INTERNAL AUDITING THAT MATTERS. Norman Marks April 2017

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1 INTERNAL AUDITING THAT MATTERS Norman Marks April 2017

2 GLOBAL AUDIT COMMITTEE SURVEY: Fewer than half of the 1,800 respondents are satisfied that internal audit delivers the value to the company it should (45%), and that the internal audit plan properly focuses on the critical risks to the enterprise (49%)

3 expectations have risen, and all internal audit functions need to rise to this new floor: providing assurance on a broader range of critical risks and clearly communicating deeper insights.

4 Internal audit mission To enhance and protect organizational value by providing stakeholders with risk-based, objective and reliable assurance, advice and insight.

5 PROVIDE ASSURANCE ON WHAT MATTERS

6 WHAT MATTERS TO THE BOARD AND EXECUTIVES?

7 Accounts payable Payroll Receiving Compliance Theft and fraud IT general controls

8 DREW STEIN, PROFESSIONAL CHAIR AND DIRECTOR Almost all of IA findings are mundane operational compliance issues - July 2015

9 WHICH RISKS MATTER? Risks to the achievement of objectives The objectives of the enterprise as a whole The risks that matter to the board, CEO, and the executive team

10 WHAT MATTERS TO THE BOARD AND EXECUTIVES? RISKS TO: Revenue targets Earnings targets Market share Major projects Reputation And so on

11 ENTERPRISE RISK-BASED AUDITING Designed to address the risks that matter Plan is driven by the organization s risks, not location or process Aligned with how the organization considers risk Updated as risks change Enables internal audit to be agile

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13 UNDERSTAND THE BUSINESS

14 WHAT ARE THE RISKS THAT MATTER? What are the organizational objectives? What objectives are not stated but assumed? What are the risks to those objectives?

15 WHAT ARE THE RISKS THAT MATTER? What keeps you up at night? What could go wrong? What has to go right? What do the executives spend their time on? What is on the agenda of the board?

16 HOW TO IDENTIFY THE RISKS? ERM Executive interviews Operational reports Workshops IA brainstorming Listen and observe!

17 WHEN YOU AUDIT A BUSINESS UNIT Still focus on enterprise risks Audit the activities at the business unit that are sources of enterprise risk Local risks may be added - optional

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19 A Working Inventory of Business Risks, for use by management and internal audit on a periodic basis Customers Customers sales Planning Reliability Relationships Contracts Standards and Expectations Customer viability Rating Agencies Maxtor credit Vendor terms (guarantees, advance payments) Environment Political Legal Regulatory Business Interruption ExternalTheft/Fraud/ Illegal Acts Business Practices Salary Inflation Innovation Knowledge Assets Empowerment Training Integrity Management Fraud Employee/Theft/Fraud Illegal Acts Resource Misuse Ethics Brand Image Tone At The Top Reputation Human Resources Availability of Skilled Staff Perf/Rewards Alignment Workforce management Communications Morale and Job Satisfaction Leadership IP Protection Competitors Strategic Planning Capital Investment Corp. Organization R&D Financial Strategic Operations Safety Environmental Compliance Govt. Compliance Reliability Operating Costs Sales and Marketing Information Technology Access Availability Continuity System Integrity Technology Infrastructure Tech Development & Integration IT & Business Strategic Alignment Outsourcer Management Cost Control Risk Management - Insurance Risk Management - Interest Rates Risk Management Foreign Exchange Investments Financing Tax Strategies Debt Compliance Acquisitions Divestitures/Closures Manufacturing Strategy Functional Location SG&A Capital Projects Quality Customer Credits/Rebates Inventory Management Procurement Contract Compliance Capacity Planning Engineering Repair Services Lease Compliance Liquidity/Cash Flow Credit/Bad Debts Financial Planning & Modeling Accounting & Reporting SEC Reporting Management Reporting Statutory Reporting Financial Forecasts Tax Accounting & Reporting Performance Management Analyst Communications Suppliers Supply Pricing Quality Relationships Billing Logistics Technology Product Obsolescence

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21 AGILE AUDIT PLANNING How often should we update the audit plan Update at the speed of the business Update as risks change

22 Auditing at the Speed of Risk! Internal auditors working from risk-based annual plans. are increasingly finding themselves addressing yesterday's challenges. Audit plans and coverage should constantly evolve as new, potential risks surface.

23 HOW DO WE MONITOR RISKS? Listen Read management reports Read industry news Get out into the field What is on management s agenda? What is on the board agenda? Think for yourself!

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25 WHAT SHOULD THE AUDIT PLAN LOOK LIKE?

26 WHAT IS AN EFFECTIVE AUDIT REPORT Communicates effectively Gets the message across to the speedreading executive Eliminates the unnecessary to focus attention on the essential 1 page or less Multiple levels of communication

27 WHAT NOT TO DO.. Write what you want to say rather than what they need to hear Use the audit report as documentation Waste time and money yours and theirs Bury value in a mountain of waste

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31 WHAT IS AN EFFECTIVE AUDIT REPORT A communication that is read and acted on right away A communication that matters! Says what the stakeholder needs to know and no more

32 Communicate what they need to know January 15, 1995 Audit of Derivatives Trading Are there any risk issues of significance to the Audit Committee or executive management? YES/NO Are there any outstanding major internal control findings meriting Audit Committee or executive management attention? YES/NO Distribution: Audit Committee Executive and Operating Management

33 THE AUDIT OPINION The AFE process does not meet the needs of the organization. Decisions are not timely and, as a result, business opportunities are lost rendering null the original business justification. In addition, valuable executive time is expended at the cost of attention to business strategies and execution.

34 THE AUDIT OPINION The process and related controls for contract review are inefficient; the same review is performed regardless of risk. As a result, current level of staffing is insufficient to ensure timely, quality reviews. The level of risk to revenue accounting, fraud, or inappropriate deals is higher than management risk tolerance.

35 Communicate what they need to know To: Chair, Audit Committee From: Head of Internal Audit Annual Internal Audit Report We have completed the internal audit plan, which was designed to address the more significant risks to the organization. In our opinion, based on the work performed, the systems of governance, risk management, and internal controls system provide reasonable assurance that the more significant risks are managed within organizational tolerances.

36 IS THERE A BETTER WAY IN 2016? Timely What they need to know, when they need to know Talk and listen Use technology Insert into normal way they receive information 36

37 OUR ROLE AS PRACTITIONERS 1. Focus on providing assurance that matters, on what matters, when it matters 2. Communicate the results of our work in business terms, effect on corporate objectives 3. Skate to where the puck is going to be 4. Find a way to use technology ourselves

38 IIA Internal Audit Principles Provides risk-based assurance. Is insightful, proactive, and futurefocused. Promotes organizational improvement.

39 CAN YOU HELP THE BUSINESS MANAGE AT SPEED?

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41 1. INSERT KEY INTO IGNITION 2. SHIFT INTO DRIVE 3. PRESS FOOT FIRMLY ON THE THROAT OF MEDIOCRITY

42 THANK YOU! Norman Marks, CPA, CRMA Author; Evangelist for Better Run Business; OCEG Fellow; Honorary Fellow of the Institute of Risk Management 4/26/