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Internal Audit Focuses Little on Outward-Facing Value Measures

By Terry Sheridan | 23rd December 2015

Internal Audit Focuses Little on Outward-Facing Value Measures

‘Internal Audit departments should continually evaluate their performance and value. A new report from the IIA Research Foundation throws up some interesting findings on how organisations measure the performance of internal audit.’

This article was published on www.accountingweb.com.

new report from the Institute of Internal Auditors (IIA) Research Foundation indicates that internal audit needs to toot its horn differently.

Delivering on the Promise: Measuring Internal Audit Value and Performance makes clear that chief audit executives (CAEs) focus more on inward-facing measures of value – things like how much of the annual audit plan gets completed – than they do on outward-facing measures, such as client satisfaction and meeting the goals of boards of directors, audit committees, management, and clients – the stakeholders. What’s more, 15 percent of CAEs say there’s a lack of formal value measures within their organizations.

“Identifying mutually agreed upon measures of performance between internal audit and its stakeholders is crucial to establishing internal audit’s value,” IIA President and CEO Richard Chambers said in a prepared statement. “There is opportunity to improve when nearly one in seven organizations have no such measures in place.”

The report is part of the ongoing Common Body of Knowledge (CBOK) study of internal auditors and their stakeholders. Its findings are based on the 2015 CBOK Global Practitioners Survey, in which more than 14,500 respondents from 166 countries participated earlier this year.

The effort is rooted in the IIA’s five-year-old mission called the “Value Proposition for Internal Auditing,” which “characterizes internal audit’s value as an amalgam of three elements: assurance, insight, and objectivity.”

“[Internal auditors] can provide assurance over specific aspects of the business, offer insights and recommendations to maximize return on organizational activities, and present objectivity to decision-makers – all of which deliver on internal audit’s value proposition,” the report states. “However, as a practical matter, time and resources are limited. How can internal auditors identify and focus on the activities that are of most value to their clients and key stakeholders?”

And that’s where the latest report comes in. It explores what’s described as the gap between performance measures used by internal audit and organizations, and how “the gap appears to form between value-adding activities and the ways performance is measured.”

When asked how their organizations measure the value of internal audit, only two of the nine performance measures ranked by CAEs are outward-facing (listed in bold below):

  • Percentage of audit plan complete: 66 percent
  • Timely closure of audit issues: 42 percent
  • Completion of mandated coverage: 41 percent
  • Client satisfaction goals: 38 percent
  • Fulfillment of specific expectations established by stakeholders (32 percent)
  • Budget to actual audit hours: 29 percent
  • Performance against the internal audit budget: 23 percent
  • Cycle time from end of field work to final report: 23 percent
  • Cycle time from entrance conference to draft report: 19 percent

The CAEs’ responses indicate they “focus on completion of tasks as the primary indicators that the internal audit function is delivering value,” the report states. “This task-specific focus looks more at a ‘to-do list’ and less on the perception of the value of those activities by others.”

As for the 15 percent who responded their organizations do not have formal performance measures, the lack of measures makes it tougher to comply with IIA Standard 1311: Internal Assessments. The CAEs “risk not knowing the quality of their efforts or the organization’s perception of that quality,” the report states.

So what to do?

The report cites six steps CAEs can take to align performance measures and value-add activities:

  • Learn customers’ expectations.
  • Validate your understanding.
  • Develop outward- and inward-facing measures.
  • Start measuring.
  • Report back.
  • Repeat the cycle.

“Remember that the successful application of these steps requires use of one of the most important skills internal auditors must possess: communication,” the report states.