Fraud Audit
Audit International now bring you the second part in this three part series – Having introduced the initial concepts of what is involved with auditing organizational culture in the first article of this three-part series, we now can begin the process of drilling down and more closely examining the first five of the top ten tips to conduct a culture audit.
Identify your cultural levers:
The first step to successfully conducting a cultural audit is to identify the daily management activities that occur throughout the organization – your cultural levers. These levers look to align the culture we desire with the day-to-day activities of everyone in the organization. If we understand what leaders focus on to deliver this alignment, then we have a starting point for identifying what to test to provide our opinion on the effectiveness of culture.
Cultural levers often vary from organization to organization, so you need to work with management to identify what is influencing behavior within your specific organization. However, there are areas that I would expect to see. Published value statements are significant and an indication of what should be happening. Leadership is also significant, not just at the top but cascading throughout the organization at all levels. In this context, the organization’s approach to people management is vital with the impact this has on encouraging the behaviors that are needed for success. However, culture goes much deeper and is present in the management of other resources, including areas such as customer engagement, complaints handling, supplier management, corporate responsibility, risk management structures and profile, and internal and external communication.
This may appear daunting, but a well-organized approach to assessing each lever can quickly identify areas that are not truly aligned with the espoused values; a clear indicator that desired culture is not operating as expected.
The next four tips examine these cultural levers more closely to illustrate what they mean and to help inform you about the questions you might want to consider testing in order to arrive at an opinion on the organization’s culture.
Reputation:
Employees watch what leaders and key individuals in organizations do and how they operate. They see the dissonance between what the organization is saying, both in its external and internal communication, and their lived experience of working there. Assessing whether there is alignment is a key aspect of any audit of culture. This is even more important given the increased focus over recent times on aspects of corporate and social responsibility and the push for Environmental, Social, and Governance (ESG) activity from investors. Acquisitions of ‘greenwashing’ in your communications can be hugely damaging. This means that it is important to pay attention to external reputation and its alignment with internal messaging and should be considered across all social media.
Leadership:
The third tip is all about the examination of leadership’s role in owning and managing the culture in the organization. In internal audit, we need to examine whether this is occurring both at design and operational effectiveness levels. We are there to check that the activities of leaders are aligned with the espoused values and are supporting the delivery of the business strategy. In our audit work we should be looking for a consistency of message and actual managerial behavior. Leaders play a pivotal role in managing the business such that there is consistency across activities and that they work toward delivering the required culture for success. To do this practically, we need to build audit programs that look for evidence of areas such as misalignment in leadership actions and customer-centric examples that manifest in the practical activities of front-line colleagues. Leadership should be able to clearly demonstrate actions that they have conducted that help move the organization closer to accurately living the culture and evidence-measurement activity that supports this.
In this context, during an audit, I would expect leaders to be able to articulate how they ensure the culture is embedded through their team’s day-to-day activities, including examples of how they role model the culture in their own activities and interactions. Interviews will form a significant part of assessing these. However, data analytics can also be used to examine areas such as communications from leaders over a period of time looking for references to culture.
Simply put, what you are looking to establish here is whether the fine words on a page have a living connection with reality and link through to a real impact on the delivery of the organization’s strategy.
People management:
This leads us to the next cultural lever – people management. The key here, as with all aspects of cultural audit, is alignment. Across the entire employee lifecycle the behaviors we need to exhibit for the business to be a success need to be front and center. This starts with the employment brand, which should signal to potential recruits what the organization’s values are and includes the testing of new recruits against this. Objectives need to be set not only about what is needed to be delivered in terms of financial results, for example, but also how these results will be achieved.
Performance management needs to be expertly conducted to explore the colleague’s contribution to delivering organizational success in the way we want it delivered. This should be a continual process and include ongoing dialogue, not just an annual form-filling event. Promotion decisions should clearly consider this aspect and signal to all colleagues how behaving in the right way counts for personal success.
In developing your audit program, you need to consider all aspects of the employee lifecycle: attraction, reward, management, development, and exiting colleagues. In reviewing all these aspects, you need to be cognizant as to where the controls are operated. In most organizations, while the Human Resources function is likely to have a key role in the design of many of the practices mentioned, the management of the risk and operation of the controls largely sits within the business units of the organization. That is the place you need to be testing reality, not just within the HR function.
Identify key processes and assess alignment:
Next, we move on to two heavily connected cultural levers: process and change. When reviewing your organization, a key step is to identify the processes that are critical to the management of the organization’s culture. From this, you can review whether their operation is consistent with the outlined culture. In this case, we mean the culture promoted not only to your employees but outside your organization through your brand and external image to customers and other important stakeholders.
