Seven Deadly Sins of Internal Audit
 

Seven Deadly Sins of Internal Audit

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Video & Slides: http://www.proformative.com/events/seven-deadly-sins-internal-audit ...

Video & Slides: http://www.proformative.com/events/seven-deadly-sins-internal-audit
Do you know how to avoid the major pitfalls that can derail an internal audit function? Too many internal audit departments are held back by focusing on things that don't matter instead of what really counts. In the face of growing regulatory pressure for public and private companies, to become more transparent and disclose material information, the internal audit team will need to elevate their position within the business. Learn how to help and collaborate with your department on how to avoid these traps and make them an advantage in your business.

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Seven Deadly Sins of Internal Audit Seven Deadly Sins of Internal Audit Presentation Transcript

  • Ask, Share, Learn – Within the Largest Community of Corporate Finance Professionals The Seven Deadly Sins of Internal Audit Michael Bechara, CPA, CRMA, Managing Director, Granite Consulting Group Inc.
  • • • •
  • • Understand and refocus on issues of critical concern to your management and audit committee • Learn how to avoid losing credibility within your company • Discover on how having an internal audit team is seen as a strategic asset to the business
  • Ask, Share, Learn – Within the Largest Community of Corporate Finance Professionals The Seven Deadly Sins of Internal Audit Michael Bechara, CPA, CRMA, Managing Director, Granite Consulting Group Inc.
  • Why Are We Discussing the 7 Sins? • •
  • What Makes an Internal Auditor Effective? Technical Skills “Soft” or People Skills Value & Fit     Accounting Skills Industry Knowledge Regulatory Awareness Financial Acumen  Managing Employees  Professional Image  Your Boss Likes You  Understanding the value of Internal Audit and how this fits in with the organization
  • What Does Value & Fit Mean? Value Fit  Understanding of Risk  Recognize costs & benefits  Ability to absorb information quickly  Realizing problems have many solutions  Translating knowledge into business solutions  Gaining the confidence of others
  • The Seven Deadly Sins
  • The Seven Sins Threats to Value and Fit 1. Ineffective Planning 2. Being Self Centered 3. Losing the Truth 4. Ineffective Communication 5. Failing Political Science 6. Inability to Negotiate 7. Destroying Credibility
  • 1. Ineffective Planning • Risk Assessment • Audit Planning Strategy • Reporting Lines Operations Tactics • Budgets • Staffing • Technology • Scheduling • Workpaper Review • Audit Report
  • 1. Ineffective Planning Risk Based Multiple Sources Of Input Uses Some Technology to Support The Process
  • 1. Ineffective Planning • – – – •
  • 1. Ineffective Planning Case Study #1 – Risk assessment is forced upon IA • Large multi-national implemented a rotational internal audit schedule for operating units • Every unit was to be audited once every three years • Became hard to explain why many resources were dedicated to auditing the “best run” units while problem units had to wait their turn • Senior Management and the Audit Committee became frustrated and the audit plan was constantly interrupted and reordered based on everyone’s evolving definition of risk • Lesson = you end up auditing by risk anyway
  • The Seven Sins Threats to Value and Fit 1. Ineffective Planning 2. Being Self Centered 3. Losing the Truth 4. Ineffective Communication 5. Failing Political Science 6. Inability to Negotiate 7. Destroying Credibility
  • 2. Being Self Centered • • Forbes Insights Global Survey of Executives and Audit Committees Only 44% of respondents believe that Internal Audit is helping their organization achieve its business objectives… …and fewer — 37% — say they involve Internal Audit in key business decisions and strategy
  • 2. Being Self Centered What is Needed • Risk & Control Experts Wanted! • Senior Management & the Board Value good opinions • Help run the business do not give utopian answers What Do I Need To Know To Help? Understand: • Organization’s objectives • Macroeconomic and industry risks Make sure: • Your solutions support the organization’s objectives Evaluate: • The cost vs. benefits of proposed solutions Specifically Open mind: • Controls and documentation are great tools • Have their limitations Logical/pragmatic: • Understand your role as an advisor and facilitator • There are many ways to solve internal audit issues
