Annual Conference and Global Internal Audit Leadership Summit 2017 (27 Oct)

Managing Cyber Risks. (KPMG) Cybersecurity is one of the top 5 risks as rated by CAEs. Cyberattacks are one of the top 3 man-made risks which can be addressed. In a survey, Asian CEOs aren’t as well prepared as their US counterparts when dealing with cyber risks and cybersecurity. There is a need for cybersecurity risk assessment. Sometimes, insiders can provoke a cyberattack too. Due to the widening of the digital footprint, it can lead to greater cybersecurity threats. External threats like new technology, technology change, regulatory compliance and changing market forces will continue to affect the cyber landscape. The new cybersecurity bill by CSA is slated to be released in Feb 2018. The Bill will affect CIIs from 7 different industries. The cyber risk gap needs to be plugged through the use of specialist reviews and audits. Some of the losses that an organization could face are theft of client information, IP, corporate date, DOS attacks etc. Nowadays, it is quite common for the attacker to attack your service provider (since there are less strict internal controls) and get information from them about your company. Some of the staff from your vendor might not be well screened also. Usually, there is no point trying to figure out who the cyber-attacker is as it is hard to prosecute if it’s not in Singapore jurisdiction. Some of the tactics that cyber-attackers use is ransomware, key loggers, phishing, insider data theft and man in the middle attacks. Do not give away passwords at any cost. Training/education is important, more so that IT tools at times. As auditors, we can audit the data classification in an organization. Cybersecurity is a growing factor and needs to be included as a risk indicator. There needs to be a detailed response plan after being attacked. There is also a need to link the cybersecurity threats to your business. One can read the ISO27000 series, MAS TRM Guidelines, NIST, COBIT and others.

SAP Case Study. (SAP) SAP is a German company. Maintenance costs is a big part of the implementation costs of having such an ERP software. For SAP itself, some of the risks facing the organization are acquisition risks, cloud computing etc. Within the audit team, they use the SAP Audit Management Software, which is automated from the end to end auditing process. One will be able to see clear audit plan overviews and also real time status updates of the plan. There are also resource management tools in place which will help improve the global resource transparency. In addition, there are audit executive dashboards in use. All these lead to better cost savings, user satisfaction and faster audit cycles for the organization. As a result, during quality assessments, the IA function scores better. Analytics helps in audit sampling for auditors.

Internet of Things. (Microsoft) The Internet has shifted from the Internet of content to service to people and now to ‘Things’. Internet is very commonly used nowadays as it is more efficient and has led to increased productivity. It has brought the whole world together through Skype. There is data in chips in our everyday devices and such data can be harnessed for decision making. Some of the benefits of IoT are that it leads to 1) safety, comfort and efficiency; 2) faster decision making; 3) revenue generation. Some of the risks of IoT are 1) privacy, security and legal (types of data collected can be collected and should be collected etc). The major challenges that will be faced are to obtain the business and IT buy-in and also the fact that data magnitude can be huge and complex and hard to interpret. It is important for IA to stay ahead of the changes and understand the risks emanating from IoT. We need to be trusted advisers to the business. CAEs need to determine the skillsets required, like from data scientists, private specialists etc. IA needs to recruit the right people. We need to change our approach to how to audit etc. The process flow is like this: device connection -> data sensing -> communication (access rights) -> data analytics (queries etc) -> data value -> human value

Data Analytics at MAS. (MAS) Data is the new AIR that we breathe. Insight is the new storage of value also. There are a few Vs we need to be aware of: Veracity, Value etc. We have approached the other departments, like banking, insurance and capital markets, to understand what are the pain points of these departments. We have moved from rule based (AML + STR) to machine learning. There is a strong need to enforce data quality and to move from just big data to smart data. Labels must be given for supervised machine learning in order for it to work more efficiently. However, there is also such a thing as unsupervised machine learning etc. For data, there is a need to achieve generalisability. An important question to ask is whether your model can work on future data? Or just past data? Ensure that your data can be interpreted and cleaned before it can be used. The process is as follows: 1) know the question; 2) understand the data; 3) find the right algorithm; 4) be aware of the limitations; 5) be sceptical; 6) automate; 7) experiment. It is important to share insights across the different departments. Machine learning is a programme which automatically improve its performance through learning and experience. Culture is hard to change and in fact, culture is more important than the application of an algorithm.

