Brain-Dead and Branded

A Servicing Company had appointed a branded internal audit firm for four years continuously. Next year, the partner of the firm became Chief Internal Auditor of the Company who was managing its internal audits for all these years. The Managing Director was somewhat satisfied with his services. However, looking at the latest internal audit report, Managing Director became very concerned as it raised only the pending issues of the last year.

Managing Director knew that his line managers were performing reasonably well even during the bad times. After discussing with his line managers and the Chief Internal Auditor, he realized that all the recommendations, though got implemented in spirit, had not been implemented in the form as suggested by the Internal Auditor.

Internal Auditor was a knowledgeable person but he was not able to add more value with any newer perspective since long. Managing Director realized that they have been always basically washing themselves with the same dishwasher i.e. all ideas of his have been listened to and there have been no fresh perspective from a newcomer who could have brought new insights about the business.

Managing Director immediately decided to change working of the internal audit function to make it more meaningful for the business. He resorted to bring rotation of duties with in the organization to change the leaderships. He thought it's not the branding which is essential as much as the competency to provide innovative and frank views without fear and favor. Thus, he worked with new risk consultants and not any branded consulting firm to change the way Internal Audit had been functioning. This ensured that they did not all go brain-dead talking to each other on the same topic just using latest buzz words which are not capable of bringing any new insights.

Simply, in most of such situations there is a need to change the entire IA function i.e. IA organization, IA leadership, IA strategy, IA technology, IA culture, Business Control Framework and Management Accounting System. Not for sake of bringing newness but to connect it with business results.

What is difficult to change is the thinking of these so called experienced top nuggets who say that there is nothing new or rocket science. These are the people who have not yet changed their ways. They have actually gone brain-dead.

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.