Internal audit must change

11 Jul 2014

New pressures are forcing the internal audit profession to think differently about communication, design and talent

Internal audit is facing a wider range of challenges than ever before. Further, its performance - perhaps as a result of these additional challenges - ranks low in the estimations of management both within and without the internal audit profession.

A range of surveys conducted by the Institute of Internal Auditors and a number of professional services firms [link] show a sustained or increased level of investment in internal audit. Executive management, according to the results, understand the worth of a comprehensive internal audit. But on the whole, their support for the profession stops there. PwC’s ‘State of the internal audit profession 2014’ found that of the over 1900 professionals it surveyed some 50% of senior management and 28% of board members believe internal audit as it is now adds less than significant value to their organisation. Only 49% of managers and 69% of the board believe it is performing well at delivering expectations. Clearly an expectation gap exists between stakeholders and the activity of the internal audit.

This expectation gap exists at a time when senior management is finding it hard to manage the risks they are facing at the same time as carrying out their core duties. The expectation gap, say specialists, points to an opportunity for internal audit to enhance its capabilities and add value, moving beyond assurance to include an advisory role too.

The surveys all suggest that for internal audit to improve its basic function and progress towards the role of ‘trusted advisor’ to management, the design of the internal audit – from the type of professionals companies use to the blueprint of the audit itself – need to change.

Suggestions focus on increasing the number and depth of conversations that internal audit and stakeholders in the business have. Results of PwC’s survey suggest that better alignment over the critical risks to the business will help internal audit understand and communicate expectations, and better manage its resources and activity.

Another theme is the imperative to recruit the right kind of talent within the internal audit function. Since the financial crisis, the need to build public trust in companies has grown exponentially. The pressure is on internal audit to address cultural risks within organisations, and a cultural audit requires different skill sets. The surveys show that senior management are looking to hire better communicators and analysts with a broader remit than just the numbers. Similarly, the breadth of risks that enhanced technology brings requires an internal audit profession well-schooled in information technology risks and controls. Targeted talent models might address the concerns of the half of senior management that believes internal audit is not performing well at obtaining or training the right level of talent for its needs.

Above all, senior management wants internal audit to look further than just the financials. “If internal audit thinks their job starts with the balance sheet, they are going to be wrong,” said Melvin Flowers, Corporate Vice President of Internal Audit at Microsoft USA. “Their job starts with the business objectives and where the company is going. If they focus on the business objectives, they will be aligned to the critical risks of the organisation.”