Back to the Future: Could We Have Envisioned Internal Audit in 2015?

Last week, the world celebrated “Back to the Future Day,” an event inspired by the 1989 movie Back to the Future Part II, which envisioned what life might be like in 2015. Like many, I was captivated when I first saw this box-office hit, starring Michael J. Fox and Christopher Lloyd. Its quirky vision of a flying hover board and a flying DeLorean turned out to be a mixed bag in terms of accurately predicting life in 2015, but all of the attention to the movie’s predictions over the past week inspired me to ponder how much internal audit has changed since the 1980s.

If I had been aboard the DeLorean with Marty and Doc when it landed in 2015, I would have been fascinated by all of the things they saw. And I am sure I would have been mildly curious how my profession might have evolved. Arguably, internal auditing had not changed much in the preceding quarter century, so I would not have expected seismic differences. I also could not have been more wrong. 

Through most of the 1980s, the most sophisticated piece of technology in our internal audit department was an IBM Selectric typewriter. Late in the decade, we obtained our first IBM XT personal computer, with its impressive 5¼-inch floppy disc drive and an astounding 640 KB of memory. At only 32 pounds (not including the monochrome monitor and dot matrix printer), it is an understatement to say that we didn’t take technology out to conduct fieldwork very often.

As a newly minted CAE in 1989, I likely imagined a future in which technology would command a much greater presence in an internal audit department. But I’m sure I never thought that internal auditors would become so dependent on technology. The Internet and cellular phones, then the size of bricks, were still being pioneered. 

While technology has driven the most visible transformational changes since the 1980s, it is certainly not the only thing that has made our profession virtually unrecognizable from three decades ago. Other notable changes:

• We moved from the “back room” to the “board room.” In 1989, internal auditors were virtually nonexistent in developing countries. The profession was certainly present in other regions of the world, but it was seen mostly as a support function for CFO organizations. The CAE reported administratively to the CFO or controller. Meetings with the audit committee were tightly controlled, and often just a formality to gain approval of the annual internal audit plan. Today, administrative reporting relationships with the CEO are mandated by regulators in many financial services companies, and almost 80 percent of CAEs have a functional reporting relationship to the audit committee or full board.
• We learned to follow the risks. In 1989, risk registers were virtually unheard of in internal audit departments. Most of us planned our audits from an “audit universe” or an “auditable entity file.” We made sure that we scheduled audits for business units, processes or controls on a cyclical basis – often without any real consideration to the residual risks residing in the auditable entity. It would be several more years before risk-based auditing emerged as a leading practice, and more than a decade before The IIA Standards mandated risk-based audit planning. Today, more than 90 percent of internal audit functions globally report that they prepare an annual risks assessment of their enterprise, and 85 percent use a risk-based methodology for preparing the annual audit plan. It may not be a hover board, but it’s an amazing development from a professional standpoint.
• We learned there are more things to do with beans than to count them. In the late 1980s, we were just emerging from the “era of hindsight.” Internal auditors were adding operational audits to their portfolio of services in many organizations, and the results were a much deeper understanding of the business. Today, almost 25 percent of internal audit resources globally are dedicated to operational audits – more than 2½ times the focus on financial controls (the key focus of the hindsight era). Even more impressive is our addition of audit coverage of risks, which was unheard of in 1989. For example, internal auditors report that 12 percent of their coverage is dedicated to providing assurance on the effectiveness of risk management, and 11 percent of internal audit resources are targeted at assessing business strategic risks. We may not have the $50 bottles of soda that Marty discovered in Back to the Future Part II, but this is way more amazing to me.
• Our skills have evolved dramatically. A typical internal audit department in the 1980s was packed with accountants. In fact, most internal audit departments recruited only individuals with accounting degrees and credentials. Once in the department, they typically considered themselves career internal auditors. Today, 96 percent of North American CAEs consider critic​al and analytical thinking skills and communication skills as essential for the internal auditors they recruit. Those targeted skills are followed by business acumen at 80 percent and industry specific knowledge at 69 percent. Accounting skills (the mainstay of the profession in the late 1980s) come in a distant fifth, with only 48 percent considering accounting as “essential.” 
• We have learned to thrive in the era of big data. The effectiveness of today’s data analysis techniques would have left us in awe in the 1980s. Data analysis then was generally limited to examining a small data sample and then computing an average or a standard deviation. Benford’s Law had been in existence for several decades, but to most internal auditors, such concepts were little more than theory. ​Companies like ACL and Caseware were just being formed. Today, use of data analytics, data mining, and data requisition tools is common in internal audit departments. Such systems allow internal auditors to access 100 percent of the information for testing in areas of concern, such as duplicate payments to vendors. In the past, information could be only sampled. In 2015, thanks to data analytics, an internal auditor can ask IT to generate a list of every check cut the previous year and grouped by vendor. Data analytics use IT files and IT interrogations to do audit testing and allow for continuous controls monitoring. Reports are run automatically every night, if necessary. My IBM XT would have crashed at the prospect of using data analytics tools, but today we are well equipped for the task.

The prospect of time travel has fascinated humans for centuries. It is always amusing to contemplate what life might be like in the future. As an internal auditor, I have witnessed extraordinary changes in our profession over the past four decades – much of which I could have never imagined. Who knows what the next three decades will bring for our profession. We can only imagine. 

For more Back to the Future internal audit musings, check out Tom Mcleod’s blog on “what Internal Audit could have done differently and how that may have impacted on what we do today.”