Cybersecurity Lessons Learned. (SWIFT Asia Pacific) SWIFT is a co-operative that is based out of Belgium. Nowadays, cyberattacks are tailored for a particular institution and that can be really scary. Hackers are now able to perform multi-stage attacks. There is a hacker collaboration space in the dark web. Cross-border banking usually requires the use of SWIFT. Hackers have different motivations for committing crimes and it is difficult to predict. Cyber must be managed from the top-down. One needs to understand that spending money doesn’t make you more secure and there is a need to evaluate cost-benefit analysis. At times, it could be the client servers which have issues. There is a need to dictate how the client runs their programmes in order to secure their environment. There needs to be a cyber-response plan in place to address attacks and to recover. In future, SWIFT would make it compulsory for banks to report on their compliance to SWIFT’s assurance framework. This will certainly help to improve transparency.

Ethics in a Digital World. (Avande) Avanade is a cloud service provider and is a partnership between Accenture and Microsoft. In this digital age, there is a debate between Personalization vs Privacy. Facebook tried to have two bots chats with one another, but they turned racist and eventually had to be put down. Although AI development is swift, it might be necessary to put the guardrails on AI and curb its growth in view of ethical considerations. What is morally acceptable in today’s society? What is lawful? Digital is becoming a way of life and ethical behaviour is vital in this day and age. Is there a need for a framework to manage ethical dilemmas? What are the possibilities of digital tech? Core ethical values are embodied by leadership and there needs to be a good tone from the top.

IA in the Age of Transformation. (Asia Pacific Black Sun, Sofitel Singapore, UOB, NTUC, EDB) What are the elephants in the room? This refers to important issues that are not being addressed by IA. IA needs to keep themselves relevant. 43% of jobs in Singapore can eventually become automated (mechanized, robotized, digitalized) etc. However, there are still many opportunities in the audit space to add value. IA needs to be high tech, high touch (build strong relationships with management), and high trust. IA’s job is to highlight exceptions to management and in order to do so, they need to be loud and courageous in the boardroom and not shirk from difficult conversations. IA needs to avoid getting on the newspaper. IA needs to familiarize themselves in the area of sustainability reporting and professional scepticism. IA needs to constantly update themselves through attending training etc. Industrial domain knowledge is also important and this is usually learnt on-the-job. People retention is important and there could be a risk of knowledge loss without people. There is a need for IA to provide inputs on controls for IT projects right at the start. If there are no audit findings, it is possible for IA to issue a clean audit report. IA should gradually take on a more advisory role for the business.

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IIA Magazine Aug 2016 issue

Cybersecurity is an area where it is lacking among major companies. Companies need to step up to beef this area up. Productivity is a main concern for employees. Ethical pressure is greater during organizational change. The COSO framework is expected to be updated in 2017. It will be updated to include the latest risk management thinking and principles. IoT is going to have a big impact moving forward and there needs to be a comprehensive approach to go about doing it.

Analytics-Driven Audits. Before tackling data analytics, internal auditors need to understand the types of data, how it is stored, and how to apply it. Automated audits are the new trend now. It can be applied to many aspects of the audit too. Understand what are qualitative and quantitative data and their measurements. Understand how data is stored and the various formats. Any outliers should be thoroughly investigated. There are 4 types: descriptive, diagnostic, predictive and prescriptive. Learn to gain insight into the business.

The Mind of a Credit Card Hacker. Smart hackers usually lay low. They can steal credit card details and then sell them. Hackers use a vector to steal data, such as phishing. They also need to collect the data quickly and then cover their tracks. The hacker will verify that the cards are valid and start off with transactions of small amounts. If they go undetected, they may get bolder. IA can encourage the company to encrypt the credit card information and monitor access to networks. Access control needs to be checked too. IA is the third line of defence.

Make the Most of Assurance. Assurance maps can enable internal audit to team with other assurance providers to visually convey how risk is managed. IA can work with other assurance providers and depict the results in an assurance map. The map allows one to spot gaps in risk coverage or any overlaps. Assurance maps can enhance and give value to AC too. The map should not be too complex.

Tough Consequences. Adequate contract administration can save organizations a tremendous amount of grief and money. It is important to monitor vendor contracts properly. The contract administrator should be the liaison party and highlight any non-compliance. There needs to be adequate financial controls over the cash receipts and revenue cycles at the vendor’s end.

A World of Connections. The IoT requires IA to confront risks that are not so neatly contained. The impact of this is growing. IoT is about interacting with the environment for business benefit. Emerging risks from IoT must be monitored closely. There are many benefits from using IoT devices too. Management needs to be aware of the risks too. There needs to be a deployment strategy too. A policy needs to be drawn up.

Cyber Resilience. IA should work collaboratively and proactively to address breaches and build resistance to future attacks. Banks need to protect the SWIFT codes. A cyber breach might definitely occur in future. There is increasing use of software to pick up behavioural anomalies. There needs to be both a protective and detective strategy. A response plan is important. Customer data should be given top priority in a cyberattack response. IA needs to understand IT from a technical and controls perspective.

