Internal Auditing Effectiveness

Internal Audit Effectiveness
Basic premise:
• What you measure is what you get (Kaplan
&Norton, 1993)

Why measure performance
Performance management has become crucial for public sector organisations:
• Significant reduction in funding
• Increased community demand for quality service
Organisations must ensure budget is allocated intelligently and must be able to measure and report whether strategic objectives are being met.
DO MORE WITH LESS

Why Internal Audit
• Internal Audit is like any other business unit
• Increasing requirement to report regularly against agreed performance measures

Traditional Approach
•
•
Measures
• Audit Plan Delivery
• Timing of Draft and Final Reports
Quality of Service
Financial/ Quality Indicators
Pros
• Measuring the same things
• Peer comparison easier
Cons
• Records the past
• Doesn’t consider strategic considerations
However, some unanswered questions:
• How well are stakeholder expectations being met by Internal
Audit?
• Is Internal Audit adding value?
• Is Internal Audit contributing to overall business performance?
• Is Internal Audit achieving its objectives?

Balanced Scorecard
The Balanced Scorecard (BSC), created by Kaplan and Norton, is a leading strategic performance management framework that offers a balanced view between outcomes and enablers of strategy
Stakeholder/Customers
“How do we have a social impact with our customers?”
Financial
“How should we allocate our resources for maximum social impact?”
Vision &
Strategy
Processes
“Which internal processes should we optimise to increase our effectiveness?”
Learning & Growth
“Which skills and capabilities should we emphasize?”

Balanced Scorecard
The BSC – a methodology for approaching performance management
Vision
Overall strategic vision of the organisation
What the organisation is trying to be
Strategic
Themes
Support the overall vision and provide areas of emphasis for the organisation to focus its activities (critical success factors)
Strategic objectives
Measurement
Targets
Initiatives
Further breakdown the vision and themes into more actionable elements
How to monitor the achievement of the strategic objectives
(key performance indicators)
What level of performance is needed to successfully achieve the strategic objectives
Actions taken to improve current performance
“DOING THINGS WELL” “DOING THE RIGHT THINGS WELL”

Balanced Scorecard
Long - term
Vision and
Strategy
Balanced
Scorecard
Short - term
Objectives and Actions
A planning tool to assist in the formulation of long term strategy and translating this into short term objectives and actions

Balanced Scorecard
The BSC - a performance measurement tool organised around 4 balanced perspectives
Objectives:
Measurements:
Targets:
Initiatives:
Financial
“How should we allocate our resources for maximum social impact?”
Stakeholder/Citizens
“How do we have a social impact with our citizens?”
Objectives:
Measurements:
Targets:
Initiatives:
Vision &
Strategy
Business Process
“Which internal processes should we optimise to increase our effectiveness?”
Objectives:
Measurements:
Targets:
Initiatives:
Learning & Growth
“Which skills and capabilities should we emphasize?”
Objectives:
Measurements:
Targets:
Initiatives:

Balanced Scorecard
• Expectations
• Perspective on IA Roles
• Satisfaction Surveys
• Requests
• Complaints
Management/Audit ee s
OBJECTIVES MEASURES
• List here.
• List here.
Board/Audit Committee
OBJECTIVES MEASURES
• List here.
• List here.
ORGANISATION
STRATEGY
• Perspective on IA Roles
• Satisfaction Surveys
• Risk Concerns
Internal
OBJECTIVES
Audit Process
MEASURES
• List here.
• List here.
• Experience
• Education
• Training
• Certification
• Reporting Relationships
INTERNAL AUDIT
STRATEGY
Innovation/Capabilities
OBJECTIVES MEASURES
• List here.
• List here.
• Improvements
• Findings
• Repeat Findings
• Savings
• Quality Assessment

Audit Committee
Management &
Auditees
Internal Auditing
Process
Innovation and
Capabilities
Strategic map
Improve Standing with Audit
Committee
Improve Auditee
Communication
Processes
Improve Auditee
Satisfaction
Increase impact or value of work
Increase quality of audit work
Increase reliance which can be placed on audit work
Focus on competency development
Embrace more efficient work practices
Propagate best practice

