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Vertical change in internal audit 

A prescription for averting crises and envisioning the future

Products, services, markets, customers, and organizations all evolve over time. But all change isn’t created equal. Learn more about vertical change versus horizontal change, what vertical change means for chief audit executives, and other insights gleaned from Deloitte’s 2016 Global Chief Audit Executive (CAE) Forum.

Many companies—and internal audit functions—engage in horizontal change when vertical change is required for successful adaptation.

Vertical versus horizontal change

At the 2016 CAE Forum, guest speaker Magnus Lindkvist, a futurist and business analyst, explained that horizontal change manifests itself in several ways:

  • The tendency of companies to do the same thing in more places. For example, a German auto manufacturer expands its sales and marketing to China.
  • The proclivity to create “new” products within existing lines. Consider a global confectioner that added three flavors to its “plain and peanut” lineup—coffee, honey, and chili. Is this an example of bold product development? Or more of the same?
  • The appearance of “R&D” in strategy plans. But in this case, Lindkvist said, R&D stands for “rip off and duplicate.”

In stark contrast is the notion of vertical change, which is defined by the following ingredients:

  • Look for secrets. Actively avoid trends and groupthink, which can suppress creativity. Instead, ponder the mysteries. Include unconventional thinkers on your teams.
  • Experiment. Don’t assume the future will be an application of previously known knowledge. Test limits. Challenge assumptions. Act boldly. “More of the same” yields nothing but greater quantities of sameness.
  • Be patient. Don’t be afraid to fail—it’s a necessary step toward success. Cultivate productive failure. Draw and share lessons from each attempt. Adopt a positive mindset: It’s not actually failure; it’s “pre-success.”

Applying vertical change to internal audit

The concept of vertical change applies both within and outside internal audit. Just as the organization as a whole must adapt or disappear, so too must its internal audit group.

The internal audit function must envision and embrace the future to remain relevant. It must apply its analytical and creative talents to itself and to the organization it serves. That way, both can avoid complacency in success and remain unrelenting in the drive to innovate.

But even as internal audit applies the principles of vertical change to its own shop, it must be aware of the need to take its stakeholders along for the ride. Making changes that allow internal audit to work better and faster, and to have greater impact, is positive only if the company is aware of, prepared for, and desirous of that change.

Shifting to a vertical construct

Transforming internal audit from a horizontal construct—doing more of the same—to a vertical construct—pushing boundaries, envisioning the future, and providing more value and actionable insights to the business—requires a shift in mindset and culture.

Traditional skills and backgrounds must be augmented with a broader spectrum of talent. Old approaches and assumptions must give way to bold thinking. Internal audit can no longer play around the edges. It must elbow its way into the game, force the action, and drive the outcome.

The success of the organization—and the relevance of internal audit—hangs in the balance.

More insights from the CAE Forum

Two additional topics covered during the CAE Forum include internal audit’s role in crisis management and envisioning the internal audit function of the future.

Crisis averted
During his career as a partner in professional services firms and in leadership positions in corporate internal audit functions, CAE Forum speaker David Viles has carefully studied many corporate crises. His conclusion? “A large percentage of crises are foreseeable.”

At the root of many crises, said Viles, there seems to be some sort of failure in operational discipline—the absence of simple and clear requirements that guide employee actions and behavior, or the failure of management to hold people accountable. To help embed and check operational discipline, internal audit should spend less time auditing numbers and more time auditing culture, he said.

A key question helps provide focus: “What do people do when no one is watching?” Internal audit can help ensure that the answer is “The right thing” by taking steps to tilt the playing field, making the easiest thing to do also the right thing to do.

Internal audit of the future 
With Lindkvist’s thoughts on vertical change and Viles’s ideas on operational discipline firmly in mind, participants brainstormed about the future and internal audit’s role in it. Attendees were asked to complete the question, “Wouldn’t it be great if in the year 2020 the internal audit function …?” Here are a few responses to that exercise.

Wouldn’t it be great if internal audit …

  • Had innovative staffing models and became a magnet for talent?
  • Could anticipate risks over the horizon?
  • Delivered powerful and insightful communications?
  • Utilized analytics and technology to transform?

To help embed and check operational discipline, internal audit should spend less time auditing numbers and more time auditing culture.

To learn more about the insights gleaned from the CAE Forum, read the full report, Vertical change: How internal audit can help avert crises, envision the future, and “make magic.” For information about our services, visit our Internal Audit page.

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