Auditing the Cloud. IA should delve into the complexities and unique risks of moving to a cloud platform. Many companies are making use of the cloud as compared to traditional data center infrastructure. Less manpower is needed to maintain a cloud as well. Servers can be added on demand too. IA needs to verify the security, reliability and availability of the data. No two clouds are the same but the common ones are infrastructure as a service, software as a service, platform as a service etc. It is good to obtain the SSAE 16 report on the vendor as evidence of its controls. It is difficult to track cloud deployment. Cloud assets can keep varying as well and it is difficult to monitor. The data is now stored on the same physical equipment as other organizations and there is a risk of leakage. A security program is still a must. Penetration testing needs to be done periodically to prevent hackers. Relying on the SSAE 16 report is useful, but not sufficient.

Trust but Verify. Control self-assessments can increase audit efficiency and spread control awareness throughout the organization. This is for process owners to self-evaluate the effectiveness of controls. This could be done via workshops/ questionaires etc. Sometimes, it is not possible to deploy a team to perform audits in every area. When CSAs are used, IA needs to explain the rationale to the management. The process owners must be identified clearly. IA needs to independently verify some of their responses. For example, only key controls or only those rated as ineffective may be selected for further testing. Continuous support is a must and training must be provided. The right level of project sponsorship is important too. It can be implemented gradually. CSA enables IA to allocate resources to focus on areas with significant control weaknesses.

Audit Never Sleeps. IA must keep innovating and improving and focus on the organizations that we love. We need to constantly do the right thing and hone our communication skills. Effective communication is the key and getting to know the auditees well is the key. Listening well is crucial too. Nowadays, IA should adopt an integrated mindset. We need to broaden our IT knowledge to meet stakeholder expectations. Applying soft skills are important too. Our work must be guarded by ethics and transparency. We need our approach our work with a strategic focus too. There is also a need to focus on our future.

Optimizing IA. IA are being continually challenged to improve their effectiveness to better meet growing expectations and workloads. IA staffing levels remain relatively constant. IA must be aware of strategy and ensure that procedures align with that strategy. IA should understand what the external risks are. As for operational efficiency, IA should offer cost effective and sustainable solutions. Quality assurance is important to ensure quality and compliance with regulations. IA should identify cost savings, understand business goals, increase collaboration, optimize technologies and strive for continuous monitoring.

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IIA Magazine Oct 2016 issue

There needs to be reporting beyond just financial type. There is a need for a risk-based approach and to look at the major objectives of the organization. It is important to have a policy for conflict of interests. Do not simply give customers what we think we can deliver, but ask them what they need. Company culture is crucial in the employee rating of their CEO. Those CEOs who are the founders, have lower pay, have good profitability usually have better ratings. Some FIs are concerned by the staffing of their AML team and the adjustment needed for new regulations. The US is the most cyber aware country. However, there are some countries which are lacking in cybersecurity preparedness and that is a concern. Brexit might have the effect of changing the impact of globalization over time.

The Art of Recommending. Internal Auditors walk a fine line when presenting recommendations to management. IA needs to show how the recommendations fix gaps and mitigate risk. There needs to be a cost vs benefit analysis too. Recommendation can either be to address a gap or as a suggestion for improvement. There needs to be both internal and external sources of information. One needs to spend time documentation down potential recommendations. It should address the root cause. Avoid addressing a person. Indicate a repeat finding. Explain how the recommendation will mitigate the risk. For areas for improvement, list them separately from the gaps. Some external info could be ‘IIA research materials, professional literature, networking, procedures from other organizations.’

‘It is a good practice to jot down recommendation ideas as soon as they come to mind, even though they may not find a place in the final report. Even if internal audit testing does not result does not result in a finding, the auditor may still recommend improvements to the current process.’

‘It is internal audit’s prerogative to provide recommendations, regardless of whether management agrees with them. Persuasive and open-minded discussions with process owners are important to achieving agreeable and implementable recommendations.’

Big Data and IA. Today’s data analytics expand auditors’ ability to tap into all types of info generated by the organization. Auditors can mine data and analyse them. IA can use statistics or visualization tools to help them too. One can test all the transactions now. There is also a great variety of data available. Velocity of data now makes it possible for IA to perform continuous auditing. Learn to understand the data and acquire the analytics tools. It is also important to develop a road map too. Big data can be harnessed in a meaningful way.

Is IA in your Audit Universe? IA should seek to enhance and protect organizational value. IA should be audited via a QAR (quality assurance review). One can evaluate the IA’s conformance to the standards, code of ethics, efficiency and effectiveness of the IA activity. It must be conducted by someone who is objective in nature. An external assessment needs to be conducted once every 5 years.