Balanced Scorecard
The Balanced Scorecard can help internal auditors assess the efficiency and effectiveness of an organisation
Clarifies strategic objectives
Establishes performance indicators
Measures performance
Provides feedback on efficiency
Provides feedback on effectiveness
Includes all perspectives of an organisation

Example Measures
Internal Audit Process Effectiveness
• Rapid and effective start-up
• Effective and timely communications
• Development and delivery of practical recommendations to improve
• Results of auditee satisfaction questionnaires

Example of Measures
Audit Committee:
Auditing viewed by the audit committee
Audit committee satisfaction survey results
Audit committee risk concerns
Management and the auditees:
Management expectations of IA
% of audit recommendations implemented
Audit satisfaction survey
Nº of complaints about audit department
Role of IA viewed by the auditee
Nº of management requests
Innovation and Capabilities:
Staff experience
Auditor education levels
Training hours per internal auditor
% of certified staff
Quality Assurance technique developed
Average years of audit experience
Internal audit process:
Completed versus planned audits
Nº of process improvements
Nº of audits findings recommendations
Amount of audit savings
Quality assurance techniques developed
Nº of repeat findings
Days from end of field work to report

Example of Measures
Objective Measure
Innovation/Capabilities
To have a high quality staff complement
(capability and training)
%age qualified staff
Training hours per year per auditor
(grade)
Target Initiatives
All staff to have minimum professional qualifications with recognised professional bodies
Develop a capability/competence matrix for each grade of staff
Review training needs based on personal development plans

IA Performance Indicators
Performance Indicator Description
Timeliness of Audit
Report
% of respondents who agreed that the audit report was produced timeously
Kept Informed of
Audit Progress
% of respondents who agreed that Internal Audit kept them informed of progress.
Current
Target

IA Performance Indicators
Nº Indicator/Description Measurement
1
2
Audit Plan Delivery
Actual nº of audits delivered against planned nº of audits on the audit plan.
Reporting
Issue of draft report after completion of fieldwork.
actual plan completion vs planned completion
% of draft reports issued within xx working days of fieldwork completion.
3
4
5
6
Reporting
Issue of final report after management response to draft received.
Quality
Customer feedback survey responses with either a satisfied or very satisfied rating.
Quality
Number of actions implemented by due date.
Quality
Number of audits completed within planned time budget.
% of final reports issued within x working days of management response being received.
Target xx % of satisfied or very satisfied customer feedback responses.
Target xx % of actions completed by management when due.
Target xx % of total audit assignments to be completed within planned time budget.

Critical success factors to implement a BSC
• Top management commitment and support
• Cascading strategy down through the organisation
• Awareness and understanding
• Organisational alignment
• Limited number of measures
• Right metrics
• Integrated in overall Processes
• Continuous process

Benefits
• A common framework and language to share experience and best practice in auditor activity
• A BSC specifies metrics that can be used to assess the effective implementation of the strategic plan
• The potential for greater stakeholder satisfaction with Internal Audit
• The potential for greater integration with colleagues in external audit functions
• Improved levels of service delivery

Realizing strategic alignment of IA function
What metrics do you include on a value scorecard to measure internal audit effectiveness?
• Significance of findings and recommendations
• Completed audits per plan
• Length of time for issue audit report
• Percentage of recommendations implemented
• Length of time to resolve audit findings
• Process improvement recommendations
• Business unit/auditee satisfaction surveys
• Audit committee satisfaction
• Revenue enhancement/savings/ cost reductions identified
• Requests from the business for a review/audit/advice
• Support of key business initiatives
• Meetings/relationship with “customer”/auditee

Realizing strategic alignment of IA function
Next steps:
• Agreement on approach and areas for setting performance measures
• Identify a need for Working Group

Internal Auditing – Train the Trainers