New Surveys Raise Alarm Bells for Internal Audit
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I have been avidly monitoring the health of the internal audit profession for the past two decades. During my initial tenure at the IIA, later at PwC, and throughout my 12 years as IIA President and CEO, I was either initiating research/surveys or reviewing those of others to gauge the profession’s progress (or lack thereof).
Several reports in recent months paint a picture of a profession that is agile enough to pivot in the face of risk-induced disruption from the pandemic, and one that can be resilient in terms of its resources. However, upon closer look, many of these reports also reveal storm clouds building on the horizon. There are at least five signals from these reports that internal auditors should heed before our hard-earned stature shows serious signs of erosion:
Internal audit is losing ground in its reporting relationships. One of the most jaw-dropping statistics in the IIA’s recent 2022 North American Pulse of Internal Audit report is that 76% of CAEs at publicly traded companies say they work administratively for the CFO! I have never been shy about sharing my views on this reporting relationship. While many CFOs fully respect the need for internal audit to remain independent, and for internal auditors to be objective, the optics indicate that CFOs who “own” internal audit are more likely to use the function to focus on their own priorities. Even more alarming is that only 4% of respondents are concerned about reporting lines. That is, by and large, a uniquely American problem, and fortunately it isn’t widespread in either the public or not-for-profit sectors. But the number of internal audit functions reporting to the CEO in publicly traded companies appears to be retreating. That is not a good development.
Too many internal audit functions are the “SOX shops” in their companies. Another troubling statistic from the Pulse report is that 60% of publicly traded companies’ internal audit functions report they also have SOX program management responsibilities. This statistic is likely influenced by the number who work administratively for the CFO. Either way, it signals that we are not as risk-centric as we profess. While accurate financial reporting and SOX compliance are important, they are not risks that warrant a continually heavy focus of professional internal auditors. Compliance is a management responsibility. Internal audit should provide assurance over the effectiveness of compliance, not be the day-to-day control testers.
When internal auditors lack expertise to address a critical risk, sadly they often avert their eyes. The IIA has been concerned about this phenomenon for years. It is a risk that inevitably leads to the uncomfortable question of “where were the internal auditors” when things go bad. Pulse reports that 85% of respondents rate “cybersecurity” as a high or very high risk, but it only accounts for 11% of internal audit plans. Allocation of resources to cyber risks is lower than to compliance and regulatory risks, operational risks, and internal controls over financial reporting (SOX). In a recently released Gartner survey, 53% of respondents said they believed “inadequate assurance over cybersecurity” was an important or extremely important issue in 2022. As Gartner observed, “A hot jobs market, and increasing demands on auditors, mean that many audit leaders are struggling to retain the staff they have. . . . Over a third of audit leaders report that high-performing talent is leaving their organization.” If we lack the skills or expertise to address a critical risk, we must acknowledge the gap with management and the board. And until we can acquire the skills or upskill our existing team, co-sourcing or other strategies are essential to addressing complex or emerging risks.
We lack confidence in our ability to address new and emerging risks. In a LinkedIn poll I conducted last year, I asked internal auditors to identify the most significant strategic risk that the profession will face in the decade ahead. The top risk (by more than double the next closest) was “the internal audit profession keeps missing emerging risks.” In an era when risk velocity and volatility have converged to wreak havoc, this concern doesn’t surprise me. Yet, the profession isn’t demonstrating a lot of confidence in its ability to overcome this strategic risk. In fact, 74% of CAEs in the Pulse survey rate “responding to new and emerging risks” among their top three concerns (and more than twice any other concern). If we are not able to identify and address new, shifting, or emerging risks, we will likely end this decade with far less stature than we have today.
Our resource outlook is less promising than it has been in more than a decade. In 2005, I was part of a team that launched PwC’s annual “State of the Profession” surveys. When I joined The IIA in 2009, we continued the tradition. Among other topics, we probed annually on the resource posture and outlook for internal audit. Both at PwC and later at the IIA, I was encouraged by the outlook for internal audit to acquire additional resources to address new and emerging risks. However, the 2022 Pulse report finds that only 24% of CAEs anticipate budget increases in the year ahead – the second lowest percentage in the 14-year history of the IIA survey. As Gartner pointed out, many CAEs are struggling simply to retain the staff they have and all signs point to talent-management struggles in the year ahead.
There are certainly other risks facing the profession, perhaps use of technology being the most glaring. More than half of Pulse respondents rate technology tools as the most helpful enabler to increase internal audit maturity, and 68% would invest more in data analytics software, if the resources were available. Yet, 56% told Gartner that “making the leap to more advanced analytics applications” is among their top challenges in 2022. What’s more, CAEs have the least confidence in being able to address the analytics issues.
Lest there be too much despair over the concerns I share here, it’s not the first time I’ve sounded the alarm. As I observed in a 2011 blog post, surveys signaled that the glass was only half-full for internal audit despite some remarkable successes. I said it then and will repeat it here: As we navigate the remainder of 2022 and beyond, it is imperative to heed the warnings and “fill the glass.”
I welcome your thoughts.
9 Comments
Thank you, Richard, for speaking about “New Surveys Raise Alarm Bells for Internal Audit”. I share your concerns, in parts for the same reasons, in parts for other reasons.
1 Reporting lines
I’d be less concerned about whether the CAE reports into the CEO or the CFO. I hear your concerns and you do have a point, of course. IMHO, both reporting lines can work. The good piece about the data is that CAE report into the C-Level, what the profession expects and advocates.
2 “SOX-shops”
Touché. SOX-compliance derails the IAF on audit subjects that matter most. I share your concern in full.
3 Avert eyes
Touché. I used to label the concern as “supply-led” audit vs. “demand-driven” audit. Auditors tend to audit what they know, not where the risk is greatest. That is dysfunctional.
