IIA New Zealand Stepping Up Conference - Influence Relevance and Value

Internal Audit and
Organisational Strategy
Increasing the Influence,
Relevance and Value of
Internal Audit
David Mallard
Cornerstone Integral
Melbourne
STEPPING UP / IIA NZ Conference 2013


WHAT WE WILL SHARE
Topic
1
2

Are we doing enough?

3

Recent research into the profession

4

The standards

5

Three common strategy failure points

6

Auditing strategy development

7

Strategy execution risk

8

Strategy execution audit

9

Insight over the journey

10

Audit people capability

11

Optimising technical with non-technical

12

The impact of strategic risk

Implications of auditing strategy

13

Conclusion

THE IMPACT OF STRATEGIC RISK

Strategic risks pose a
much more significant
threat to companies
than more easily
auditable risk areas

Strategic risks cause
68% of severe market
capitalisation decline


ARE WE DOING ENOUGH?

Strategic risks
account for 68%
of severe
market declines

Percentage of Risk
Failures Leading to
Significant Market
Decline

Percentage of Time Spent
By Audit Departments on
these Risk types
Risk Categories

68%

6%
Strategic

7%

Audit
departments
report spending
only 6% of their
time auditing
strategic risks

12%

13%


Legal and
Compliance

Financial

Operational

13%

49%

32%

RECENT RESEARCH

To deliver real
value, audit plan’s
must be
responsive, flexible
and aligned with
company strategy
61% of survey
respondents said
Internal Audit did not
have a mandate
aligned to business
strategy
Top Priority - be more
relevant to achieving
the organisation’s
objectives

RECENT RESEARCH

# 1 PRIORITY:
BE MORE
RELEVANT

INTERNATIONAL STANDARDS
OCTOBER 2012

2130. A1 – The internal audit activity must evaluate
the adequacy and effectiveness of controls in
responding to risks within the organisation’s
governance, operations, and information systems
regarding the:
1. Achievement of the organisation’s strategic
objectives
2. ..
3. ..

THREE COMMON STRATEGY FAILURE POINTS
Flawed Business Assumptions: Management assumptions may not be
rigorously tested resulting in organisational objectives that are
inconsistent with the enterprise’s capabilities or the realities of the
business environment.
Business Unit Misalignment: Lack of communication or a strategy
development framework for business units can result in business
unit objectives and operating plans that fail to align to enterprise
objectives.
Employee Understanding: Poor communication of strategic priorities
throughout the organisation can lead to a lack of understanding and
belief in the future direction of the company.

SIMPLE STEPS TO AUDIT STRATEGY
1. Strategic Planning Process Audit: Review the
strategic planning process to ensure there is a
common framework for the development of
business unit strategic plans and assess the
alignment between business unit, department, and
corporate level strategic plans.
Does the company
have a documented
process for strategic
planning? Has the
process been
complied with?

Are enterprise
level strategic
objectives
documented
and
measurable?


Are Business
Unit objectives
reasonably
related to
enterprise
objectives?

Is there
alignment
between
enterprise and
business level
strategies?

2. Audit of Assumptions: Identify and validate
assumptions about the internal and external
environment made at the enterprise, business
unit, and project level.

Are key assumptions
underpinning the plan
for achieving objectives
documented?


Are key assumptions
reasonable given all the
evidence?

3. Strategy Communication and Awareness Audit: Assess
the effectiveness of strategy communication to all levels of
the organisation.

What level of awareness
do employees have in
the strategy?

To what extent do
employees believe in the
strategy?


Do incentives and/or
performance criteria link
to strategic objectives ?

STRATEGY EXECUTION IS THE CHALLENGE
Kaplan and Norton (developers of
the balanced scorecard) report
that 90 per cent of organisations
fail to execute their strategies
successfully.

Fortune Magazine famously
stated that organisations fail
to successfully implement
strategy, not because of bad
strategy, but because of bad
execution.

STRATEGY EXECUTION RISK

Strategy Execution


STRATEGY EXECUTION RISK

In the 2013 State of the Profession
study, PwC highlighted that
management is least satisfied with
Internal Audit’s contribution in
less-traditional audit areas such as
‘large change program’
assessment.
This suggest Internal Audit’s
approach to large strategic change
programs requires a rethink.

AUDITING STRATEGY EXECUTION

My experience at Australia Post



Regularly polled senior
executives and Board
members about their
perception of Internal
Audit VALUE and
effectiveness



Stakeholder
feedback resulted in
the question:
How does Internal
Audit address
strategic risk more
effectively?


HOW WE TACKLED STRATEGIC RISK
1. We viewed the organisation's strategic plan as an
‘inventory’ of organisational change programs
2. Ranked each program by importance to company
objectives, complexity, scale etc.
3. Diagnosed history of previous investments, where
they had succeeded or failed, and considered
organisational capability challenges
4. Developed new Audit tactics to assess strategic
program investments


FOUNDATIONAL THINKING
- THE INTEGRAL FRAMEWORK
INDIVIDUAL

INTENTIONAL (I)

BEHAVIOURAL (IT)

Personal Mastery

Capability Mastery

Attitudes

Performance

Engagement

Accountability

Perspectives

Results

INTANGIBLE

TANGIBLE
CULTURE (WE)

SYSTEMS (ITS)

Cultural Mastery

Strategy Mastery

Relationships

Structures

Politics

Policies

Leadership

Technology

COLLECTIVE

FOUNDATIONAL THINKING
- THE INTEGRAL FRAMEWORK
INDIVIDUAL
INDIVIDUAL

The
Language of
Thoughts &
Feelings

The
Language of
Behaviour &
Action

INTANGIBLE
INTANGIBLE

TANGIBLE
TANGIBLE
The
Language of
Relationship
& Meaning

The
language of
Systems &
Strategy

COLLECTIVE
COLLECTIVE

- THE AUSTRALIA POST EXPERIENCE
1. A HOLISTIC view – considered typical program management
and technical issues in conjunction with humanistic elements –
collective and individual
2. PIR’s not optimising limited Audit resources. ‘In-Flight’ real
time assessment

3. Rapid feedback – ‘Contemporary, Actionable Assurance’
4. Relevant to stakeholder objectives - organisationally and
personally

Feedback on more than 50 data points is collected. Depending on project
scale/risk, several Health Checks are conducted over the project lifecycle
and/or within significant project phases.


