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Is Your Audit Plan Keeping Pace With Your Business?Duncan Edwards

Liam McCaul – Partner, Risk Advisory Services

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Internal Audit — Adding Value To Your Company

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Objectives

Why do we need to demonstrate the value of

internal audit? What do we mean by ‘value’? What are the key drivers that deliver internal audit value? How do we measure value?

To consider four questions:

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Why do we need to demonstrate the value of internal audit?

Internal audit now higher up the boardroom agenda. Commercial pressures to derive the maximum benefit from

all resources employed. Greater corporate governance focus. The objective to ‘add value’ is now explicit in the IIA’s

Standards for the Professional Practice of Internal Auditing.

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Definition of Internal Audit

“Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.”

Institute of Internal Auditors UK and Ireland

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What do we mean by ‘value’?

“Things only have the value that we give them”Molière

“Things only have the value that we give them”Molière

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Stakeholder expectations Who are your principal stakeholders?

- Audit Committee- Executive Management

- Line Management- Customers- Regulators (including External Auditors)

How do they value internal audit? Are you sure that is still what they want?

“Since events such as Worldcom and Enron, and the subsequent legislative and regulatory changes, key stakeholders in most organisations, such as the Board and the Audit Committee, have different expectations of their internal audit function.”

‘Finding Your Level – Internal Audit Benchmarking Survey’ (Ernst & Young)

“Since events such as Worldcom and Enron, and the subsequent legislative and regulatory changes, key stakeholders in most organisations, such as the Board and the Audit Committee, have different expectations of their internal audit function.”

‘Finding Your Level – Internal Audit Benchmarking Survey’ (Ernst & Young)

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What do we mean by ‘value’?

“The most valuable thing an internal audit function can provide is independent assurance on the effectiveness of controls over risk”

Simon D’Arcy - President of the Institute of Internal Auditors 2007

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The “Pendulum Effect”Has the Pendulum Swung too Far?

FINANCIALOPERATIONALSTRATEGIC COMPLIANCE

1990’sR

ES

OU

RC

E FO

CU

S2004+

AssuranceConsultative

RISK

Approach

Management Expectations

Regulatory Change

Corporate Scandals

Internal Audit

Drivers

Skills Technical/ExecutionInnovative/Collaborative

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‘The Value Agenda’

IIA Survey of Heads of Internal Audit, CEOs, CFOs and Audit Committee Chairs.

Sought responses on a range of issues related to the value generated by internal audit including:

- how and where internal audit adds value? - how value is measured and demonstrated?

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The Value Agenda – Sources of Value

1. Assurance that major business risks are being managed appropriately (72%).

2. Assurance that the internal control framework is operating effectively (68%).

3. Identification of new business risks (41%).4. Detection and prevention of fraud and irregularities (30%).5. Improving Business performance by sharing knowledge of best

practices (29%).6. Use of Knowledge and experience to tackle urgent issues (24%).

“Which aspect of internal audit’s role is of primary importance in terms of value to the business?”

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What are the key drivers that deliver internal audit value?

DefinesDefinesDelivery of promises

Right Direction

PurposeValue

Strategy

Skills and

skills

development

Team /

organisation

structure

Relationship

management

process

Right

peopleFacilitates

Customer /

business interfaceFacilitates

Customer/business interface & right

behavioursRight People

RelationshipManagement

process ResourceAnd Skills

Development

Team/Organisation

structure

IA

methodologies

Knowledge

management

Support and

development

Tools and

technology

Operational

management

Properly

equippedProvides Delivery

infrastructure

Delivery methodology &

execution

Quality Assurance

Supporting tools &

technology

Operational & performance management

ProvidesEfficient and

effective delivery

infrastructure

ProperlyEquipped

Knowledge Management

Leadership/Change Management

Value to stakeholder

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How do we measure value?

“Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted”

Albert Einstein

“Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted”

Albert Einstein

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How do we measure value?

The IIA Survey identified that: 75% of Heads of Audit are not required to formally

demonstrate the value they deliver. Quantitative measures were focused on inputs and process

efficiency rather than outputs and value. Qualitative measures were “woolly, subjective and difficult to

pin down.”

BADLY!!!

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Demonstrating Value – a personal view A balanced scorecard process is in place for IA. The measures and KPIs used to measure performance focus on

what is created, not what is input. A formal monitoring process is in place with the key

stakeholders to validate the scorecard and plan for improvements.

IA management and staff believe intrinsically in the value scorecard approach and continually strive to improve performance beyond agreed targets.

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Demonstrating Value – a personal view Communication – get the message out and make sure the

‘perception of value’ is in your favour.

There is an effective stakeholder and customer feedback process. Leading functions will adopt a combination of post audit survey forms and one to one meetings with key business management/stakeholders.

The value measures, targets and feedback processes used will directly focus upon the agreed roles and responsibilities and, therefore will change as the roles and responsibilities evolve and change.

Leading functions will open themselves up to independent quality assurance process. The Institute of Internal Auditors recommend that this is undertaken at least once every 5 years.

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A Framework for demonstrating value

Value Charter

StakeholdersAgenda

Value measurements

Detail agreed means to measure value delivered. Where measures are softer, commitment from your stakeholders to help measure the value delivered is critical

Value Attributes

Detail the specific attributes that are required to be demonstrated

Value scorecard

The Scorecard should contain actual examples of how the value attributes were delivered

Value Drivers

Understand who your key stakeholders are and what they value

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Demonstrating Value – ‘hard measures’

Hard measures of the value delivered by internal audit may include:

Description Unit of measure

Client satisfaction survey results Ave. scores

Cost savings or incremental revenue attributable to internal audit recommendations

€€€

Degree of completion of the internal audit plan % completed

Requests for internal audit input into business projects No. of requests

Best practice opportunities highlighted/recommended No. highlighted

Business sponsorship of IA recommendations % accepted

Time taken to issue final reports

Implemention of IA recommendations

No of days

% Complete

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Adding value to your company

Summary

This is now a requirement of our profession – it is not just

‘nice to have’. Be clear who your stakeholders are and what they value. Critique your function – has it the “right direction, right people and is it

properly equipped” to deliver value. Reporting should be formal, contain qualitative and quantitative

measures and be aligned to your stakeholders’ value drivers.

If there was no formal requirement to have an IA function,would your organisation still have one?

If there was no formal requirement to have an IA function,would your organisation still have one?

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A final thought…

“Strive not to be a success, but rather to be of value”

Albert Einstein

“Strive not to be a success, but rather to be of value”

Albert Einstein

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Is Your Audit Plan Keeping Pace With Your Business?Duncan Edwards

Ernst & Young www.ey.com/ie/risk

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