4 Address new and emerging risks
While I do not expect internal auditors to be best in class identifying new and emerging risks I concur that the IAF should keep learning in expanding its repertoire of providing comfort / assurance that such new and emerging risks are on the radar and mitigated to extent possible.
5 Resource constraints
Fair point.
Conclusion:
Excellent issues, Richard. Worth monitoring and caring about, absolutely. To “fill the glass”, to more fully exploit the potential of internal auditing there are further issues that deserve attention, IMHO.
Frst and foremost, I think the IA profession has an identity issue. Who we are and what we stand for deserve clarification especially when competing with other professions. We are NOT external audit. Doubt that is clear enough in the community and in the eyes of stakeholders. Time is ripe to challenge the purpose of the IA profession. The recent co-authored article, jointly with Professor Jeppesen from the Copenhagen Business School, makes a few suggestions in that regard. We suggest “Gardener of Governance” as new leitmotif. We do not expect everybody to agree. We would like professional peers to read and ponder. Notably, a Boston Consulting Report (BCG-Roche, 2021) views “Custodian of Performance” as the future mantra of the Finance Function. Are we aligned intra-profession, thinking e.g. of the Global-IIA and ISACA.
In addition to PURPOSE (PROFESSION), we see four enablers that determine the future role and impact of internal auditing that deserve attention: PLANET (what is the role of internal auditing in the ESG space?), PUBLIC (what does the public and what do Boards know and think about the profession?), PROSPERITY/PERFORMANCE (Simply focusing on controls may not be added value. Is the IIA partly encouraging an insular view? Should improved controls pass the performance check, too? Should added value mean “verified by clients”?), and PEOPLE (Is the profession clear enough about the relevant curriculum future leaders shall study and learn? Why are there so many designations? Why did QIAL fail?Is the CIA up to date? How do we train and educate the future leaders?).
Some more food for thought, I hope.
The article Lenz-Jeppesen is freely available:
Lenz, R. and Jeppesen K.K. (2022), The Future of Internal Auditing: Gardener of Governance, EDPACS, https://www.tandfonline.com/doi/full/10.1080/07366981.2022.2036314 (FREE ACCESS)
Richard, do you remember the video we shot on internal audit’s role in SOX? I still hold that view. Internal Audit should have the resources to perform the testing for SOX, even manage the program on behalf of management, as long as they are not making management’s decisions. They are better than anybody else and this approach not only costs less but can add huge value.
On reporting to the CFO, the trend is not a negative one. You can tell when practitioners do not see it as a problem. In fact, it is easier to get the time and attention of the CFO than the CEO. Administrative reporting does not mean, in theory or in practice, that IA is owned by the CFO. To the contrary, I know of some situations where the CAE reported to the CEO and the latter “owned” IA and had him perform all sort of special projects for him – even including firing people.
If IA dedicates 11% of their total resources to cyber, that’s a lot. I see no evidence that is insufficient.
I see no alarm bells here, except that internal audit is suffering from the same paucity of good people that can be hired as the rest of the economy.
Happy to discuss/debate.
Very relevant and interesting article. Yes, the comments are common to Asia-Pacific countries also. Reporting relationships are always strenuous between the Accounts and Audit team, irrespective of the hierarchy. Simple reason, their objective is heterogenous. The % & reporting may vary from org to org. SOX audit has always been a contentious issue, some of the CIA’s are forced to take up as a part of the Annual Audit plan, while others have to help the Management to do a pre-check before the stat auditors do their review. Similar other internal audit area is physical verification of inventory / assets. At times, concerned process owners take the support of the IA PV reports to confirm the qty / qlty of the inventory / assets. Addressing emerging risks is possible only if the Sr. MGT (Tone at the TOP) has faith, confidence in CIA’s capability (knowledge & skill) on value addition.
I, like others, am not too concerned about administrative reporting. Far more important is the practical relationship between the CAE and the Audit Committee. As to the survey respondents who said that they have SOX program management responsibilities — I’m unclear as to exactly how that phrase was perceived by the respondents. I can easily envision an environment where this is not a concern to me. Or one that would be concerning. Details matter. As to auditors averting their eyes or avoiding emerging risks (perhaps the same issue) – that’s a big one to me. Internal auditors should be serving the needs of the organization via consultation with executive leadership and the Audit Committee. These groups should have a very big impact on what is (or is not) included in audit’s planned reviews. The focus should always be on strategically significant activities. Within this consultative approach, internal audit is there to respond to what’s been asked of it and has no option to “avert its eyes”. Nor should it unilaterally divert resources to address something just because internal audit perceives something as “emerging”. Practically speaking, executive leadership and the A.C. should never expect all audit shops to have expertise in all areas — especially emerging areas of uncertainty. So, it’s really not that hard to make the case for finding additional expertise once they have a clear consensus of an activity’s strategic criticality along with audit’s responsibility to review this new activity.
On the “Internal audit is losing ground in its reporting relationships”, if the same survey is conducted in Nigeria, it will be an obvious negative trend too. You will hardly find CFOs who will not want to own the internal audit function if given the opportunity here. Also, You will hardly find CAEs who will be happy with this reporting relationship here in Nigeria because of our environment and customs. In my opinion, the buck stops on the table of the board of directors in ensuring that CFOs or CEOs or any other CxOs does not own the internal audit function or use the function to arbitrarily meets selfish targets while the function looses focus on significant risk areas or important business matters. If the board appreciates the importance of internal audit’s independence regarding the achievement of their own governance responsibilities, confirming the independence of the function through direct relationship and communication should be prioritized. Thanks so much Richard F. Chambers, I’ve been educated again about the current affairs of our noble profession.
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