IIA Magazine Feb 2017 issue

IIA Feb 2017 Issue

Internal Auditors need to provide maximum return on investment and audit the right things. They need to understand the company’s strategic mission, objectives and KPIs. More auditors need to base their work on the International Standards for the Professional Practice of Internal Auditing.

The 5 emerging threats are (i) global economic uncertainty; (ii) increased regulatory burden; (iii) significant industry changes; (iv) business model disruption; (v) cybersecurity threats. Global economic uncertainty seems to a bigger risk in 2017 as compared to previous years. In the compliance space, with the new US administration, enforcement areas could see some change. Trump could change the legislative, regulatory and executive actions under Obama’s reign.

Although most companies feel that they could detect a sophisticated cyberattack, many of them do not have an adequate communication strategy in the event of a significant attack. Also, some of the BCP might be lacking. The continuous monitoring of cyberattacks is also a challenge.

Data Mining. By leveraging data, internal auditors can address issues beyond the reach of traditional analysis techniques. It involves making use of data which had previously no formulated relationships, patterns. Artificial intelligence, machine learning, statistics and database systems all come into play. Some of the techniques auditors can use are predictive modeling (IF), data segmentation (data clustering), neural networks (artificial intelligence), link analysis (links between records), deviation detection (red flags). The use of email mining can identify red flags in fraud etc. Social network analysis is also possible. IA should continue to look for ways to innovate their audit testing.

Intelligent Assessments. Use cognitive technology to help identify high-risk areas. These are intelligent computer systems that can aid in the performance of risk assessments. For instance, this tool can extract and analyze text from audit reports and analyze trends and high-risk areas. Natural language processing (NLP) has the power to tap into every sentence of every report to churn out more information. The machine will convert text to a certain structure and add meaning to the text and teach the computer to understand audit concepts. Words like ‘fraud’, ‘finding’, ‘auditee’ can be flagged out.

Turning Up the Heat on Fraud. A fraud risk assessment can help auditors take the organization’s ethical temperature. There are many ways to do it, example, through surveys, focus groups, workshops etc. The focus is mainly on fraud risk. It works best in small brainstorming sessions with operational management. Using the ACFE’s Fraud Risk Assessment Tool can be useful as it provides a structured approach. Risk assessment is about identifying where fraud might occur and the potential perpetrators. IA can do surveys to measure the ethical climate and voting can be anonymous. The results of the survey can be discussed with management. If there are high risk areas with fraud risks, IA can pay more attention to them.

The Accidental Discovery. Small or remote locations can be more susceptible to embezzlement, especially when they are not audited regularly. Confront someone after the facts have been reviewed. Look at the big picture. Controls that aren’t operating effectively are as good as them not being there.

Auditing what matters. Add value by selecting audits that contribute to achievement of strategic objectives. Auditors now should start looking at this area. Look at where the company spends the most money, what their main programmes are etc. Find out who is responsible for the strategy and make them IA’s stakeholders. Traditional audit activities can move towards strategy too. IA should use the COSO ERM framework in its entirety. The aim is for IA to a strategic partner to management. Don’t fear failure and find out more from the auditee by talking to them. The trick is to engage with processor owners easy and evaluate control design. IA should do the following: (i) Identify and define the risks; (ii) rate the risks; (iii) address risks in detail. Getting management buy-in is also important. The CAE must convince the AC to highlight the need for a strategic approach. Most IA wants to be a trusted advisor.

Core Principles and the QAIP. The new IPPF in 2015 can be incorporated into the QAIP to show that the IA is aligned with the mandatory IPPF elements. Learn to develop a concept and approach that is easy to understand. Core principles are a mandatory element of the IPPF. IA need to have general conformance with the Code of Ethics and Standards. The 5 steps are (i) establish a maturity framework (ineffective, partially effective, effective, sustainable, world class); (ii) map core principles with the standards and code of ethics; (iii) Define characteristics of maturity in 3 aspects of standards and QAIP characteristics, infrastructure and process characteristics, core principles and specific characteristics; (iv) perform internal and external assessment consistent with requirements of QAIP; (v) Evaluate and report maturity levels for core principles.

Champion of Trust. By modelling high standards of ethical behaviour, IA can help shore up faith in the organizations they serve. How can IA be a trusted advisor that is well respected? One way is via ethical commitment. IA needs to model ethical conduct in everything they do. IA must have the courage to sound off before things get in trouble. Ethical commitment is the key to a well-functioning IA. Ethics should come naturally to all. We also need to build ethical resilience (integrity, courage, honesty, accountability, trustworthiness).

Infusing IT Auditing into Engagements via a three-phase approach. The tech sector is growing at a rapid rate. Internal auditors also need to develop IT-related capabilities. IA needs to think about the future of integrated auditing. For a start, IA can incorporate IT perspectives into current audit engagements. This can involve documenting down what are the IT automated controls. One can also read IT policies or those on change management. One should also identify resources and pinpoint where they are stored (example: servers). Map core IT resources and data to key business objectives. Respond to IT risks and identify audit objectives that can add value. An integrated audit can help in this. In the middle term, IA can build an IT audit team, understand the IT framework like COBIT, perform IT audits and also foster relationships with IT and management. In the long term, IA can leverage on data analytics and obtain professional certifications (like IIA and CISA).