A 360O STRATEGIC PROJECT HEALTH CHECK

Assessments from multiple perspectives

Poll stakeholder perceptions
and/or confidence levels
horizontally and vertically


ORGANISATIONAL POLITICS


‘CULTURAL CUL DE SACS’


Triangulate feedback.
Deep dive on the ‘hot
spots’ and validate


Integrates the ‘Hard and
Soft’ risk issues aligned to
the phase of program
development or
implementation, enabling
a more holistic assessment
of relative risk to the
Strategic program.
Drives close to real time
Internal Audit feedback
enabling program course
corrections before its too
late.


- ‘SAYING IT RIGHT’
Internal Audit Headline Conclusion…..


- ‘SAYING IT RIGHT’
During the
review, each success
factor is broken
down into its core
components.
Internal Audit
considers all
information
collected from 50
data points during
the assessment and
applies its
professional
judgment to
determine the final
ratings.


- INSIGHT OVER THE JOURNEY
A PRACTICAL EXAMPLE OF INFLUENCE, RELEVANCE AND VALUE

After a series of
strategic project
assessments, an
organisational
capability profile
emerged which
was adopted as
input to inform
people
engagement and
development
strategies


AUTOMATE THE PROCESS
- www.projectaudits.com


AUDITING STRATEGY - ONLY PART OF THE STORY

A focus on auditing
organisational strategy is very
important, however is only part
of the story to being
influential, relevant and more
valuable


AUDIT PEOPLE CAPABILITY

A September 2013 survey highlighted
that 92% of senior executives in the
U.S. acknowledge there is a serious
gap in workforce skills with the most
significant concern relating to ‘non
technical’ capability such as
communication and creativity.


People skills are vitally important
to internal audit’s ability to stay
close to company leadership and
remain aligned with the key
strategies and priorities of the
organisation.

The most effective Internal Auditor
possesses a broad range of nontechnical attributes in addition to
deep technical expertise.

In a complex, volatile and changing
environment the ‘softer’ attributes of
Audit performance are increasingly
critical to the success of Internal Audit
functions

Leading CAEs stated that the skills
necessary for success are effective
communication, the ability to build
strong relationships and a capacity to
engage internal and external partners.

ATTRIBUTES OF INTERNAL AUDIT EXCELLENCE

Focus on
critical risks
Align value
proposition
to customer
expectations

Promote
quality and
innovation

Attributes
of
excellence

Leverage &
manage
relationships

Deliver cost
effective
services


Match
talent
model to
value
proposition

Leverage
technology

Enable a
client
service
culture

ATTRIBUTES OF INTERNAL AUDIT EXCELLENCE

WE INVESTED HEAVILY
OVER A SUSTAINED
PERIOD IN ‘PEOPLE’
CAPABILITY
ATTRIBUTES
INCLUDING SELF
AWARENESS &
EQ, NEURO LINGUISTIC
PROGRAMING, PYRAMI
D
THINKING, AUTHENTIC
CONVERSATIONS ETC

PEOPLE DEVELOPMENT RESEARCH & INTERNAL AUDIT
Creative and
Relationship
Attributes

Task and Reactive
Attributes - often
where Internal Audit
is perceived as
‘inhabiting’

‘Compliance, Control, Protecting’

PEOPLE DEVELOPMENT RESEARCH & INTERNAL AUDIT

Relating, Self Awareness,
Authenticity,
Systems Awareness,
Achieving

Research highlights a high correlation between individual development
maturity, ‘creative’ leadership attributes and personal effectiveness, particularly
in dealing with the increasing uncertainty, ambiguity, volatility and complexity of
interconnected global business markets.
This is particularly relevant for the role of Internal Audit.

OPTIMISING TECHNICAL AND NON-TECHNICAL
CAPACITY IS THE KEY TO SUSTAINED SUCCESS

Requires higher
levels of
systems and
people thinking

EQ is twice as
important as
technical
competence*

• D. Goleman, Emotional Intelligence: Why It Can Matter More Than IQ (Bantam Books, 1995)


THE IMPLICATIONS OF AUDITING STRATEGY

Operational

Create Value

Strategic


Expand
Skills
Operational Risk

Traditional Audit Skills

Preserve Value

Compliance

Finance

Strategic Risk

Compliance Risk

Financial Risk

Enhance
Engagement

HOW TO INCREASE THE INFLUENCE, RELEVANCE
AND VALUE OF INTERNAL AUDIT?
For Internal Auditors to be
perceived as relevant, influential
and valuable we must focus on
strategic risks in our
organisations. At the same time
we must act to build our non
technical capacity. By tackling
these core themes well, we are
more likely to be perceived as
‘Trusted Advisors’ by our
stakeholders.

THANK YOU !
David Mallard

david@davidmallard.com


IIA New Zealand Stepping Up Conference - Influence Relevance and Value

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