Changed Management Assurance

A telecom company adapted not only its product offerings but also its organization structure due to rapid technological changes and change in customer demands. Due to increased pressure of these market enablers, it decided to change its organization structure which eliminated several levels of management and introduced business segment and market region wise management teams. More empowerment and greater decentralization of decision making have been introduced.

Along with its reorganization, it also changed its accounting system. It eliminated its use of annual budgets, replacing them with a system of rolling financial plans and forecasts. The focus was now on activities and how cost-centers consumed financial resources on various activities. Along with rolling forecast, it started to report profit & sales per business segment on a quarterly basis. Local authority levels were increased for financial transactions and spending.

It has broadened its reporting to include a series of Key Performance Indicators (KPIs) that provided non financial measure on customer, finance, employees, internal efficiency, and innovation. The forecasts and KPIs were to form basis of performance evaluation of the business units to be compared with the pre-specified targets as agreed.

The company wanted its risk management efforts to align with above re-organization and adaptations and to answer the following questions: Whether execution is aligned to its new strategy and the changing environment? Whether its management accounting system is functioning and evolving with the change and what risk and trade-off exist within its new reporting & MIS environment. Also, how best it can monitor and track its KPIs.

Risk Management System must support firm's new decision-making and control system instead of adding negative value by thinking in an orthodox way. Internal Audit (IA) function should ensure that the new system is providing quick and accurate information for decentralized decision making. IA should now emphasize on controls related to activities, business segments and KPIs.

Internal Auditor should understand that short term budgets are both planning and control tools. Long term budgets which were used earlier reduce managers' focus on short term performance and primarily used for planning purpose. Line item budget restricts the responsibility of a manager by forcing the manager to make purchases in prescribed amounts. The budget lapsing has benefit of greater control on short term spending. Manager who can control the size of operations should be evaluated based on static budgets; manager who does not control size of operations should be evaluated based on flexible budgets. These understanding will reduce any possible dispute with auditees.

Auditor should understand process of determining values of reporting KPIs and should have knowledge as to who is processing this information, possible conflicts of interests, and inter-dependence & trade-off possibility between various KPIs. It is also a good idea to develop Key Success Factors (KSFs).

Internal Auditor should ensure that the management accounting is facilitating regular follow-up on non-performing activities and management team is diagnosing the root causes and taking appropriate actions on a timely basis.

In other words, Internal Audit function has to think differently in this era of rapid change.