How audit earns plaudits.

• Author: Pancoast, John
• Position: Includes related articles - Management Strategy

Okay, you've re-engineered every other area of your company. Now what about audit? Take a look at how other companies measure the immeasurable.

The finance function in most large companies is scrambling to focus more on finance activities that contribute economic value to the business and to eliminate activities of little or no value. That's worked out well for the transaction-oriented functions, where you can easily identify activities and processes and readily measure productivity. But how do you evaluate a finance function like audit, where the service is so ill-defined? We recently worked closely with the general auditors of some of America's top corporations to address these challenges and to identify best practices for internal audit. What worked in assessing internal audit can work anywhere in finance, so let's take a look at internal audit as a case study.

General auditors are buffeted by the same issues as CFOs. Their three key concerns are audit's mission and its value to the organization; the organization and human-resources approaches that best support the mission; and the cost management of both internal and external audit. Overall, it's hard to tell whether the internal-control environment in many companies is improving as a result of auditors' actions, raising doubts about their abilities to carry out their responsibilities. Companies without a measurement program for financial processes have no way of verifying improvements in the control environment. Meanwhile, management is demanding greater value from the audit process, implying that internal-control auditing isn't useful and often drawing auditors into the unfamiliar arenas of operating audits and efficiency findings, which are thought to have more tangible benefits. In fact, many audit organizations shift between the extremes of internal-control assessments and operating audits.

Many finance managers believe experienced auditors can't manage other finance areas; they suggest the functional expertise required in audit inhibits the development of management skills. More important, audit has a poor image, based partly on a historically combative and adversarial operating style, that makes recruiting staff from within the company difficult. The increased inter-twining of finance functions and information systems has made application-system skills a near-requisite for effective auditing. All of this conspires against transferring staff among various finance units, even though most managers know such career development benefits the company and employees.

While auditors search for guidance in determining the basic direction of audit, they don't have many quantitative measures of the cost of either internal or external audit. The eight companies we worked with, each with more than $10 billion in sales, had total internal audit costs of $200 to $900 per $1 million of revenue, a wide variation by any reckoning. It's little comfort that the companies closest to what we call best practice are clustered in the middle of the range, because audit costs are the product of a complex set of factors that make simple numerical comparisons worthless.

Our research identified best practices in the definition of audit's mission, human resources issues and cost containment. We worked with each of the participants through a detailed quantitative survey, a data review and intensive on-site interviews to define current practices of the audit department for each company's environment. No one company exhibited all elements of best practice, but a few were close.

THE ACTIVIST MISSION

All best-practice audit organizations share certain characteristics. For starters, they're committed to developing the finance organization's and the company's future leadership. General Electric is probably the best-known and most successful organization in this regard. Individuals who begin their careers in the audit department spend two to four years there, simultaneously going through a developmental training program to prepare them for other positions within the company. As a result, audit has a reputation for being a great place to develop professionally. For...