  • 2. Being Self Centered • • • • •
  • The Seven Sins Threats to Value and Fit 1. Ineffective Planning 2. Being Self Centered 3. Losing the Truth 4. Ineffective Communication 5. Failing Political Science 6. Inability to Negotiate 7. Destroying Credibility
  • 3. Losing the Truth The Problem Beware of… Key Actions  We deal with complex issues that have many facets to them  What may seem like a serious issue can turn out to be trivial and what may seem trivial may turn out to be very serious  The facts are revealed slowly and in pieces     Solidifying your position and refusing to reconsider based on new facts Do not become married to positions that are unsupported by facts This problem usually appears in Audit Reports Audit issues have a way of transforming from the workpaper to the final audit report  You are allowed and you should change your mind when new facts are brought to light  Manage emotions of your team and management  You will gain respect and prestige by aligning yourself with the facts  Holding on to an outdated position will open you to the charge that “you are just there to find something!”
  • 3. Losing the Truth Case Study #3 – The Auditor is the Last to Know • An operating unit of a major aerospace company releases an accounting reserve causing a significant rise in net income • The auditor asks the Controller for the justification for the release of the reserve • The Controller responds that he has none • The issue is documented in the audit report • Later the Unit President calls and details many meetings and discussions and full support • The auditor refuses to change his position and keeps referencing the Controller’s comments
  • 3. Losing the Truth Original Audit Report – Support for Reserves Condition: Management reserves were released without discussion, reasoning and/or documentation. Specifically, a management reserve that was released for submarine program (00084) in the amount of $1,052,779. Management was not able to explain the logic, assumptions or reasoning behind this release. Risk: Unexplained/unsupported adjustments to profitability have been made that may create a misstatement in the financials. Agreed Action: Documentation supporting the logic, assumptions and calculations for all management reserves will be discussed, documented and maintained.
  • 3. Losing the Truth Original Audit Report – Support for Reserves Revised Audit Report – Support for Reserves Condition: Support for releasing management reserves is not maintained with the accounting data and the Controller is not involved in the discussion regarding the release of reserves. Specifically, a management reserve was released for submarine program (00084) in the amount of $1,052,779 without the input of the Controller. Risk: The appropriate accounting treatments may not be applied resulting in a misstatement to the financials. Agreed Action: The Controller will be involved in all discussions regarding releasing reserves and will advise as to the appropriate accounting treatment based on the facts and circumstances of the program.
  • The Seven Sins Threats to Value and Fit 1. Ineffective Planning 2. Being Self Centered 3. Losing the Truth 4. Ineffective Communication 5. Failing Political Science 6. Inability to Negotiate 7. Destroying Credibility
  • 4. Ineffective Communication • • • • –
  • 4. Ineffective Communication • • •
  • 4. Ineffective Communication The Temptation  These days data is cheap and readily available  Understand what is important to your audience  Not what data but what concerns  Communicate in business terms not in auditor speak How Is this Done?  Consolidate issues from audits into common themes 1. Get to the point or the “newspaper headline” 3. Back up your thesis with selected data 2. Develop a thesis for why this condition exists 4. Have the main body of data available
  • 4. Ineffective Communication • • • • • •
  • 4. Ineffective Communication • • • • • • • •
  • 4. Ineffective Communication • • – – – –
  • The Seven Sins Threats to Value and Fit 1. Ineffective Planning 2. Being Self Centered 3. Losing the Truth 4. Ineffective Communication 5. Failing Political Science 6. Inability to Negotiate 7. Destroying Credibility
  • 5. Failing Political Science Politics is a process by which groups of people make decisions. The term is generally applied to behavior within civil governments, but politics has been observed in all human group interactions, including corporate, academic and religious institutions. It consists of "social relations involving authority or power" and refers to the regulation of a political unit, and to the methods and tactics used to formulate and apply policy
