How Next-Generation Leaders Are Transforming Internal Audit

Andrew Struthers-Kennedy, Managing Director Global Practice Lead, Internal Audit and Financial Advisory
Mark Peters, Managing Director UK Practice Lead & Practice Innovation Lead, Internal Audit and Financial Advisory

Internal audit departments have faced unprecedented levels of disruption over the past couple of years. Changes in workplace culture, the increasing use of digital technology and data analytics, an evolving risk landscape, and a growing war for talent are putting increased strain on audit functions and the broader organizations they are part of.

Internal audit professionals have always strived to stay on top of risk and industry trends, and understand and align their activities to their organization’s priorities. These recent, ongoing disruptions are driving internal audit leaders, along with those in the broader risk arena, to accelerate their focus on evolving and innovating the methods, tools and processes used for managing risk and providing assurance, including the adoption of new technologies.

Protiviti recently published its 2022 Next-Generation Internal Audit Survey, which captures and analyzes responses from over 500 internal audit professionals and core stakeholders. More than half of the respondent group were internal audit leaders — chief audit executives (CAEs) or the equivalent — and over 20 countries were represented in the survey.

Audit Departments Make Progress With Transformation

Innovation is often perceived as a monumental event or quantum leap forward. Yet, change can also be achieved incrementally in the form of micro-innovations. If transformation is viewed through the lens of making progress in performing tasks more efficiently and effectively, then it’s perfectly appropriate to assume that incremental steps over time will add up, leaving the organization in a fundamentally different and better place than the current state.

As evidence of how the view of transformation is evolving in internal audit, audit leaders are becoming more optimistic in their self-assessments of where they are headed. Although a slight majority of CAE respondents view their internal audit departments as slightly behind the competition in terms of transformation, going forward more audit leaders anticipate being in the forefront of innovation based on their current and planned levels of transformation activities. This demonstrates an optimism in the profession and a commitment among internal audit leaders to make progress.

This year, innovation activities and initiatives are front and center for audit functions, with 70% of respondents reporting that their department’s focus on innovation and transformation has increased over the past year, a figure roughly 6% higher than reflected in last year’s survey. Moreover, 75% of CAEs responded that they are undertaking innovation activities.

While large organizations are leading the way in innovation, smaller organizations are also showing growth. Financial services and technology are showing the highest levels of innovation activities among all industries surveyed.

The top area of focus for audit leaders this year is the use of data analytics. Internal audit practitioners have been pursuing more data-enabled auditing for a long time. The benefits are universally acknowledged, and we are observing a renewed, and serious, commitment to making use and analysis of data an embedded part of the internal audit lifecycle.

Advanced audit analytics are generally enabled through a suite of technologies that provide robust functionality to acquire, transform and analyze data and report analytical results. Specific technologies include those used for data and process mining, visualization, analytics automation, and methods in the artificial intelligence continuum. Departments are also seeking technologies to automate the collection and cleaning of data to further facilitate the application of advanced analytics and statistical analysis, perform predictive and prescriptive analytics, and provide high-impact, dynamic reporting and dashboards.

The other top focus areas included the greater use of dynamic risk assessment and continuous monitoring techniques (including through the use of data), and proactive coordination with other assurance functions. Many internal audit departments prioritize engagement with other assurance functions across the first and second line, both to help shape the internal audit agenda as well as to provide a more comprehensive, coordinated, and common view of enterprisewide risk. This view of total assurance across the organization is a growing trend that is increasingly being highlighted in the Next-Generation Internal Audit Survey.

Addressing Top Barriers to Innovation

 So, what is holding internal audit functions back from achieving their innovation and transformation goals? The top barriers to innovation cited in this year’s survey included competing priorities, a lack of capacity and continuing skills gaps.

When discussing competing priorities or the lack of capacity, it’s important to remember that there is no one-size-fits-all approach to innovation. It doesn’t always demand massive change or huge investments. To achieve success, it’s most important for organizations to right-size their innovation strategy and priorities based on budget and resource constraints, a clear-eyed view of what can be practically achieved, and whether the required skills and tools are available.

Investing in additional training and team development can go a long way toward addressing the capacity challenge. Roughly 55% of respondents said they were focused on training and developing their current staff to build up next-generation audit capability.

But training is not the only solution, and audit departments may not wish to further burden staff who are already stretched to the limit. Audit departments can get additional help from other areas of the organization through regular rotational programs and knowledge and resource-sharing with other departments. Audit leaders may also choose to complement or fill needed skills gaps through external partnerships or by direct hiring. Most boards and audit committees are very supportive of bringing in additional resources to address critical gaps in knowledge.

When it comes to the challenge of competing priorities, there are no easy solutions. The survey results showed that just 60% of audit committees demonstrated interest in audit transformation and innovation initiatives. To gain full support of senior leadership, the board and the audit committee, audit leaders must articulate a clear vision and strategy for transformation, and then communicate it with their audit committee and the organization at large.

A majority of internal audit departments are already sharing either a high or a medium level of information with their audit committees, reinforcing that this is the time to introduce those initiatives if you haven’t already done so.

There is a correlation (and we might even offer, a causal relationship) between the amount of information sharing and relative engagement. Typically, the more information on transformation and innovation initiatives that the CAE is sharing with the board, the more engagement and support will be reciprocated. Conversely, when the board starts to ask questions on these topics, the CAE begins sharing more information in board meetings as well.

Before approaching leadership or the board to seek funding approval for enabling technologies or transformation initiatives, it’s best to come equipped with a clear vision and strategy and be able to articulate it well. Last, audit leaders should be prepared to provide a business case showing expected quantitative and qualitative return on investment (ROI) for the proposed projects.

Achieving Transformational ROI

ROI can be difficult to measure when it comes to innovation and transformation activities, particularly in the short term. It’s important to remember that measurements of return do not necessarily have to be quantitative and directly related to the performance of the function (in terms of efficiency, effectiveness, and coverage). They can include qualitative measures — such as the different lines of inquiry or dialogue that can be explored with stakeholders, quality of the experience and staff sentiment — factors that impact the organization’s ability to attract, retain and engage team members.

This is where the concept of “micro-innovations” comes into play. Capturing quick wins through small pilot initiatives during discrete segments of the internal audit cycle are evidencing some good returns.

 Innovation and transformation initiatives are rarely easy or simple, but they are critical for internal audit to keep pace with today’s rapid changes in the business and maintain their critical assurance role and relevance. Success requires a commitment from leadership, engagement within the internal audit team, good communication, alignment on vision and activities, a willingness to explore, and ongoing communication with and support from executive stakeholders and the audit committee. To achieve this, make sure you have a clear vision and strategy of what you want to accomplish as well as a business case detailing expected ROI before seeking funding and resource approval for your next set of enabling technologies and transformation initiatives.

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