The state of the Internal Audit profession

This article is based on the “State of the Internal Audit Profession Study: Finding True North in a period of rapid transformation” report which was published by PwC in March 2015.

The report marks PwC’s 11th annual State of the Internal Audit Profession Study and reflects the opinions of more than 1,300 Chief Audit Executives (CAEs), senior management and board members globally.

The study results suggest that external drivers of change are influencing how internal audit should evolve to maintain its relevance. Senior managers and board members hold the view that businesses are experiencing rapid transformation.

Companies are now operating in an environment of uncharted territory where risks challenge their ability to successfully execute their strategies.

In response to external forces, most companies are rethinking and redesigning the entirety of their business from their overall business model, product and service portfolios and go-to-market strategies, to their back-office and supply chain operations.

The study shows that nearly 70 per cent of companies have gone through or are going through transformation in response to market shifts. Another 12 per cent are anticipating doing so in the next 18 to 24 months.

These initiatives range from focusing on cost reduction to increasing market and sales activities to increasing focus on innovation and realigning business models. No doubt, companies are facing new and more-complex risks.

In the face of this rapid transformation, it is easy for internal audit to lose direction and fall behind.

A call to Internal Auditors

To remain relevant, practitioners must equally evolve and find innovative ways to keep up with the needs of their businesses.

According to the study results, only 11 per cent of CAEs believed their current internal audit functions are providing value to their companies. Another 60 per cent believe that they will need to start doing this within the next five years.

To remain relevant, internal audit functions have to start finding answers to the question ‘what must/should we do’ rather than ‘what can we do’. The message is clear, internal audit cannot afford to tread the path of ‘business as usual’.

How to remain relevant

So how can internal audit evolve and become or remain relevant to their businesses?

Similar to external audit, internal audit has traditionally operated in a restrictive and sometimes overly cautious manner. To remain relevant, however, CAEs must begin to revise this traditional approach to assessing enterprise risks based on only current and historic events to a position where they are proactive and anticipate risks.

This also means that internal audit must seek to offer perspectives on all business risks (strategic, compliance, financial and operational) and become involved in the most impactful business objectives.

More important, internal audit must provide recommendations on how to manage or mitigate risks before they occur.

The results of the study show that while every internal audit function’s path to providing true value and remaining relevant to their companies may be different, concentrating on the following four areas will be critical to pointing it in the right direction.

• Focusing on the right risks at the optimal point in the process;

• Developing the talent and business acumen to be relevant and offer valuable insight;

• Strengthening alignment with enterprise risk management (ERM) and other lines of defence, and

• harnessing the power of data throughout the audit life cycle to provide better insights into the business.

In the next article which relates to the above topic, we will consider the lessons for internal audit functions in Ghana.