  • 5. Failing Political Science Why Should We Care? Success Requires…  Anyone who deals with improvement needs to understand the decision making process  We need to be sure the decisions that are made will “stick”  Solutions will be implemented far more quickly if you know where to go  Ignore conventional wisdom i.e. the CEO is the top decision maker  Open our eyes and observe the decision making process  Follow the decision even after its made Key Point  Understanding the politics of your organization allows you to formulate workable solutions to business issues that will get implemented.
  • 5. Failing Political Science – – Evaluate: – – –
  • 5. Failing Political Science • • • • • •
  • The Seven Sins Threats to Value and Fit 1. Ineffective Planning 2. Being Self Centered 3. Losing the Truth 4. Ineffective Communication 5. Failing Political Science 6. Inability to Negotiate 7. Destroying Credibility
  • 6. Failing to Negotiate Why Do We Have To Negotiate?  Negotiation is a BIG part our job  We deal with business problems − Typically more than one solution  We are the experts but we have to take into account the views of others Richard Chambers, President & CEO of the IIA “It starts with relationships … with senior management, company leaders and the audit committee. This is a service function, and you do have clients. You do not subordinate your judgment, but you do serve.
  • 6. Failing to Negotiate We Need To Be Flexible But Still Maintain Our Integrity  Moderation in business is a skill that is acquired through experience  Knowing when to stand like a rock and knowing when to compromise requires a vast database of prior experiences  Like a stalk of wheat  If you are too stiff, you will be broken and too soft you will trampled on
  • 6. Failing to Negotiate Tips  Focus on the end goal and not how to get there − The end rather than the means  Make sure you understand the other position  Make the other side work − Demand suggestions!  Career Development − Develop an understanding of what has significant impact Traps  Compromising on the wrong issue  Bringing an external audit mentality to internal audit  Never developing the ability to distinguish between critical and non critical issues
  • 6. Failing to Negotiate • • • • •
  • The Seven Sins Threats to Value and Fit 1. Ineffective Planning 2. Being Self Centered 3. Losing the Truth 4. Ineffective Communication 5. Failing Political Science 6. Inability to Negotiate 7. Destroying Credibility
  • 7. Destroying Your Credibility • Credibility is Internal Audit’s biggest asset • If credibility is lost, we have nothing • Our entire profession is based on “Independent Assessments” • If these assessments cannot be believed then they are worthless
  • 7. Destroying Your Credibility Ways to Destroy Your Credibility  Acting on initial feelings  Listening to people that try to feed you information or “inside data”  Forming an opinion on data that you or your team have not independently verified  Sharing this unverified data with others (Even worse!)  Relying on reputations, forecasts and preliminary opinions
  • 7. Destroying Your Credibility Ways to Build Your Credibility  Make judgments and voice opinions based on actual audit testing and documentation  Do not be swayed by, or act on, rumor or “inside information”  Do not discuss the audit results except with those who must know  Not depending on past performance during audits  Only presenting issues that you have personally reviewed
  • 7. Destroying Your Credibility Case Study #7 – He said, she said but there was nothing • At a company gathering, many operating unit heads made negative remarks about Unit A • The Head of IA was taken aside many times and told that he must “do something” about Unit A • Threats were made about the competency of the Head of IA if he did not act • No hard evidence was presented • Fortunately the Head of IA did not react and during later audits the Unit was found to be very well controlled
  • The Seven Virtues! Nothing more than what your first business mentor probably told you
  • Back to Value and Fit Value & Fit  To be successful we need to understand how we provide value and how this fits in with the organization  A solid base of technical skills and regulatory knowledge is a basic requirement This Means…  The ability to translate this knowledge into effective and pragmatic solutions that others will buy into  Having the credibility and integrity to deliver this to the organization The Result  What separates the executives from managers