This article was reprinted with the permission of The Institute of Internal Auditors.
Well into the 21st century, businesses worldwide are focusing more and more on managing risks, be they internal or external, financial, operational or strategic, involving technology or regulations or related to reputation.
While organizations are raising the bar on effective risk management, executives face extraordinary headwinds spawned by a turbulent environment in which risks materialize virtually overnight. Just this year, global financial and business markets have been rocked by spectacular cybersecurity breaches, geopolitical instability in the Middle East and Eastern Europe, refugee crises and more.
Internal auditors working from risk-based annual plans developed before March are increasingly finding themselves addressing yesterday’s challenges.
All of this reinforces my long-held belief that internal audit must take a more continuous approach to risk assessment. Audit plans and coverage should constantly evolve as new, potential risks surface and undergo assessment. Such an approach adds significant value for internal audit’s stakeholders, particularly during sudden or unexpected crises.
I learned early in my career that conventional planning for internal auditing is not designed to deal with unexpected risks. In 1990, I was in the middle of an old-school, annual plan as chief audit executive for the U.S. Army when Iraq invaded Kuwait. Risks that few saw coming suddenly appeared. I had to toss my internal audit plan for the year and begin to continuously assess risks so I could identify and reset our internal audit priorities.
How likely will we be to avoid surprises if we follow traditional methods and routinely conduct our audits based on a plan that’s six months to a year old? The answer is obvious. Not only do we need to assess risk on a continuous basis, we must have fresh information to keep our audit plan up to date.
A common excuse I hear from internal auditors for not designing continuous risk-assessment processes is that they are difficult and time-consuming. Indeed, many departments have trouble finding time for even one enterprise-wide risk assessment each year. But there are several simple techniques to help you consistently keep your risk assessment current:
- Formal methods. In its most recent Common Body of Knowledge (CBOK) Study, The IIA Research Foundation noted that the idea that “an internal audit activity can update its audit plan only once a year and still remain timely, responsive and effective needs to be challenged strongly.” One way to continuously monitor risk is to identify key risk indicators (KRIs) at the outset of the year and monitor them periodically or continuously throughout the year.These KRIs can be linked to the results of the annual risk assessment, or to risks that are notoriously volatile. When anomalies appear, internal audit should assess whether the organization’s risks are shifting, and internal audit’s coverage should adapt accordingly.
- Shoe-leather assessments. Another way to keep your risk assessment and audit plan up to date is what I like to call “risk assessment by walking around.” This method is exactly as the phrase implies and relies on developing strong working relationships with key members of senior management. This way, you know about new risks as soon as they do. Risk assessment by “walking around” may lack the discipline and structure of more formal assessments, but it’s a powerful strategy for keeping in touch with what’s happening in your organization and may reveal new risks that your formal risk indicators do not. Given the number of business units and executives in large companies, risk assessment by walking around cannot be the responsibility of only the CAE; the entire internal audit department must be organized and deployed.
- Bird’s-eye view. A third approach is simply to set your antenna as high as possible to detect industry-wide changes, economic trends and other external factors. Industry publications, seminars and professional association meetings can be valuable sources for acquiring crucial intelligence that might impact your risk assessment. This, too, must be a team effort.
So, what’s the best type of continuous risk-assessment program for keeping up with the speed of doing business? Any one of the methods I’ve outlined is a far better option than merely establishing an audit plan once a year, then following it regardless of changing circumstances. Unfortunately, none of these methods is truly complete by itself.
My advice: Use a combination of approaches. Formal methods are best for staying on top of previously identified risks, risk assessment by walking around helps identify new internal risks and taking a bird’s eye view by setting our antennas high allows us to address new external risks as they emerge within our industries or in the overall economy.
The recent CBOK Study included the need to “Conduct a More Responsive and Flexible Risk-Based Audit Plan” as one of its “Imperatives for Change.”
The study recommended the following “Key Action Steps for CAEs”:
- Assess the maturity of your risk assessment process and develop plans to extend its application across the enterprise.
- Develop processes within internal auditing to identify and report on emerging risks:
- Make the identification of emerging issues a key performance responsibility of your direct reports.
- Coordinate with your organization’s other risk and control units to share information and views on emerging issues.
- Identify and use external sources of relevant data, knowledge and business issues to help uncover additional emerging issues.
- Assess your process for making periodic updates and revisions to your annual audit plan. Develop steps to enable internal auditing to move faster and make more frequent changes to the audit plan as the organization’s risks evolve.
- Talk to your key stakeholders (executive management and the audit committee) about the need to make more frequent updates to the audit plan. Seek agreement on an appropriate balance between the need for internal audit to “complete the annual plan” and the desire for internal audit to make changes in response to emerging and changing risks:
- Consider implementing a “rolling” audit plan — for example, a plan that is rolled forward to cover the next six months.
- Conduct regular and frank discussions with both senior management and the audit committee about the nature, scope and severity of the organization’s risk profile.
- Develop or refine your audit reporting to demonstrate a more direct link between changes to the organization’s risk profile and associated changes to the audit plan.
In the 21st century, risks are more dynamic than ever. For this reason, we must adapt our approach to planning our work so that we can audit at the speed of risk.