Blurred Lines. Internal auditors need to have the skills and perspective to deal with frauds that don’t match the standard villain story. One needs to look for the motivations and benefits. IA needs a clear perspective on how to approach fraud. One needs to analyse why did the fraudster want to commit the crime.

Taking the Lead on Nonfinancial Reporting. Internal audit is well-positioned to examine how its organization reports on nonfinancial issues. European companies now need to disclose in the annual report how they are discharging social, environmental and ethical issues. Non-financial info is important to gauge the society’s impact. Management needs to be concerned over non-financial reporting. Sustainability reports should disclose how the company performs in some specific areas. You need good non-financial reporting systems. In the US, sustainability reporting is not mandated and not practiced by many companies. Non-financial data are often over-looked by IA. IA needs to have the right process competencies for effective non-financial reporting. There needs to decisions on materiality over nonfinancial reporting. Strong communication skills are the key. It is possible to create a multidisciplinary team that can provide combined assurance. IA needs to engage the first line of defense first.

Audit processes take flight. The updated COSO Internal Control-Integrated Framework is at the heart of Boeing’s internal audit work. The new COSO framework has 17 guiding principles across the 5 control components. The principles-based approach is being used. It is important to give weight to all of the COSO components. Keep the focus on inherent risks. Every audit requires a detailed process flowchart.

Privacy in the workplace. Organizations must find ways to accommodate employees’ personal technology use while also meeting regulatory and other requirements. Digital technology has changed a lot of things. Privacy issues are becoming more important. Employees tend to violate privacy risks more. IA should be able to understand where the risks lie. A lot of data is being collected and analysed. Some form of employee monitoring is necessary, but not excessively. Who is responsible for lost data on a cloud? In the US and Europe, there are a lot of acts that company must comply in relation to global privacy laws and regulations. In Europe or Japan, the privacy laws are more absolute. There needs to be a strong governance/ privacy framework in place. A risk assessment should be performed on a frequent basis to evaluate the impact of changes to regulation. If an organization expands, IA should make sure controls are in place to manage privacy. Training and awareness needs to be made at every level. Trust must be built between employers and employees.

A Unified Approach to Compliance. Failure to comply with regulation could lead to fines and reputational damage. There needs to be a co-ordination between IA and compliance function. IA needs to understand the business goals and how the compliance team plans to assist the business in achieving them. One can examine from both a macro and a micro level. The IA charter should clearly document the role of the IA team in compliance. We should focus on the foundations of the assessment. IA should sound out levels of residual risks that are greater than risk appetite. How does the organization ensure completeness in the assessment? IA can rely on the compliance team to update them on the regulations. Key compliance decisions must be documented. IA and compliance teams should meet to discuss once in a while. IA can share audit reports with the compliance teams. IA can leverage and use the compliance risk assessment. However, IA should check whether it is complete. To achieve the IA mission, IA needs to include compliance too.

The Power of Rhetoric. Understanding the powers of persuasion and applying key rhetorical skills can improve the work of any IA. IA needs to possess rhetoric to persuade the auditee to accept the recommendations. The key elements are speech, audience, text. The author is usually the engagement lead. All members and groups of audience needs to be considered. The audit report is the written text. The team selected must be capable and know how to perform the engagement. Logos appears to one’s logic and the supporting documents. Pathos focuses on the audience’s irrational modes of response and is an appeal to emotions. Design of slides must be beautiful and also simple to read. Word selection is important and IA should give a balanced view.

The Red Flags of Fraud. Internal auditors’ knowledge of the business makes them ideal candidates to detect unethical behaviour. Fraud affects the bottom line and active measures to detect it are better. Red flags are signs that it could occur. IA can do a red flag analysis. There are different types of fraud, financial statement fraud, employee fraud, tech fraud etc. For FS fraud, personal enrichment is common. IA can scan the GL to look out for unusual trends etc. Analytical procedures can be used too. Employee theft of cash is possible. Other types of fraud are employee expense reimbursement fraud, payroll fraud and kickback scheme. Most frauds usually happen only after a year of service, because the employee needs to learn of the internal controls first. The chance of fraud is greater if the person is in financial difficulty. Data analytics can help to review red flags. Anti-fraud training must be conducted. Early detection is the key as if the fraud persists, the loss will be even greater.

‘Ethos is established when the audience determines that the author is qualified, trustworthy, and believable.’

Anticipating Information Security Regulation. As threats and data breaches become more common, so will regulatory oversight. Data breaches are more common and the risk to consumers are growing. One needs to establish a security risk assessment process. IA can adopt ISO 270001 to enhance their information security program. An employee security awareness program is very important too. IA needs to validate and assess the control environment too.

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