There Is Plenty to Celebrate About the State of Internal Audit

It is the time of year when there is a seemingly endless number of white papers and research monographs being published on the internal audit profession. In the past month or so, no fewer than seven new papers have explored the current state of the profession. Much of the thought leadership published annually on the internal audit profession is designed to coincide with The IIA’s General Audit Management (GAM) conference, typically held in March. All of this leads to what I call “internal audit white paper season.”

Media coverage related to the recent white paper epidemic could lead one to believe that the profession is under siege. Headlines have focused on issues such as the political pressures that internal auditors face within their organizations or internal audit challenges in identifying emerging risks and meeting stakeholder expectations.

To a certain extent, the media’s focus is understandable, for each of the white papers seeks to offer insights and coaching points to help internal audit functions build upon recent gains. If we didn’t know better, we might assume that internal auditors are wandering in the wilderness, trying to figure out how to add value in the 21st century. Anyone who takes the time to peruse the stack of new research would realize that the internal audit profession has achieved a great deal and is riding a wave of enhanced stature that spans more than a decade.

When evaluated as a whole, thought leadership published in recent weeks reveals at least three key trends that are good news for the profession:

• Internal auditors are gaining proficiency at recognizing emerging risks.
• The profession understands that evolving risks require new skills.
• Internal audit’s stakeholders recognize the value the profession brings.

Let’s explore each of these in a bit more detail.

Internal auditors Are Gaining Proficiency at Recognizing Emerging Risks

CAEs recognize the importance of staying abreast of emerging risks and adjusting audit plans accordingly. As evidence, more than 61 percent are monitoring key risk indicators throughout the year, according to The IIA Audit Executive Center’s 2015 North American Pulse of Internal Audit report. In addition, more than 70 percent of CAEs are talking to management about emerging risks throughout the year in an effort to identify those that warrant audit coverage, and nearly 80 percent are updating their audit plans based on the changing risk profiles they identify. Nearly 90 percent believe their audit planning is designed to be responsive to changes in the organization’s risk profile.

The most notable example of an emerging risk that clearly has internal audit’s attention is cybersecurity. Almost 70 percent of CAEs view cybersecurity risks as high, according to the Pulse survey. Eighty percent will have cybersecurity in this or next year’s audit plan, according to Protiviti’s From Cybersecurity to Collaboration: Assessing the Top Priorities for Internal Audit Functions (PDF).

For more than a decade, internal auditors have been keenly focused on identifying and following the risks. According to Grant Thornton’s recently published Competing Priorities: Are CAE and Audit Committee Priorities in Sync? (PDF) report, 69 percent of internal audit functions will conduct fraud risk assessments this year and 61 percent will undertake a data security risk assessment. As risk assessments are highlighting new and potentially lethal risks, internal audit’s coverage is clearly shifting. The IIA’s Pulse survey found that more than 32 percent of CAEs are increasing coverage of strategic business risks in 2015, and almost 38 percent are increasing coverage of IT risks.

The Profession Understands That Evolving Risks Require New Skill Sets

Perhaps nothing illustrates the seismic shift in the profession over the past decade more than the portfolio of skills now resident in a typical internal audit department. The days of the internal audit function being focused primarily on financial controls is but a distant memory. In fact, more than 80 percent of internal audit plans in 2015 will be dedicated to risks other than financial-related topics. And skill sets are evolving accordingly.

According to the Pulse survey, CAEs say the most essential skills for internal auditors in 2015 are analytical/critical thinking (96 percent extremely or very essential); communication (also 96 percent extremely or very essential); and business acumen (80 percent extremely or very essential). As CAEs recruit for new talent, recent surveys reflect that these are precisely the skills they are seeking. By contrast, only 47 percent hold similar views about the essentiality of accounting skills in 2015.

The portfolio of skills in the typical internal audit department is highlighted in PricewaterhouseCoopers’ (PwC’s) 2015 State of the Internal Profession Study: Finding True North in a Period of Rapid Transformation (PDF)​. PwC found that 90 percent of internal audit functions surveyed have general IT skills, 70 percent have business continuity skills, and 64 percent have data privacy skills. Where the skills fall short of those necessary to address an emerging risk, CAEs have become increasingly adept at securing them. PwC reported that 71 percent plan to secure specialized IT expertise with the help of third parties in 2015.

Internal Audit’s Stakeholders Understand the Value the Profession Brings

Internal audit is ultimately judged by the value it brings to the organizations it serves, and no one understands this better than CAEs. While there are many ways internal audit’s contributions can be judged, the ultimate assessment of its value falls to its key stakeholders: management and the board.

There is plenty of evidence in the recent white papers that stakeholders are finding value in the work of internal audit. As I noted in an earlier blog post​, KPMG Audit Committee Institute’s 2015 Global Audit Committee Survey probed the views of audit committee members on the value of internal audit. While the report noted that “audit committees are still looking for greater value (from internal audit),” it confirmed that 78 percent of respondents were satisfied or somewhat satisfied with their organizations’ internal audit function.

CAEs understand the importance of assessing audit committee expectations and maintaining a continuous dialogue with management and the audit committee. In the end, I often assess the real value that customers and stakeholders place by where they invest. In that regard, more than 40 percent of Pulse CAE respondents expect their budgets to increase in 2015. In addition, 97 percent expect internal audit staffing to be equal to or greater than 2014 levels as management and audit committees seek to optimize the value of a well-organized and resourced internal audit function.

Finally, a lot has been made of the U.S. Public Company Accounting Oversight Board​ Practice Alert 11’s impact on the reliance by external auditors on internal audit’s work. What the headlines have not mentioned is that 94 percent of Pulse survey respondents ind​icated the external auditors still rely on at least some of their work.

While this blog is not intended to serve as an “all clear” signal for the internal audit profession, it is important to put things in perspective. I believe the reason that so many are coaching the profession on how to enhance performance is not that the glass is half empty. Instead, everyone recognizes the extraordinarily important role internal audit plays in a strong GRC environment. So, let’s take heed of what we do well and set our sights not on the valleys but on the peaks in the distance.

I welcome your thoughts.