Qatar, May 25 2014 – Many organizations have reported that their internal audit functions took strides to improve their performance during the past year, but data shows that the progress has not been sufficient to keep pace with today’s increasingly risky and complex business landscape. Limited improvement of performance continues to hinder internal audit’s ability to build the right capabilities and deliver on stakeholder expectations. However, the bigger challenge lies within the differences of opinion existing between stakeholders and Chief Audit Executives (CAEs) on the nature of what is expected of internal audit, according to PwC’s Internal Audit State of the Profession 2014 study.
“Our latest study indicates that many internal audit functions are responding to a wide variety of stakeholder demands rather than taking purposeful action in designing their function around an aligned set of expectations,” said Andrew Garrett, Internal Audit Leader for PwC Middle East. “Internal audit must be aligned with the expectations of its stakeholders in order to strategically build the right capabilities and raise its performance and value.”
This year’s study reflects the opinions of more than 1,900 chief audit executives, internal audit managers, members of senior management and board members, representing 24 industries across 37 countries. Including around 40 from the Middle East mainly from the GCC. PwC’s latest report takes a deep dive into stakeholder expectations, detailing the possible expectations internal audit can potentially meet, and the tactics leading organizations are using to gain alignment around those expectations. It also discusses how leading internal audit functions are building the capabilities to deliver on their stakeholders’ expectations and increase their contribution, ultimately driving increased value to their organizations
More than half (55 percent) of senior management reported that they do not believe internal audit adds significant value to their organization, and nearly 30 percent of board members believe it adds less than significant value. However, study participants believe that given adequate resources, opportunities exist for internal audit to increase its value and its contribution to the business.
Business risks are rising across the board, and PwC's recent Risk in Review study highlighted that 70 percent of Middle East executives compared to 75 percent globally reported increased risks to their business. Internal audit functions delivering the greatest value have alignment on their role in the current risk environment as well as around emerging risks. They are building resources to meet these aligned expectations and key risks to the business, and are therefore positioned to provide significant value to the organisation.
“We saw from our study that on average, only 49 percent of senior management and 64 percent of board members believe internal audit is performing well at delivering on the foundational attributes and their associated expectations” said Stephen Anderson, PwC Qatar Managing Partner. “Even CAEs see an opportunity for improving internal audit performance with just 65 percent believing their function is performing well. Achieving alignment around organisational objectives, stakeholder expectations and business risks is a significant step towards internal audit improving its relevance and value to the business and be the trusted advisors.”
PwC’s study suggests that stakeholders and internal audit should be establishing expectations aligned to eight foundational attributes of internal audit – business alignment, risk focus, quality and innovation, service culture, talent model, stakeholder management, technology and cost effectiveness. Considering these attributes, stakeholders reported low levels of performance in bringing the right level of talent to the organization, leveraging technology and delivering cost-effective services.
“As indicated in the study there is a number of internal and external drivers that cause a change in an organisation. 42 percent respondents from the Middle East indicated that technology change and IT risks mark the biggest external driver of change that will face organisations in the next 18 month, compared to 58 percent globally. While 60 percent said that change management initiatives are the biggest internal drivers for change.” said Tabish Mushtaq, Director Risk Assurance PwC Qatar.
By aligning expectations and having the right skills and capabilities, internal audit functions can add significant value to their organization as either an assurance provider (i.e. delivering objective assurance and executing on an often more traditional audit plan) or trusted advisor (i.e. providing value-added services and strategic advice to the business, beyond the execution of the audit plan). PwC’s latest study revealed that trusted advisors are more often seen as adding significant value – 67 percent of stakeholders reported that trusted advisors provide significant value compared to 33 percent of assurance providers. Trusted advisors are also performing at a much higher level on the eight foundational attributes of internal audit.
Without alignment on expectations, investment in skills and capabilities to deliver on expectations and a well-designed communication plan, internal audit may be limited in its ability to deliver high performance and provide real, measurable and appreciated value. PwC outlines the key steps CAEs, board members and senior management can take to purposefully design an internal audit function:
CAEs: Lead the design and communication plan
CAEs should lead by developing a point of view on what stakeholders expect of internal audit and how to fulfill those expectations, especially by assessing needed skill sets against current capabilities. A communication plan should be created to purposefully gain alignment on the suggested expectations. CAEs should regularly re-evaluate the design and approach of the internal audit function to keep it aligned with stakeholder expectations.
Board members: Provide proactive input and approval of the design
In addition to providing input on the board’s expectations of internal audit, board members should offer insights to senior management on what they expect of internal audit in terms of achieving internal audit’s short and long-term strategic plans and ultimate approval of the expectations set. Board members should encourage the CAEs to have regular and more frequent communications with the board. Communication plans should include how and when the board would prefer internal audit report progress against expectations.
Executive Management: Support the design
Support the design of internal audit by clearly communicating expectations and supporting internal audit’s involvement in non-traditional areas. Senior management should embrace the concept that internal audit capabilities and capacity have evolved, and if properly aligned and resourced, internal audit is capable of delivering on broader more strategic initiatives and producing significant value. In addition, management should support internal audit’s efforts to develop metrics that align to expectations, and expect more than the often typical reports on audit plan status.
“The bottom line is that if an internal audit function delivers more, stakeholders can ask for more as the function is positioned to do more and is given the opportunity and resources to deliver against broader expectations. Getting to this level may not be easy, but internal audit functions can begin moving in that direction by purposefully re-designing their function around an aligned set of stakeholder expectations, building capabilities to meet these aligned expectations and delivering greater value to the organization,” concluded Andrew Garrett.
"PwC 2014 State of the Internal Audit Profession Study" was launched in the Middle East at the Internal Audit Conference – Qatar that took place on the 25 & 26 of May. To download a full copy of the report, please visit: http://www.pwc.com/us/2014internalauditstudy
About PwC Middle East
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