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Home > Auditing Best Practice > Internal Audit and Partnering with Senior Management

Auditing Best Practice

Internal Audit and Partnering with Senior Management

by Bruce Turner

Executive Summary

  • The business world is constantly changing. Internal auditors increasingly need to embrace ongoing changes to the business. They also need to understand changes to key drivers, such as the regulatory environment, the profession, and the social and political landscape.

  • To do so, internal auditors must maintain a meaningful dialog with senior management, so as to understand their changing needs and expectations.

  • An internal audit work plan that aligns neatly with the primary risk concerns of senior management and other key stakeholders ensures that the audit effort is directed at the areas that are likely to add the greatest value to the organization.

  • Because of the increasing complexity associated with running an organization, internal auditors must ensure that their recommendations translate into improved business processes and effective risk management, governance, and control arrangements.

  • Internal auditors need to have the capability to deliver a product that meets or exceeds the expectations of senior management.

  • Internal auditors must also be able to tell their story to maintain their influence, relevance, and credibility within the organization.

The Changing Environment

“The internal audit function has evolved from corporate cop to that of a savvy in-house consulting service.”1

Internal auditing in the twenty-first century imposes even greater demands on the professional internal audit staff, whose role has expanded to combine both an assurance and a consulting service to management. Internal audit charters have been broadened considerably to reflect these demands.

The chief executive of the Institute of Internal Auditors in Australia (Christopher McRostie) has reflected:

“In rapidly changing and increasingly complex business and regulatory environments the internal audit function has evolved from corporate cop to that of a savvy in-house consulting service that not only reports problems, but that also gives constructive suggestions to line managers about how to improve the performance of the business.”2

Internal audit staff are being increasingly relied on to provide organizational expertise in risk management, internal control, and governance processes as a consequence of the emergence of stronger corporate governance demands across the world. Internal auditors need to have strategies in place that allow them to remain abreast of trends and emerging issues within their organization and the broader business community.

Contemporary internal auditing practitioners need to apply a strategic approach to understanding the key organizational value drivers and positioning themselves to meet the expectations of senior management.

Internal auditors are well placed to influence senior management in setting the right tone at the top. This, in turn, is a powerful way to nurture an organizational culture that is consistent with the values, risk tolerance, and strategies of senior management and the board.

What Senior Management Wants

“The Chief Audit Executive should effectively manage the internal audit activity to ensure it adds value to the organization.”3

Senior management trusts internal auditors to “tell it as it is” by reporting without fear or favor. One company chairman4 observed that “senior management want much more immediate and informal input on how the corporation is doing … I’d rather have the internal auditor on my doorstep telling me what I need to know so I can act on it now.” His main suggestions for internal auditors were:

  • Don’t be distracted from good business practice.

  • Understand your customer.

  • Avoid being too production-oriented.

  • Prioritize your activities and coordination role.

  • Speak up when others may not.

Senior management is looking for assurance that current business activities meet regulatory and legislative obligations. They are also looking for ideas that drive better business performance in line with their overarching strategies and business model.

Internal auditors are best placed to meet senior management’s expectations when they apply a sense of urgency to their work, apply a win–win mindset, and consistently deliver on commitments made. It is imperative that the integrity and credibility of their activities is undoubted, and that they nurture a professional and constructive relationship. The chief audit executive should undertake surveys of senior management to measure the quality of the service and determine how well the internal audit activity is serving their needs.

See below for a perspective on senior management’s priorities in one organization in relation to internal auditing.

The chief audit executive ought to maintain regular conversations with senior management with the objective of understanding their business perspectives and expectations of the internal audit activity. This helps to shape the planning, objectives, and scope of individual audits. The relationship should be based on cooperation, collaboration, and mutual respect.

A structured stakeholder relationship program is a useful mechanism to ensure that regular contact is maintained and that the conversations and commitments are appropriately tracked. It needs to be tailored for the business environment by recognizing the areas that need the greatest level of contact.

By way of example, a three-tier stakeholder relationship program schedule might have:

  • Quarterly contact with senior managers, such as the chief financial officer and chief risk officer.

  • Half-yearly contact with business leaders in remote locations.

  • Annual contact with managers of relatively low-risk activities like marketing.

Because of the heavy workload of many senior managers, it may be difficult to get time in their diaries. Get to know who their gatekeepers are and build relationships with them. That can sometimes help to unlock the doors in a more timely manner.

Some larger agencies establish audit liaison officers or champions across their business lines or regional offices as contact points for the internal audit activity. These people can also facilitate audit planning and the conduct of audits, and provide periodic updates on the status of previous audit recommendations.

There are benefits in establishing an internal auditor alumni. Most internal auditors retain their passion for the profession when they leave the area. They represent a fertile avenue across the organization for keeping abreast of what is really going on in the business.

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Further reading

Books:

  • Australian National Audit Office (ANAO). Public Sector Internal Audit: An Investment in Assurance and Business Improvement. Better Practice Guide. Canberra: Australian National Audit Office, 2007. Available from: www.anao.gov.au
  • Covey, Stephen R. The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change. London: Simon & Schuster, 2004.
  • Fraser, John, and Hugh Lindsay. 20 Questions Directors Should Ask About Internal Audit. Toronto, ON: Canadian Institute of Chartered Accountants, 2004.
  • Frigo, Mark L. A Balanced Scorecard Framework for Internal Auditing Departments. Altamonte Springs, FA: Institute of Internal Auditors Research Foundation, 2002.
  • Pickett, K. H. Spencer. The Internal Auditor at Work: A Practical Guide to Everyday Challenges. 2nd ed. Hoboken, NJ: Wiley, 2004.
  • Sawyer, Lawrence B., et al. Sawyer’s Internal Auditing: The Practice of Modern Internal Auditing. 5th ed. Altamonte Springs, FA: Institute of Internal Auditors, 2003.

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