An Inconvenient Truth: Most Internal Audit Departments Are Small

When I first became a CAE almost 30 years ago, I inherited an internal audit department with very limited resources, especially considering the size of the enterprise. With five internal auditors plus myself, we were challenged to provide quality internal audit coverage for a $10 billion entity. I knew I had my work cut out for me, and we wouldn’t get more resources unless we demonstrated greater value than the department had in the past.

I chronicled that journey in one of my books, The Speed of Risk: Lessons Learned on the Audit Trail 2nd Edition. From that first assignment as a CAE, I would go on to lead internal audit teams of more than 1,000. Yet, I never lost sight of the fact that most internal audit departments were closer in size to the first one I led.

Last month, I was starkly reminded of the realities that most of the world’s CAEs face when I reviewed a new research report from The IIA and the Internal Audit Foundation. The long-awaited report is the most comprehensive survey of the global internal audit profession in almost seven years. Based on more than 3,600 respondents from 159 countries, it is packed with valuable insights.

But most striking to me were data on internal audit function size. Globally, 51% (48% in North America) of those surveyed said their internal audit function comprised a staff of five or less. More broadly, 71% (73% from North America) overall said their team had 10 or fewer staff.

It’s a sobering reminder of the inconvenient truth that the average internal audit department remains small!

Let’s unpack my assertions.

First, why do I consider an internal audit team of five or less to be small? That might sound subjective, and some could consider such a staff to be adequate, particularly for a smaller enterprise. But from my experience, it can be very challenging to address an organization’s critical risks with only a handful of internal auditors. For example, a five-person team typically has no more than 6,000 staff hours to dedicate to internal audit engagements in a year. That might sound like a lot, until you consider the priorities and expectations of stakeholders.

Organizations often expect internal audit to address financial, compliance and operational risks as their highest priorities. In fact, almost 80% of survey respondents indicated their team had “significant” responsibilities related to compliance risks – including SOX, J-SOX and other ICFR reporting requirements. In addition, 41% of respondents indicated that “support for the external auditors” was a high priority.

Audit committees in particular want internal audit to prioritize assurance on financial controls, risk management and, increasingly, cybersecurity – before addressing other risks. If we assume that 50-75% of a small internal audit department’s plan is earmarked for those “stakeholder baseline risks,” a five-person staff is left with as little as 1,500 staff hours to address other risks (non-cyber IT, ESG, third-party, governance, culture, etc.). Depending on the average number of hours per engagement, a small internal audit team might be able to undertake only three or four non-compliance/financial engagements per year. Even a 10-person staff would be challenged to tackle six to eight such engagements in a year.

Adding to the pressures, small audit teams can face extraordinary difficulties recruiting and retaining talent with deep and diverse expertise. By definition, small departments are typically constrained by small budgets, limiting not only staff size but compensation, especially for those offering specialized skills, such as IT, cyber, etc. In addition, it is unlikely there will be any discretionary funds for co-sourcing or the acquisition of technology tools.

Secondly, if my assessment of the challenges facing small audit teams is true, why do I also consider it an “inconvenient truth?” Frankly, thought leaders such as myself, The IIA, and others often fail to understand and recognize the incredible challenges confronting small audit teams. We extol the importance of identifying, monitoring and auditing emerging risks, such as ESG, culture, governance, etc., without fully acknowledging the unique challenges facing the majority of our audiences. It is inconvenient, but the truth is that most internal audit departments are just trying to keep their heads above water. They need practical advice and guidance on how to preserve and enhance value with often (extremely) limited resources.

This is not to suggest that our efforts to elevate the profession through timely guidance, thought leadership and advocacy are misplaced. To the contrary, it is critical that we continue to coach up the profession. However, we must not ignore the needs of so many.

For my part, I plan to rededicate my efforts in the coming weeks and months to ensure that I am not only offering insights for audit teams of 500, but also for audit teams of five.

I welcome your thoughts.