How Can Internal Audit Add Value to the Business

With increasing regulations and expectations for transparency, internal auditing has become an essential function for organizations of all sizes. However, many still view internal audit as a “necessary evil” that adds little real value beyond basic compliance checking. 

A well-structured internal audit program can add tremendous strategic value to an organization by objectively evaluating risks, monitoring critical control points, and highlighting opportunities for improvement. The key is positioning internal audit as a proactive business advisor rather than a reactive compliance cop.

Here I will explain how modern internal auditing goes beyond basic compliance to help management run the business better. Read on to learn the various ways internal audit adds value across strategy, operations, reporting, and governance.

How Can Internal Audit Add Value to the Business

What is Internal Auditing and How Does it Traditionally Operate?

Before examining how internal auditing can add value, it is important to understand what internal auditing entails in a traditional context.

Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.

The internal audit function is established by the board of directors and its responsibilities are defined by the audit charter. The chief audit executive typically reports functionally to the board and administratively to the CEO.

Historically, internal audit activities have included:

  • Compliance audits – assessing conformity with policies, procedures, laws, regulations, contracts
  • Financial audits – reviewing accuracy, timeliness of accounting records and financial statements
  • Operational audits – evaluating efficiency and effectiveness of operations and controls
  • Investigations – addressing allegations of fraud or misconduct
  • Consulting services – advice on governance, risk management, and control matters

While these services remain important, there is an opportunity for internal audit to play a much more strategic role within the organization.

Evolving Role of Internal Auditing in Adding Value

Rather than being seen as a policing function, internal audit is increasingly becoming a value-adding partner to the business. This expands the traditional scope of work to provide forward-looking insights that improve strategy, operations, reporting, and governance.

Some key shifts that enable internal audit to add more strategic value include:

  • Adopting a risk-based approach to guide audit planning and resource allocation
  • Focusing less on historical transactions and compliance, and more on emerging risks and improving control
  • Leveraging technology (analytics, automation) for continuous auditing
  • Expanding consulting services to advise on key initiatives and projects
  • Cultivating a collaborative, dynamic relationship with management
  • Reporting on risks, trends, industry benchmarks – not just audit findings
  • Aligning with organizational objectives and strategy

With this type of progressive repositioning, internal audit becomes a trusted advisor providing assurance and actionable insights that drive organizational performance.

Specific Ways Internal Audit Adds Value

Beyond this general evolution in scope and positioning, there are a number of specific ways that internal audit functions add value for an organization:

1. Independent Assessment of Strategic Risks

A key role of internal audit is evaluating the organization’s strategic risks – those most critical to the achievement of objectives. This includes:

  • Reviewing management’s risk assessment methodology
  • Testing key risk mitigation activities and controls
  • Providing an independent view of residual risk exposure
  • Validating accuracy and completeness of risk reporting

By focusing audit activities on the most significant risks and building an enterprise view of risk, internal audit provides assurance to the board that risk is appropriately monitored and managed.

2. Assessment of Emerging Risks

While management focuses on day-to-day operations, internal audit has a critical role in scanning the horizon for emerging risks and assessing potential impact.

This may involve:

  • Monitoring the external environment for economic, regulatory, and competitive threats
  • Tracking internal indicators and warning signs
  • Conducting research on new technologies or process changes
  • Interviewing subject matter experts on emerging risks

Providing an objective view of emerging risks allows the organization to implement timely mitigation plans and minimize disruption.

3. Evaluation of Internal Controls

A core function of internal audit is assessing whether the organization has appropriately designed and consistently executed internal controls for key business processes. This involves:

  • Mapping key processes and identifying significant control points
  • Testing controls to verify operating effectiveness and compliance
  • Identifying control gaps or improvement opportunities
  • Following up on remediation of control deficiencies

Robust control testing and reporting give management assurance that policies and procedures are being followed consistently across the organization.

4. Targeted Audits of High-Risk Areas

In addition to regular audits driven by the annual plan, internal audit provides value by performing targeted, short-notice audits of high-risk areas. These are triggered by issues such as:

  • Significant changes in the business/regulatory environment
  • New product or technology introductions
  • Restructuring/downsizing initiatives
  • Performance issues or adverse trends in an operation
  • Suspected misconduct or fraud

Timely, focused audits can verify issues are mitigated before they escalate into substantial problems.

5. Monitoring Key Performance Indicators

Internal audit plays an important monitoring role by developing and validating key performance indicators (KPIs) for critical organizational objectives.

This involves working with management to:

  • Identify quantifiable metrics that align with strategic goals
  • Define appropriate performance targets or benchmarks
  • Design reporting tools and dashboards
  • Continuously monitor KPIs and investigate unexpected results

Reporting on objective KPIs and progress to targets gives management an independent view of organizational health and performance issues.

6. Identifying Cost Savings and Efficiency Improvements

As an objective outsider, internal auditors can often identify opportunities for cost savings or efficiency improvements through operational audits.