Employees, in their scanning of the organizational environment, will spot processes that do not sit well with declared ideal behaviors and values, where potentially the organization is looking to put short-term gain before longer-term goals. If these exist, it sends a huge signal to customers and colleagues that leadership does not really mean what they say. Included in these key processes are likely to be many of the internal processes around people and supplier management, but, most significantly, processes around how you deal with customers and how you respond to their feedback and complaints.
Alongside this, consideration needs to be given to how the organization’s change programs identify how changes they are looking to enact to systems and processes promote the desired culture. Change programs are a key touch point where the organization can ensure that the culture is being reflected in operating practices. However, they can also be a point of risk. Delivering efficiencies, while at the same time undermining the desired culture, can create problems that are hugely difficult to unpack.
Next up, in the third and final installment of this article series, Audit International finish identifying and discussing the remaining top ten tips to audit culture and conclude the journey that set out to help you deliver cultural insights within your organization. We hope you’ll stick with us.
Audit International are specialists in the recruitment of Auditors and various Corporate Governance Professionals including Internal Audit, Cyber Security, Compliance, IT Audit, Data Analytics etc across Europe and the US.
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In 2023, organizations may face new and expanded cybersecurity and compliance mandates, which could vary from location to location and from one industry to the next. As a result, your organization may be looking to obtain a certification or will need to pass an audit for a specific set of standards or requirements.
While recognition for demonstration compliance or receiving certification is a great reason to celebrate, the process leading up to that is often time-consuming and sometimes dreaded, especially if you must undergo an audit first.
But audits don’t have to be as frustrating as they once were. With the right resources and tools, you can pass your next audit with ease. Here are five tips from Audit International to help:
Know your current program state.
Don’t wait until the audit is underway to find out where you might have gaps or weaknesses. Go ahead and assess your current compliance state so you know what you need to address before your real assessment gets underway. Consider using a cybersecurity compliance platform that automates these assessments for you and look for a platform that gives you real-time compliance scoring, so you’re never caught off-guard if something isn’t functioning as you intended or you’ve overlooked an important control or other security measures.
Document and evidence.
You can do everything correctly and score 100 on your current assessment, but if you don’t have a document repository that puts everything you need right at your fingertips in one place, or if you can’t supply all the necessary proof and evidence an auditor may want, you likely won’t get credit for what you’re doing right. Put away those binders of dusty old printouts you haven’t looked at since your last audit. Instead, use a cybersecurity management platform to track and retain all of your evidence and documentation all in one place for easy, shareable access with your auditors.
Put teamwork to work for you.
Instead of chasing down who’s responsible for which compliance requirement and trying to understand what they’re doing and how well they’re doing it, use a compliance management platform to help you automate task assignments, track progress, send alerts when those tasks are complete, and assign new tasks as they pop up. A platform like Apptega can even externally alert your auditor when your team has completed an evidence request or other necessary task.
Communicate across your organization.
One of the challenges in building a compliance culture is often that program managers speak industry lingo and not the same language that people in different roles within the organization can understand and relate to their day-to-day responsibilities. Instead of scrolling through hundreds, maybe even thousands of rows of data to find what you need for your next compliance conversation, consider using a compliance management platform that has a pre-built library of reports you can quickly draw on for your next engagement, whether that’s your C-suite, an auditor, or your tech team.
Don’t go at it alone.
While you can meet all the requirements on an audit prep checklist, the reality is when you work on a program, it’s easy to overlook issues an outside eye might catch. Before your next audit, go beyond a self-assessment and consider working with an outside compliance consultant to take a closer look at your existing program and help you seek out and address issues before your auditor finds them.
Audit International are specialists in the recruitment of Auditors and various Corporate Governance Professionals including Internal Audit, Cyber Security, Compliance, IT Audit, Data Analytics etc across Europe and the US.
If you would like to reach out to discuss your current requirements, please feel free to reach us via any of the following:
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Audit International are stating the main Risks and Actions companies are putting on their 2023 internal audit plans. The past year concentrated attention and shone a spotlight on the increasing fragility of organizations. With a complex set of risks manifesting simultaneously, audit committees are prioritizing some of the most serious implications resulting from the ongoing war in Europe and a triple squeeze of supply chain, workforce and inflation pressures.
According to data from Gartner’s 2023 Audit Plan Hot Spots report, which identifies the key risks and recommended actions for Audit to benchmark their efforts against in the coming year, 81 percent of Chief Audit Executives polled have cyberthreats on their agenda to cover in audit activities over the next 12-18 months, with an additional 13 percent tentatively planning to do so. Even in a year with a high number of varied and seemingly imminent risks facing organizations, cyberthreats remained an agenda topping item for Audit Committees and senior executives as the drivers of the risk shifted from a generalized focus on inadequate security controls to specific need to prepare for highly sophisticated state-sponsored cyberthreats and new cyber breach disclosure requirements. Even as some risks remain perennial threats, shifting drivers can change the nature of the risk and need for updated mitigation and coverage plans.
