)
Strategy Mastery
Structures
Policies
Technology
TANGIBLEINTANGIBLE
INDIVIDUAL
COLLECTIVE
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The Language of Thoughts &
Feelings
The Language of Relationship & Meaning
The Language of Behaviour &
Action
The language of Systems & Strategy
TANGIBLEINTANGIBLE
INDIVIDUAL
COLLECTIVE
INDIVIDUAL
COLLECTIVE
TANGIBLEINTANGIBLE
FOUNDATIONAL THINKING- THE INTEGRAL FRAMEWORK
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2. PIR’s not optimising limited Audit resources. ‘In-Flight’ real time assessment
3. Rapid feedback – ‘Contemporary, Actionable Assurance’
1. A HOLISTIC view – considered typical program management and technical issues in conjunction with humanistic elements – collective and individual
4. Relevant to stakeholder objectives - organisationally and personally
AUDITING STRATEGY EXECUTION- THE AUSTRALIA POST EXPERIENCE
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AUDITING STRATEGY EXECUTION- THE AUSTRALIA POST EXPERIENCE
Feedback on more than 50 data points is collected. Depending on project scale/risk, several Health Checks are conducted over the project lifecycle
and/or within significant project phases.
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AUDITING STRATEGY EXECUTION- THE AUSTRALIA POST EXPERIENCE
A 360O STRATEGIC PROJECT HEALTH CHECK
Assessments from multiple perspectives
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Poll stakeholder perceptions and/or confidence levels
horizontally and vertically
AUDITING STRATEGY EXECUTION- THE AUSTRALIA POST EXPERIENCE
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ORGANISATIONAL POLITICS ‘CULTURAL CUL DE SACS’
AUDITING STRATEGY EXECUTION- THE AUSTRALIA POST EXPERIENCE
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AUDITING STRATEGY EXECUTION- THE AUSTRALIA POST EXPERIENCE
Triangulate feedback.Deep dive on the ‘hot
spots’ and validate
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AUDITING STRATEGY EXECUTION- THE AUSTRALIA POST EXPERIENCE
Integrates the ‘Hard and Soft’ risk issues aligned to
the phase of program development or
implementation, enabling a more holistic assessment
of relative risk to the Strategic program.
Drives close to real time Internal Audit feedback
enabling program course corrections before its too
late.
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Internal Audit Headline Conclusion…..
AUDITING STRATEGY EXECUTION- ‘SAYING IT RIGHT’
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During the review, each success factor is broken down into its core components.
Internal Audit considers all
information collected from 50 data points
during the assessment and
applies its professional judgment to
determine the final ratings.
AUDITING STRATEGY EXECUTION- ‘SAYING IT RIGHT’
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AUDITING STRATEGY EXECUTION- INSIGHT OVER THE JOURNEY
After a series of strategic project assessments, an organisational
capability profile emerged which was adopted as input to inform
people engagement and
development strategies
A PRACTICAL EXAMPLE OF INFLUENCE, RELEVANCE AND VALUE
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AUTOMATE THE PROCESS- www.projectaudits.com
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A focus on auditing organisational strategy is very important, however is only part of the story to being influential,
relevant and more valuable
AUDITING STRATEGY - ONLY PART OF THE STORY
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A September 2013 survey highlighted that 92% of senior executives in the U.S. acknowledge there is a serious gap in workforce skills with the most significant concern relating to ‘non
technical’ capability such as communication and creativity.
AUDIT PEOPLE CAPABILITY
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People skills are vitally important to internal audit’s ability to stay
close to company leadership and remain aligned with the key
strategies and priorities of the organisation.
AUDIT PEOPLE CAPABILITY
The most effective Internal Auditor possesses a broad range of non-technical attributes in addition to
deep technical expertise.
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Leading CAEs stated that the skills necessary for success are effective communication, the ability to build
strong relationships and a capacity to engage internal and external partners.
In a complex, volatile and changing environment the ‘softer’ attributes of Audit performance are increasingly
critical to the success of Internal Audit functions
AUDIT PEOPLE CAPABILITY
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Attributes of
excellence
Focus on critical risks
Match talent
model to value
proposition
Leverage technology
Enable a client
service culture
Deliver cost effective services
Leverage & manage
relationships
Promote quality and innovation
Align value proposition to customer expectations
ATTRIBUTES OF INTERNAL AUDIT EXCELLENCE
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ATTRIBUTES OF INTERNAL AUDIT EXCELLENCE
WE INVESTED HEAVILY OVER A SUSTAINED PERIOD IN ‘PEOPLE’
CAPABILITY ATTRIBUTES
INCLUDING SELF AWARENESS & EQ, NEURO LINGUISTIC
PROGRAMING, PYRAMID THINKING,
AUTHENTIC CONVERSATIONS ETC
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PEOPLE DEVELOPMENT RESEARCH & INTERNAL AUDIT
Creative and Relationship Attributes
‘Compliance, Control, Protecting’
Task and Reactive Attributes - often
where Internal Audit is perceived as
‘inhabiting’
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Research highlights a high correlation between individual development maturity, ‘creative’ leadership attributes and personal effectiveness, particularly in dealing with the increasing uncertainty,
ambiguity, volatility and complexity of interconnected global business markets.
PEOPLE DEVELOPMENT RESEARCH & INTERNAL AUDIT
Relating, Self Awareness, Authenticity, Systems Awareness, Achieving
This is particularly relevant for the role of Internal Audit.
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• D. Goleman, Emotional Intelligence: Why It Can Matter More Than IQ (Bantam Books, 1995)
Requires higher levels of
systems and people thinking
EQ is twice as important as
technical competence*
OPTIMISING TECHNICAL AND NON-TECHNICAL CAPACITY IS THE KEY TO SUSTAINED SUCCESS
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THE IMPLICATIONS OF AUDITING STRATEGY
Pres
erve
Val
ueCr
eate
Val
ue
Finance
Compliance
Operational
Strategic
Operational Risk
Compliance Risk
Strategic Risk
Financial Risk
Traditional Audit Skills
ExpandSkills
Enhance Engagement
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For Internal Auditors to be perceived as relevant, influential and valuable we must focus on
strategic risks in our organisations. At the same time
we must act to build our non technical capacity. By tackling
these core themes well, we are more likely to be perceived as
‘Trusted Advisors’ by our stakeholders.
HOW TO INCREASE THE INFLUENCE, RELEVANCEAND VALUE OF INTERNAL AUDIT?
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THANK YOU !
David Mallard