This may include:

  • Benchmarking costs against competitors or industry
  • Identifying redundant or outdated processes
  • Assessing resource utilization and capacity
  • Finding procurement savings
  • Improving the utilization of technology
  • Optimizing organizational structure

While management focuses on strategy, internal audit provides a valuable perspective to identify tactical savings and improvements.

7. Advisement on Technology and Automation

Many audit departments are now leveraging technology to modernize operations across the organization.

Internal audit helps guide the strategic adoption of solutions in areas such as:

  • Robotics and intelligent automation
  • Audit analytics and continuous monitoring
  • Data visualization and performance dashboards
  • Blockchain, cloud computing, and cybersecurity
  • Artificial intelligence/machine learning applications

Lending audit expertise on technology deployments helps maximize ROI and enterprise alignment.

8. Facilitating Governance Best Practices

Internal audit plays a key assurance role regarding organizational governance – the processes for directing, managing, and monitoring activities.

This includes assessing:

  • Board and executive performance and reporting
  • Committee structure, charters, and effectiveness
  • Code of conduct and conflict of interest enforcement
  • Subsidiary governance practices
  • Ethics and compliance program execution
  • Succession planning activities

Internal audit provides unbiased assurance that governance practices align to established standards and frameworks.

9. Compliance Auditing and Monitoring

While no longer the primary focus, confirming compliance with policies, laws, regulations, and contracts remains an important internal audit activity.

Compliance work involves:

  • Scheduled audits for key regulations (HIPAA, SOX, PCI, etc.)
  • Discussions with legal counsel on areas of compliance risk
  • Assessing compliance resources, training, and monitoring
  • Testing controls and transactions for adherence to requirements
  • Monitoring hotlines for reports of non-compliance

Documenting compliance provides assurance for both internal executives and external regulators.

10. Investigations of Misconduct and Fraud

When allegations arise regarding misconduct or fraud, an internal audit provides the objectivity and skills for effective investigation. Activities may include:

  • Receiving and evaluating tips/complaints
  • Interviewing involved parties
  • Gathering, validating, and analyzing evidence
  • Tracing funds and transactions
  • Coordinating with legal counsel
  • Reporting conclusions to the board

While unpleasant, competent investigations limit damage from inappropriate activities.

Best Practices for Maximizing Internal Audit Value

While evolving internal audit’s scope and positioning lays the foundation, there are important practices that enable the function to operate most effectively:

  1. Regular communication – Continuous informal meetings between CAE and management at multiple levels to build trusted advisor relationships.
  2. Leveraging technology – Use data analytics, continuous monitoring, and automation to increase efficiency, insights, and coverage.
  3. Coordination with external auditors – Align efforts and scope with external audits to address risks efficiently.
  4. Dynamic audit planning – Continuously re-evaluate the plan to address emerging risks based on significance and urgency.
  5. Reporting trends and benchmarks – Move beyond just isolated findings to provide insights on risk patterns and industry norms.
  6. Recommend solutions, not just problems – Where possible, provide options and best practices to remediate issues.
  7. Monitoring remediation efforts – Validate follow-up to help management successfully implement solutions and prevent recurrence.
  8. Cultivating internal audit talent – Hire and develop professionals with a balance of technical skills and business acumen.
  9. Collaborating across lines of defense – Coordinate with other oversight groups to optimize coverage and eliminate redundancies.

Challenges in Elevating Internal Audit’s Value

While the opportunities are plentiful, there are cultural and operational barriers that complicate internal audit’s evolution:

Perceptions of Internal Audit’s Role

  • Management views auditors as fault-finding or creating unnecessary work.
  • The board has limited interest beyond basic compliance reporting.
  • External auditors don’t coordinate work, duplicating some efforts.
  • Internal auditors prefer routine compliance testing over higher-risk strategic work.

Internal Audit Capabilities and Structure

  • Skill sets are compliance-focused rather than data-oriented advisory services.
  • Understaffing prevents adequate risk coverage and hinders value-added projects.
  • Traditional audit techniques have not kept pace with modern data analytics.
  • Reporting is more tactical rather than communicating enterprise risk patterns.

Organizational and Cultural Challenges

  • Information silos prevent internal audit’s understanding of enterprise risk.
  • Pushback from management when recommendations impact personnel or operations.
  • Lack of quality assurance and continuous improvement practices.
  • Internal audit activities and findings not consistently driving improvement.

Addressing these challenges requires vision, leadership, communication, and commitment to realize internal audit’s full strategic impact.

Final Words

Internal audit groups face the opportunity and expectation to expand their scope in order to become trusted strategic advisors. While maintaining independence and objectivity, internal audits can evolve to provide vital insights, continuous risk monitoring, and best practice recommendations. By embracing a more value-added approach, the internal audit function can help drive performance, adaptation, and sound decision-making across the enterprise.

We welcome your thoughts and perspectives on how internal audit can maximize value for your organization. Please share any experiences or comments below!

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