Cyberthreats, however, are not the only vulnerability an organization faces in an increasingly fragile world. In developing this year’s report, the need for Audit to support their organizations through rethinking their approach to resilience in the face of growing fragility became evident as a key theme underlying several top organizational risks. These risks are generally under-covered in audit plans for 2023, in some cases less tangible and immediate than the category of risks that have been urgently prioritized as a result of the headline events of this year.
Resilience-related risks are manifesting with real world and high-velocity consequences all the same, and Audit needs to understand the risk indicators, urgency drivers and the right questions to ask the business to ensure that rethinking resiliency is on the agenda in 2023.
Below I review three such risks and strategies for Audit on how to approach them.
Climate Degradation
Nearly six in ten CAEs have no specific plans to provide assurance over climate degradation next year. This in and of itself is a key risk indicator for most organizations, as a failure to refresh business continuity plans related to climate risks puts an organization at higher risk for a key infrastructure failure and related loss of productivity among other risks.
While CAEs generally express limited confidence in their climate coverage plans, rethinking resilience means going beyond sustainability reports and identifying vulnerable assets. Audit departments need to incorporate in their plans the inevitability of increasingly severe weather events and mitigation strategies for the loss of key infrastructure, both their own and that of key third parties, such as suppliers.
Culture
Even more challenging for Audit is culture, traditionally a key source of resilience for many organizations that now is fraying under the weight of new working models (hybrid/remote), social and political polarization and a general lack of connection felt by employees who are reporting witnessed misconduct at rates 30 percent lower than pre-pandemic.
Despite such challenges, only 16 percent of CAEs are revisiting culture in light of shifting sociopolitical expectations of their workforce, investors and the media for next year, and just 10 percent report they are highly confident in providing assurance in this area. Internal Audit needs to push the business on reassessing how employee expectations and engagement are monitored in a hybrid and remote world, while policies related to political and social issues need to be formulated now and not in real time during a crisis.
Organizational Resilience
Ultimately, rethinking resilience means covering organizational resilience as a dedicated risk that is part of the audit coverage plan. Organizational resilience, broadly defined, is an organization’s ability to withstand shocks. This is likely to become ever more important in the face of new and ongoing geopolitical tensions, which can abruptly trigger a set of interconnected but differentiated risks to manifest simultaneously. While refreshing scenario planning and mitigating against change fatigue are necessary steps in this process, building true organizational resilience requires a view into the interconnected risks facing an organization and developing resilience-related initiatives across the enterprise.
With less than half of CAEs definitely planning to cover organizational resilience next year and just 32 percent highly confident in providing assurance specifically on matters of resilience, it’s clear there is more work to do in establishing this as a top audit priority. Chief Audit Executives can regain momentum by launching activities that encourage collaborative discussions between business units on interrelated risks and reviewing plans to address change fatigue within their organizations at a time when events over the past two years have likely dramatically diminished capacity in this area.
While these resilience-related risks feel less tangible and urgent than mitigating against “clear and imminent” dangers like supply chain vulnerabilities and state-sponsored cyberthreats, they are important and increasingly acute risks in their own right. Viewing them through the lens of rethinking what it means to be a truly resilient organization can be a useful framework for starting the right conversations within the Audit Committee and formulating effective coverage in next year’s audit plans.
Audit International are specialists in the recruitment of Auditors and various Corporate Governance Professionals including Internal Audit, Cyber Security, Compliance, IT Audit, Data Analytics etc across Europe and the US.
If you would like to reach out to discuss your current requirements, please feel free to reach us via any of the following:
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With businesses facing the strongest economic headwinds in years, the Chartered Institute of Internal Auditors is urging internal auditors to embrace data analytics to navigate more risky, uncertain, and volatile times ahead.
To support their call to action the Chartered IIA, a professional organization for internal auditors in the U.K. and Ireland, in partnership with AuditBoard has published a new report “Embracing data analytics: Ensuring internal audit’s relevance in a data-led world.” The report is aimed at encouraging internal auditors to fully embrace data analytics in the age of systemic risk.
The aftermath of the pandemic, the war in Ukraine and now a recession has all magnified and exacerbated a multitude of business-critical risks. These major risk events are having compounding downstream effects on supply chains, inflation, growth, costs, Forex rates, cybersecurity, and workplace mental health. Creating an adverse business risk environment of a kind not seen for decades. Making it challenging for boards to keep pace with the myriad of risks they now face.
