IIA Magazine Apr 2016 issue

Soft skills seem to be lacking in some of the IA teams. There is the art of interviewing that must be executed properly. IA can set aside time to work with other parts of the business. Audit reports are not the only communication channel.

Time to Shift the Mindset. Pulse report urges IA to focus on culture and cybersecurity response. Board members should discuss with management to ensure that there is a common understanding. There is a risk of poor vendors and that firms could suffer from reputational damage. There needs to be strong third party risk practices.

Fraud Prevention. An effective control environment can deter or minimize the occurrence of fraudulent activities. Internal controls may not always be designed to prevent fraud. There must be a strong control environment for fraud prevention. Background checks and fraud related training can be useful indeed. Whistle-blowing hotlines can be set up. A certain level of anonymity must be ensured. No one person should complete control over a whole particular process, from start to end. Monitoring activities should take place on a frequent basis.

The Call no CAE wants to receive. A strong working relationship between IA and the CIO is essential to responding quickly to a cyber incident. This is important as cyber attacks can lead to reputational damage. One can verify the controls at the vendor and get them to fill up a data security risk assessment questionnaire. IA can be the trusted advisor that an organization needs.

Collaborative Risk Management. As organizations consolidate their risk processes, IA may not be able to continue to stand alone. Risk collaboration and organizing risks are more important nowadays. There is a need to be efficient about going about this. Risk needs to be organized neatly. ERM is one way to link everything together. Auditors should be open to other ideas on organizing and mitigating risk.

The Ticking Ethical Time Bomb. The financial loss from theft was secondary to the effect on company culture. Sometimes, the most obvious issue is no the more important one. Small frauds can lead to large ones. Reinforcing identity is also very smart sometimes, as it can help with ethical reinforcement. Increasing controls should not be done as a knee-jerk reaction sort of thing.

A Matter of Trust. Attention to detail and focused effort can help IA build the relationships required to be perceived as valued advisers. IA should be given time to innovate, gain an understanding of evolving challenges and talk to people in the business regularly about the issues they face. You help to build trust if you know what the regulators or other people are doing. Sometimes, top management might even tell CAE the problems that are upcoming. Relationship building and being part of the management team is crucial. However, there is still a need to be independent even if IA is like a trusted advisor. Try to leverage on technology.

‘IA can often be forgotten if it is not part of the core team, because it is less visible than those functions that meet and talk regularly.’

‘Auditors are there to make organizations better – it is a key part of the way they can add value. Not commenting when they see a better way to do something could show a certain lack of moral courage.’

Proactive Fraud Analysis. Integrating advanced forensic data analytics capabilities can help auditors mitigate fraud risks and demonstrate returns. IA can invest in such tools as it can help in the monitoring of risk. IA should ask ‘What are the high risk accounts?’; ‘When?’; ‘Where?’ etc. IA should focus on the low-hanging fruit first. The first project undertaken should be easy. Learn to go beyond the descriptive analytics. Learn to embrace both structured and unstructured data. Communication is the key. It would be good to automate the tests and involve the end-users. Also, learn to set a realistic timetable. Keep analytics simple and intuitive – don’t include too much information in one report so it isn’t easy to understand.

Getting More from Interviews. Instead of emphasizing formalities, IA should approach each interview like a conversation. You can gain insight into the way operations work and identify gaps etc. Plan your questions beforehand and be prepared. However, the less formal it is, the more information you can find out from the interview. Try to make it a conversation. Learning about the auditees’ life can help to build rapport and build the bond. Talk to others within the auditees’ same department. The interview’s purpose should be specific, attainable and outcome oriented. Preparing for the interview helps a lot. The location matters as well. Try to open in a way that makes the auditee at ease. Try to explain the purpose and the outcome of the interview. Learn to practise effective listening. One can ask thought provoking questions that will help to elicit information. Learn to practise active listening and show positive body language such as being attentive. You can prepare questions but there is no need to follow to a list strictly. It can be difficult to build rapport. Do not try to tell the interviewee that the interview must be done to complete the audit. Have lunch with auditees once in a while. People love to hear about themselves.

‘Auditors should be curious about the way processes work, the way the organization works, and perhaps most importantly, the people who make it work. Curiosity will lead to a better understanding of the organization, better ideas for improving the organization, and a better rapport with the individuals within the organization.’

On the Hunt for Payroll Fraud. Taking a close look at payroll risks can enable IA to help their organizations save money and identify wrongdoing. Payroll fraud is more common if there is irregular workforce patterns. Payroll is usually shrouded in secrecy. Overpayment is more common than underpayment. IA can also examine to seek actual cost savings/ productivity gains. IA can adopt a helicopter overview of payroll data and the payroll process. One can compare payroll costs with other organizations. Rosters should be designed to optimize the allocation of employees to operational needs. Management welcomes findings that reveal specific wrongdoing because they provide hard-to-dispute evidence. IA can look out for certain insights and then drill further. There are many common findings. The audit fieldwork needs to be well-researched and planned.

Guardians of Integrity. IA can provide insight into corporate identity and people-related risks. For instance, IA can evaluate the ethics and organizational integrity. IA must communicate with the board and management and be the corporate conscience. Testing the effectiveness of the ethics programs can be tough. It is important to understand how an organization defines success. It is important to uphold the code of ethics: integrity; objectivity; confidentiality; competence. IA should examine incident reports too. IA must be as wise as the board, as savvy as management, and as shrews as attorneys. Stakeholder surveys could be used to understand the management and employee ethics. IIA needs to exercise fair and ethical decision making.

