Can you innovate your internal audit?

• Author: Vondra, Albert A.
• Position: Includes related article - Management Strategy

Is your internal audit department focused on the right target? Ask yourself some tough questions.

Many senior executives are taking a hard look at their internal audit expenditures, given the increasing pressure on corporate earnings and the need to slash their overhead expenses. The question they're asking is simple: "Are we getting the maximum value relative to our costs?"

At too many companies, the answer is "no."

Almost every major company across the United States employs an internal audit staff, with some departments numbering in the hundreds. The companies typically established the functions in the 1970s to improve their internal financial control environment. Since then, advances in information technology have meant more reliable control systems. As a result, time-consuming, routine testing often is less beneficial--often unnecessary. But, in some cases, the investments in computer technology coupled with computer audit techniques haven't translated into less auditing and fewer people.

So companies are struggling with the question of what they should be doing about internal audit. Business as usual, even incremental change, isn't good enough in these competitive times. With so much work that adds little value to the control environment or--more important--to bottom-line results, you need a more radical approach.

A QUALITY QUIZ

What is the audit function currently doing in your firm? Before you can make any recommendations on redirecting your internal auditors, you need to review the function's existing role and responsibilities. More and more major companies, such as Anheuser-Busch, PepsiCo, Chase Manhattan Bank, Quantum Chemical, W. R. Grace and Southwest Bell, are examining what's going on and why.

Answer the following questions to give yourself a basis for making the changes you need to have an audit function that helps your company work more productively, efficiently and competitively.

* Does your internal audit department strengthen your company's system of internal controls and performance measures?

Internal audit is a primary resource supporting your company's overall internal control environment by providing an oversight function. The department should properly measure and evaluate risk and allocate the audit effort in the appropriate areas. It should produce cost-saving ideas to make the process more efficient and improve control, and it should serve as a key personnel resource to other departments and units of the company.

* How does your internal audit department compare to operational and organizational benchmarks of departments of similar size in scope of activity, cost-effectiveness, stature within the organization and staff size and experience?

Many companies use benchmarking to search for the best practices--those that lead to superior performance--within their industries. When you benchmark, you're determining what you must do to become a leader by studying the existing leaders. Not only must your internal audit department identify any gap in performance between its operation and that of the leaders; it must also forecast how rapidly the leaders are improving. Otherwise, your company may improve but still fall further behind.

* Does your internal audit department communicate effectively with management and the audit committee?

Internal auditors should be skilled in dealing with people and in communicating effectively. The reporting processes you establish must effectively communicate the results of the audit work to each of the internal audit department's "customer groups," including the audit committee, senior management, operating management and the external auditors.

* Is your internal audit department part of the management team, and does it generate cost-saving and process improvement ideas to help the organization achieve its goals?

An important aspect of this is whether the internal audit department is properly focused to meet the company's needs not only for today but for tomorrow. The...