Beyond Cost Savings: Defining the Big-impact Audit

Whether it’s in internal auditing or in life in general, we all aspire to make a difference. We want that feeling of accomplishment that comes with knowing we have changed the world, if even in a sm​all way. But internal auditing is especially rewarding when we can make a big impact — when we bring about major changes that improve operations and cause senior management and the board to sit up and take notice.

So what’s a big impact in internal auditing? Obviously, “big impact” often equates to “big dollars.” Any auditor would be proud of a report showing that a contractor had overcharged his or her organization by tens of millions of dollars — or, better yet, that a full $300 million could be saved merely by delaying a proposed expansion initiative.

There’s no doubt that big-money audits command the immediate attention of management and the board, but sometimes the audits that make the biggest impact are not the ones that result in enhanced cash flow. Even during a global financial crisis, we need to remember that internal auditing extends well beyond financial audit, and internal audit reports can generate immediate, significant, and enduring results in other ways.

Often big-impact audits are focused on issues that are highly material, enterprise wide, related to health and safety of individuals, or potentially highly visible/sensitive. Big-impact audits are the engagements that bring about significant changes. For example, an audit that identifies grossly inadequate physical security policies could be expected to have a major impact regardless of any potential financial impact.

Big-impact audits also tend to have immediate results. Too often, internal audit engagements are slow to generate impact. But consider the effect of performing an information security audit that identifies serious weaknesses in firewalls, or an audit that unearths substantial noncompliance with an important regulation. These engagements may or may not have a substantial financial impact, but the results would be both immediate and significant.

The effects of high-impact audits can endure long after the end of the report. Imagine, for example, a report demonstrating that, based on financial risks, reputation risks, operational issues, or other factors, a proposed merger/acquisition strategy is not in the best interest of your company. The organization might literally be transformed or saved because of a single well-documented audit finding.

In general, big-impact audits have an enterprise wide impact. Many audits focus on isolated or limited problems. We need to avoid unnecessary “scope creep,” but we should also keep in mind that, the broader the audit scope, the bigger the potential impact. For example, a company wide audit that identifies inadequate contract administration usually will have more impact than one that identifies construction contract problems in a single department.

Audits of high-visibility or high-sensitivity issues often generate high impact. This is particularly true in the government sector, where audit reports are often brought to the public’s attention. The impact is immediate and significant when an audit discloses that agency officials are abusing official funds for personal use, but in the public sector, as elsewhere, financial results are not the only issue. A few years ago, global publicity resulted from a finding that government employees were using their work computers for the SETI@home project, a scientific experiment that uses Internet cooperation to search for extraterrestrial intelligence. And we can all imagine the headlines when a government audit discloses consistent, agency-wide lack of adherence to legislation such as the U.S. Fair Labor Standards Act.

Another fertile area for big-impact auditing is the audit of health or safety issues. Such audits do not have to be broad or extensive. For example, auditing a facility renovation plan might disclose that the plan does not ensure adequate asbestos abatement. Lives might be saved if an audit finds that a lineman training program does not adequately convey principles of grounding.

One approach of identifying big-impact audits is to consider the attributes our stakeholders value. Every organization’s stakeholders are unique, but they almost always appreciate practical recommendations that enhance the bottom line by increasing revenues, holding down costs, or mitigating key risks. Audit customers also value audits that unearth significant new risks or that respond to their specific requests.

Any audit is more likely to have a big impact if we have the basics in place. For example, we are more likely to get results if our audit reports are succinct and timely, and if they show balanced results based on continuously objective auditing. When we are regarded as trustworthy and fair, our reports are more likely to carry weight. By building strong relationships with management, we are helping to ensure that our recommendations are given serious consideration. The result? Most types of engagement can have a big impact under the right circumstances.

Despite the wide variety of engagements that can make a big impact, it is all too common to hear comments such as, “Internal audit never really changes anything at my organization,” or, “Our audit department is so small we can’t really make a difference.” I believe that these statements never have to be true.

In internal auditing, as in life in general, you don’t have to be big to make a difference. Regardless of the size or positioning of internal auditing within an organization, we can have a big impact. In my next blog, I will outline five specific strategies for making a bigger impact with internal auditing — strategies that can be used successfully even by the smallest internal audit shops.