Internal-Audit

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IIA Magazine Jun 2016 issue

A toxic culture is present when your work negatively affects your health – physically and emotionally. An example of such could be a change in management or management through fear and intimidation. The two options are to leave or to name the problem and discuss to make it better. Payroll should have continuous checks and balances. It is not good to report risks on an ad-hoc basis. Talent issues and development need to be addressed. There is a strong need to fight corruption. However, whistle-blowing hotlines might be underutilized, as employees fear retaliation after reporting. There are some companies which do not trust enterprise cloud deployments still.

The Fire Drill. Auditors can learn to deliver a focused message that results in management action. Effective planning of our work is the key. For instance, we can look at past audit findings. Next, one should compensate with competence, meaning backing up observation with data and experience. Sell with the passion of a champion. Findings should be sold to address a control weakness that is causing an unacceptable risk. One needs to communicate the big risks well. In the end, we need to deliver a focused message that can result in management action.

The Tech-Savvy Auditor. Effective use of audit technology can enable audit departments to provide valuable insights. Most IA staff are not familiar with IT or have weak IT backgrounds. This is not acceptable. Technology can lead to a more efficient audit and also might cut fraud losses. There is a need to improve the audit software. There should be a data analytics centre in-house. There is a need to review software usage.

Integrating Key Risks and Performance Indicators. IA can leverage its risk knowledge to improve operational performance and reduce risks exposures. IA can provide assurance on the achievement of objectives. IA can encourage the formalization of KPIs and KRIs. KRIs can serve as an early signal of increasing risk exposure. There needs to be a formal project charter. There needs to be a KPI framework with proper planning, reporting, monitoring etc. The key metrics need to be identified and a dashboard can help to present graphically the results. The KRI should be closely linked to the KPI.

Toxic Leaders, Toxic Culture. IA can identify unhealthy behaviors that may undermine the organization. Culture will affect an organization’s success. Therefore, identifying the toxic leader is important. Toxic leaders want power and control. These tend to be autocratic leaders. They could have a strong sense of entitlement and focus on themselves and not the organization. Exerting power through fear can undermine morale. They do not like to be challenged and seek to manipulate others. Closed-minded leaders think of ‘My way or the highway’. There is no need to confront the toxic leader. IA can refer the person to compliance or legal counsel. One can use behavioural psychology to analyse. For a more objective method, one can look at the reasons for turnover and examine turnover rates. One can also look at employee engagement survey results. One needs to use experience and facts as much as possible.

Analytics and the small audit department. No matter the size of an audit function, analytics can be implemented for big gains. How to go about using analytics? Some simple ones to consider are benchmarking, variance analysis, ROA, turnover etc. The analytics must have goals and performance measures. Selecting the right data source is the key and there is a need to verify the accuracy of the source. Brainstorming can help to identify key data. It is crucial to have a plan that will allow IA to continue to improve its analytics capability. It is important to attain small wins in analytics.

Business Risk. Keynote speakers for this year’s IIA International Conference identify emerging risks facing organizations. Cyber risks is at the top of the priority list for many. Ransomware is a big threat to hospitals nowadays. Other threats include politics, the economy and terrorism. Social media risks sometimes aren’t within an organization’s control. Auditors should use corporate culture to work in their favour. An organization must monitor the external environment closely. There should be a common understanding of what the risk appetite and risk cultures are. Audit needs to adjust fast and invest continually in education. IA now also needs to learn to be innovative.

An Anti-corruption Check-up. Capability maturity models can help organizations assess the effectiveness of the anti-corruption programs. This model was developed at Carnegie Mellon University. One can use the model to identify strengths and weaknesses. There are basically 4 levels of maturity. There are 7 components that form the basis of anti-corruption maturity model. There is a need to tally the scorecard too.

Craft Our Role. IA should create the role for themselves that is best for both the organization and their own personal development. IA needs to be ingenious, use creativity and resourcefulness when developing their role. Do not limit the scope to be too small. It is important to be familiar with the business in order to value add properly. The control environment needs to be evaluated properly. One can develop business acumen. It is crucial to ask the right questions. IA should network more with the other departments to build rapport and also to get a feel about the management style in the department. Learn to practise combined assurance. One can work with another dept for a joint review. This is the way to maximize external resources.

Fraud and related-party transactions. IA can identify red flags and reduce the risk and impact of related-party fraud. IA need to be able to recognize related-party fraud risks. Providing loans at below market rates is a red flag. Failing to disclose the related-party nature of the loan is a red flag. IA should try to identify related party transactions. Try to identify whether employees have link to companies that transact with the organization itself. It is also possible to compare cost variations among vendors to see how they differ from the average cost. The organization should not pay costs significantly above market prices.

Communicating Results. Sharing audit observations is one of the most important tasks auditors perform. Communicating properly can help enhance rapport. Make sure the observations are correct and are not challenged by management. Plan the timing of issue dissemination, which is as soon as possible. Try not to surprise management at the end of the audit. Write clearly. Exercise diplomacy.

‘One of the quickest ways to lose management’s respect is to make it clear that IA does not understand what is has been auditing. The answer is to take the time to learn the business, processes, and risk associated with the audited area.’

Care and Feeding of The Company’s Culture. How can IA help to ensure a healthy organizational culture? Auditing culture is certainly work examining. Healthy organizations should have guidance on norms and expectations and a healthy tone at the top. Transparency is important. Management should think long term and have a sound strategy. Ask yourself whether the root cause is behavioural or cultural in nature. The problem with culture is that it is not clear cut and might be hard to evaluate. Those who are toxic in nature might be held accountable and be responsible.

Internal-Audit