As risks continue to pile up, companies are looking to their internal audit functions to deliver value by educating stakeholders on emerging risks and leading risk management practices that will improve the business.
According to a recent report by PwC of over 1,600 chief audit executives (CAEs), senior management and board members, internal audit functions that have very effective leadership perform better and add greater value to their business.
More than half of the stakeholders who participated in PwC’s 2016 “State of the Internal Audit Profession” study revealed that they now believe internal audit is contributing significant value – up six points from 2015.
However, the study also highlights that 62% of stakeholders expect more value from internal audit (Africa: 85%; South Africa 83%) with 55% (Africa: 69%; South Africa: 68%) expecting internal audit to be a more proactive advisor within the next five years.
Brendan Deegan, PwC Global internal audit leader, says: “We are seeing a close correlation between strong leadership and internal audit’s ability to add value and deliver high performance. To continue fostering internal audit functions to become trusted advisors within their organisations, stakeholders should promote strong internal audit leadership, while audit executives should work to elevate the performance and perceptions of their respective functions.”
Shirley Machaba, PwC Africa internal audit leader and past president of the Institute of Internal Auditors South Africa, says: “This year’s study obtained more stakeholder input than ever before. Stakeholders told us that as a profession, internal audit has increased the value it delivers.
“Although this is a positive trend, there is room for improvement as a number of stakeholders are still expecting more from internal audit functions. Overall, 62% of stakeholders (Africa: 87%; South Africa: 83%) expect more value from internal audit, including almost half of those already receiving significant value. Many stakeholders want internal audit to expand its value beyond its traditional role of assurance.”
PwC’s report outlines five actionable characteristics that are consistently exhibited by the most effective internal audit leaders:
* Create and follow through on a vision – Very effective internal audit leaders possess a strong vision that aligns with both a company’s strategic direction and stakeholders’ expectations. These very effective leaders translate their visions into strategic and measurable plans and also invest in capabilities in support of their vision. Just over half (Africa: 48%; South Africa: 54%) of very effective leaders have strategic plans in place compared with 39% of effective leaders and 26% of less effective leaders.
* Source and retain the right talent – CAEs identified talent shortages as the most significant barrier to increasing their contributions as leaders, and as business transformation continues to evolve, additional new skills are required. To be a very effective internal audit leader, they must exhibit two talent behaviours that stand out from the pack: a focus on mentorship and talent development, and an ability to source the right talent when needed. The study identified very effective leaders with policies of “no hierarchy in the room,” which facilitates staff development through open discussion and problem solving as a team. The study also showed that the majority of very effective internal audit leaders: 73% (Africa: 47%; South Africa: 100%) use co-sourcing as a part of their talent strategies.
* Empower the internal audit function – Our study identified that empowerment by stakeholders is a clear factor in the organisational positioning of very effective leaders. Empowerment is achieved through a combination of factors, including the position the CAE holds in the company, the tone set by stakeholders, and the business acumen of the leader. According to PwC’s report, 78% of very effective leaders hold senior positions in their organisation with an appropriate leadership title. Stakeholders also shared they are gravitating toward more senior leadership talent to fill the CAE role, and acknowledged their responsibility to empower the CAE by setting a culture that supports the importance of a strong control environment.
* Demonstrate executive presence and communicate continuously – Nine out of 10 very effective internal audit leaders excel in demonstrating executive presence, bringing bold perspectives and thinking broadly about the company, according to the report. Internal audit leaders must inform, educate and influence stakeholders as well as earn their trust, but they face a difficult communication challenge where internal audit functions have to communicate with a variety of internal and external stakeholders who each have different expectations of the function.
* Align with the business in meaningful ways – Partnering with the business in meaningful ways sets certain internal audit leaders apart. According to the study internal auditors should be able to stand out in three specific behaviours to become a very effective leader: develop relationships built on trust; build partnerships across the lines of defense to play greater roles in coordinating risk management across functions; and use these connections to raise their level of engagement across the organisation, taking on leadership roles in working with management, compliance, legal, and other assurance functions to develop an integrated assurance strategy. Several very effective leaders have even intentionally renamed internal audit (for example, as “audit services”) to brand the function as a collaborative one that partners with the business.
“It’s through close alignment with various stakeholders and owning internal audit’s role as a leadership function within the organisation that will allow internal audit to help their companies keep up with the changing business and risk landscape. But all of this can’t be said and done without a clear vision, supported by a strategic plan and enabled with top talent” concludes Herman Muller, PwC Internal Audit Innovation Leader.