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Perspectives

Innovation imperative of internal audit

A guide to accelerating strategy and techniques in internal audit

The need for internal audit to increase its impact and influence generates the innovation imperative. That imperative calls upon chief audit executives to lead their functions to adopt new technologies, methods of working, talent models, and relationships with stakeholders, not as one-off initiatives, but within a larger audit innovation strategy.

Internal audit innovation

The most effective way for internal audit to meet stakeholders’ evolving needs, remain relevant to the organization, and capitalize on limited resources is to continually innovate and modernize. In fact, according to respondents of Deloitte Touche Tohmatsu Limited’s most recent global Chief Audit Executive (CAE) survey, the most innovative internal audit groups believed they had the most impact and influence within their organizations.

This is not innovation for its own sake, but for the sake of the executive team, board, audit committee, business managers, risk functions, and other stakeholders, who are all coping with disruption. As the organization and stakeholders adopt new business models and technologies and face new risks, internal audit should evolve its capabilities if it is to continue to provide assurance, advice, and risk anticipation.

In addition, COVID-19 and its economic fallout have, to varying extents in various industries, upended audit plans, on-site visits, and traditional auditing methods. At the same time, most organizational activities have undergone change in the face of resource constraints and ongoing uncertainty. The suddenness and severity of this crisis has also prompted many executive teams and boards to call upon internal audit for advice regarding emerging risks and key decisions. As a result, many internal audit groups that had already been engaged in innovation have accelerated those efforts. Functions that had been only considering new ways of working are now actively adopting them.

Here we aim to illuminate ways in which internal audit leaders and functions are responding to the need to accelerate innovation as the risk landscape and stakeholder needs continue to evolve.

Responding to the innovation imperative

The leadership imperative for internal audit

Innovation does not just happen. CAE leadership is needed to secure not only the buy-in, but also the active support of the C-suite, audit committee, and other stakeholders. That leadership is needed to expand internal audit priorities beyond compliance to anticipating and advising on key risks. It’s needed to enable internal audit to develop the mindset and behaviors that generate innovation. And it’s needed to set, or at least support, new priorities for internal audit and the culture change that the function and its stakeholders will need to undergo.

Prominent elements of that mind-set and those behaviors include
the willingness and ability to:

  • Engage collaboratively with a broad range of stakeholders from diverse disciplines
  • Be part of a team of equals, without concern for hierarchical roles
  • Undertake a task with only a hypothesis and the expectation that the desired output may change
  • Work on output in a fast-paced, iterative manner, prioritizing speed over elegance without seeking perfection every time
  • Make decisions based on imperfect information in real time using on-the-spot judgment rather than existing standards and clear decision rules
  • Be candid with colleagues and peers about evolving processes, and help them see how they can contribute to this evolution

These elements do not characterize traditional internal audit functions, leaders, or staff. However, that was changing even before the current crisis. Many internal audit leaders and groups have been leaning into advisory roles, delivering more relevant reporting, and using advanced analytics and new talent models. A good number of internal audit groups have been adopting new ways of working, as confirmed by Deloitte research. Many have been working to better understand themselves and their approaches.

How do innovative internal audit groups do it?

In research, client engagements, and our CAE Greenhouses and Labs, we’ve found that certain broad initiatives—underpinned by the mindsets and behaviors summarized above—enable internal audit to innovate. Innovation goes beyond simply applying analytics to your risk assessment or using a new mode of reporting. Innovative CAEs think bigger, more holistically, and more strategically when implementing their internal audit techniques. In general, these leaders and their groups:

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Grasp the need to innovate:

At the deepest level, you either believe that you need to innovate, or you don’t. Given the rate at which organizations have been changing and the myriad of risks they face, it should be clear that Internal Audit should evolve.

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Reposition internal audit:

Although most internal audit groups have expanded their purview beyond compliance and assurance, many are still seen as a policing function. Now is the time to change that.

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Go beyond technology:
It can be easy to make innovation about technology. While technology enables automated controls testing and the like, use of technology itself is not the goal of internal audit innovation. And it would be a mistake to think so.
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Adopt Agile IA:

In contrast to point-specific technology solutions, Agile internal audit (or Agile IA) is among the leading ways for internal audit to shift to more innovative approaches.

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Diversify the team:

New hires with various business backgrounds and ways of working—and different life experiences and points of view—can enrich the diversity of thinking and behavior in a function. That diversity enables internal audit to discover new ways of seeing and solving problems and enhances its ability to work with different stakeholders.

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Burnish the brand:

Innovative internal audit groups often find themselves viewed differently by stakeholders. The CAE is invited to take (or retain) his or her seat at the table. Internal audit becomes a magnet for talent, and work becomes more engaging to internal auditors as it becomes more relevant to stakeholders.

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Exercise transformative leadership:

Internal audit often provides assurance and advice on major change initiatives, such as an IT installation, finance transformation, or post-merger integration, and generally does a good job. Yet when it comes to internal audit change initiatives, we’ve often seen reluctance to apply the same rigor.

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Internal audit innovation: Standing still is not an option

We believe, as do many senior executives and board members, that internal audit has more to offer their organizations in our environment of high risk and ongoing disruption. While certain activities remain essential, continual evolution means that standing still is not an option. That need to evolve presents an opportunity for internal audit to raise awareness of the function’s capabilities and to educate stakeholders about the need for internal audit innovation.

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