Breaking Down The Standards. With the right strategy, practitioners can divide conformance into bite-size, easily digested portions. The standards consist of attribute standards (series 1000 to 1322) and performance standards (series 2000 to 2600). Some IA may neglect the attribute standards and focus on the performance standards instead. However, both are very important. IA should perform an assessment of how well they are conforming to the Standards. An external assessment must be conducted once every 5 years. The audit work program needs to be reviewed and approved by the CAE before engagement commencement. Ultimately, conforming and understanding the principles behind the Standards are important.

Auditing Organizational Governance. IA has an integral role to play in improving the organization’s strategic performance. This area is becoming increasingly important in recent years. Governance reviews can help prevent governance failures. Less than 1 in 6 IAs conduct reviews for their organization’s strategy. Sometimes, it might be difficult to conduct a separate governance review. Rather, it might be easier to incorporate it as part of routine audits. One can focus on both the governance structures as well as the organizational culture. Some of the soft controls can include management competence/style; mutual trust and openness; strong leadership; high performance and quality expectations; shared values and understanding; high ethical standards. However, for some of these measures, there are no hard data to analyse. Hence, it is important for IA to read the signs. IA can also provide a more advisory role, which is educating board about developments and trends in the industry and governance best practices. In terms of strategic reviews, IA has much to work on. There is a tendency to focus on weaknesses in financial reporting etc.

Good Governance is All About Quality. The 5 quality rules are (i) customer focus; (ii) management leadership; (iii) Teamwork; (iv) Measurement; (v) Total commitment to continuous improvement.

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Panel Discussion: What are the Boundaries?

This panel discussion was held on 14 April 2016 and featured the following speakers: Loh Chin Ee, Suzanne Choo and Zhou Decheng.

Some of the important questions to ask are the following: Should literature even be taught? Which approach should be adopted? What kind of materials should be covered? The discussion is focused on literature that is taught in the secondary school curriculum. From surveys, over 25% of Singapore’s have heard of local authors like Catherine Lim, Russell Lee, Low Kay Hwa etc. There is a category of works known as canonical works. Should they be introduced? They are essentially a series of books chosen by a select group of people that reflects popular local culture. Should students be made to study such books? Should you choose a popular work or less popular works that reflect societal values? There are 3 possible approaches that be adopted. The first is the heritage view. This is a view that works chosen should reflect the national identity and should have cultural value. This is in line with social studies. However, should controversial books like those on race/religion be chosen as well? The next approach is the multi-perspective one. This is where important issues are raised. These include issues like ‘home/belonging’, ‘cost of living’, ‘family’ etc. Books chosen based on this approach should contain issues where students can relate to. The last approach is the world-lit view where both local and world literature should be studied. By world literature, it does not only include UK and US publications. This approach allows the student to develop a global perspective on issues. Ultimately, there are many questions that still need to be answered. Such as, who selects the books? Should some works be made compulsory or do teachers have some freedom to decide? Should more shorter works be selected, or just one or two long works?

The next area of discussion was on cosmopolitanizing literature education. Arts for arts sake? Oscar Wilde once commented that ‘All art is quite useless.’ In secondary schools, there are many questions in exams that are focused on style. This is closely related to aestheticism. However, this is a dangerous trend and could be the trend of why the number of students studying literature is declining. Formalism is the study of the text alone, without taking account author’s background or the students’ emotion. There is basically nothing beyond the reading of the text. This is the idolatry of the text. Is there no social value in the works? Does the text really no meaning beyond the words used? Is literature really useless? In Singapore, there is a heavy emphasis on American and British works. Instead of formalism, we could introduce cosmopolitan ethical criticism. This encourages students to think about ethical issues, morals and philosophy. This makes them better able to empathize with others and makes them better citizens of the world. Greek ethics is useful and can certainly improve students’ lives. Text could be chosen based on their underlying ethical issues and concepts. Literature could be a good way to introduce simple ethical concepts to students. Some of the text covered in the secondary school syllabus include ‘George Bernard Shaw – Pygamalion’; ‘Arthur Miller – Death of a Salesman’; ‘Mildred Taylor – The Road to Memphis’; ‘Where Angels Fail to Tread – EM Forster’. The books are heavily Western centric. Is there room for more controversial text?

The last discussion was on Chinese literature in Singapore and why we need a paradigm shift in thinking to improve it. The current syllabus covers about 50% classical works and 50% modern works. There is much emphasis on Chinese poetry. The syllabus is also classified according to genre. Both translated works and analysis are tested. Li Bai’s war poems are included as well. In addition to poetry, there is also fiction works like short stories and flash fiction that are covered. Martial arts novels are included too. Even sensitive areas like Gender issues could be themes covered in books.

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