Adding value: creating value has become a matter of survival

Internal Auditor, Feb, 1997 by Anthony Walz

Yet surprisingly, some internal auditors seem to have little idea of how they add value. They view internal auditing as an essential function, one with a guaranteed and exclusive franchise. In their minds, internal auditing is immune to the kind of critical examination that can ultimately lead to downsizing and outsourcing.

The danger in that type of naive and short-sighted thinking is that, although management may not have given much thought to the value of internal auditing, sooner or later they will. Without understandable constructs for explaining and demonstrating their value creation, internal auditors risk being labeled by management as resource consumers, not value-adders.

* Internal Audit's Value

Creating value ultimately means improving the market value of the firm. Functions must be prepared not only to explain how they affect market value, but to demonstrate increasing value as well.

Internal auditing can add value in only two ways: by reducing the cost of the internal audit function itself, and by making audit recommendations that add value. These two approaches are neither dependent nor mutually exclusive. To achieve world class status, internal audit functions must pursue both cost reductions and high value audit recommendations.

* Reducing Costs

Decreasing audit costs is the most direct and controllable way for internal auditors to add value. Every cost reduction translates immediately into greater value, and successful implementation does not depend on other functions. Within the constraints of its operating budget, audit management can assume responsibility for the department's operating expense and can take measures to curtail related costs. Two routes for achieving cost reduction involve improving productivity and eliminating work.

Improving Productivity

When the audit staff can improve their productivity and perform the same amount of work with fewer resources, value is created. The saved resources can be preserved, used to perform additional audits, or shifted to other activities. Keys to increased productivity include achieving higher levels of proficiency, using more efficient audit techniques, and employing better audit strategies.

Proficiency - The most obvious way to improve productivity is to perform current audit plans and techniques at a higher level of proficiency. Improving proficiency often requires changes in fundamental tasks, such as training and recruiting. Proficiency is driven primarily by the quality of personnel and adequacy of supervision. Staff motivation, competency, and professionalism are other determining factors.

More Efficient Audit Techniques - Successful internal audit shops are learning to leverage technology and knowledge to create value; using expert systems to replace post-transaction testing is one example. High value solutions, however, are not necessarily high tech. Sometimes simple innovations can produce powerful results, and world class internal audit functions understand that innovation doesn't just happen.

Cultivating an organization of continuous learning and innovation is necessary in the continual search for more efficient ways of working. Innovation is promoted and planned. Lessons learned are captured to create an expanding base of knowledge and then applied in subsequent projects. Such organizations depend on creative people, empowered to pursue their ideas.

Better Audit Strategies - Redesigning the audit plan to achieve greater efficiency may be the most powerful, and the most ignored, approach for improving productivity. By restructuring and reconfiguring audits, internal auditors can develop plans that provide broader and more in-depth coverage at reduced cost.

An obvious example of such redesign is shifting audit's focus from back-end to front-end reviews. Information systems auditors have always participated on the front-end in system development reviews. However, the approach need not be limited to IS projects.

As organizations change more rapidly, the need and opportunity to influence developing procedures, practices, and systems grows. Front-end reviews can pay big dividends by helping to avoid situations that lead to long-term audit inefficiencies. Providing consultation and advice on the front-end allows the auditor to influence the process or system being developed so that effective controls and audit techniques are built-in.

The internal audit staff's goal should be to structure the overall plan to achieve the greatest coverage with the fewest resources.

Developing an audit plan implicitly involves selecting from several possible audit strategies, and the final decision should depend not so much on the individual pieces of the plan but on how they combine to create an overall package.

Eliminating Work

As organizations undergo faster and more substantial change, internal auditors must seek out and discard obsolete projects and services. Audits that were once high value can quickly loose their importance because the underlying risk has dissipated. Dynamic organizations have dynamic risk profiles.