“Data is key for organizations to navigate more risky times ahead and it is key for the future of internal audit. Understanding what the data shows about risk resilience in today’s complex environment will help ensure organizations’ success. We urge businesses and internal audit to embrace data analytics,” says John Wood, Chief Executive of the Chartered Institute of Internal Auditors.
However, in these challenging times harnessing and embracing the power of data analytics can enable internal audit to deliver faster and more incisive insights on fast moving risks, that boards can then act upon swiftly. Helping organizations to quickly identify, manage, and mitigate emerging risks during rapidly evolving situations.
Needs Improvement
The report is based on a survey of 298 internal audit executives from the private, public, and third sectors across the UK and Ireland. The survey revealed:
60% of internal audit functions are already using some for of data analytics, an additional 7% having advanced to AI. However, this still leaves a third yet to adopt data analytics.
The top three risk areas for using data analytics are financial (62%), fraud (17%), and legal and compliance (6%).
The top three benefits of using data analytics include greater level of assurance (48%), 100% audit coverage (21%) and enhanced efficiency (14%).
The top three barriers to fully embracing data analytics include lack of skills (49%), lack of resources (24%) and lack of time to implement (12%).
Only 17% expressed concern that internal auditors could be replaced by robots in the future. Instead, data analytics and AI can free up internal auditors’ time to focus on strategic and systemic risks that could be coming down the track.
The report makes several recommendations for boards and internal audit, including:
– Boards and internal audit should ensure that senior management has defined the organization’s top five risks, and that the data support this view and is correct and reliable.
– Boards and internal audit should ensure that the organization has its own data strategy in place.
– Boards should work with internal audit to identify what data is available to improve risk assurance, and how data analytics could be applied to this data to improve assurance coverage across the organization.
– Boards and internal audit should work together to champion a data analytics culture and promote a data-first mindset.
“Given the warp speed at which risks can emerge and wreak havoc, embracing data-analytics is non-negotiable for boards and internal audit if they are to stay on top of the multitude of risks that organizations are now wrestling,” says Richard Chambers, Senior Internal Audit Advisor of AuditBoard, and former President of the Global IIA. “Data analytics enables faster and higher quality assurance for boards to then act on. In stormy economic times a data-led approach has never been more urgent.”
Audit International are specialists in the recruitment of Auditors and various Corporate Governance Professionals including Internal Audit, Cyber Security, Compliance, IT Audit, Data Analytics etc across Europe and the US.
If you would like to reach out to discuss your current requirements, please feel free to reach us via any of the following:
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Audit International believe effective communication of information on risks associated with hazards and control measures, is an essential and integral component within the risk assessment process. The fundamental goal to communicate the outcome of your risk assessment thereafter to the rest of the organization, contributes to the health and safety of your (peer) employees.
A risk assessment is usually executed by you as a safety professional, being part of the safety department of an organization. For you, the outcome of the risk assessment is often quite clear and simple to follow. However, struggles do arise to communicate about risk outside the safety department. How do you communicate to different organizational levels effectively? How do you make sure everyone in your organization is not only aware of, and but also understands the risks they are dealing with? Audit International have these tips.
In this short blog, we will focus on the Communication and Consultation step. You must communicate about your risks and its treatment, but how do you handle this? If you communicate too much no one will know what to listen to nor remember it. If you communicate too little, no one will understand the context or details of the information. Use the tips below to overcome such struggles.
Tips for effective risk communication:
1. Have a common ground
Before talking about risks, people need to understand the basic concepts of safety. Do not assume that everyone is on the same page regarding risks. Define concepts clearly to avoid confusion. Make sure that there is a common definition of risk established, so employees manage risk based on the common concept and view of what constitutes as risks. Inform your organization about the nature of the risk management and why you are doing it.
2. Make sure everyone can understand
As you communicate to different levels and departments in de organization, it is convenient to tailor your message to the one who receives the message. One of the goals for risk communication is to provide meaningful, relevant, and accurate information in clear and understandable terms. Be aware that these criteria can be different for people on the operational work floor than for higher management. Adjust your information to your target audience, so everyone in the organization knows their role in managing the risks they face. This will help you filter the information effectively.
3. Consider the form of communication
How often do you want to communicate to your colleagues? Depending on which colleagues, this could be every day, every week, monthly, or yearly. If the frequency is yearly, writing a report will not be too much trouble. If the frequency is weekly, writing a report will likely be too time-consuming to create and read. It won’t be long before your employees are demotivated which will likely lead to less clear communication – or worse, confusing communication! Think about other ways of communication, such as videos, posters, or interactive means. A one-sided communication strategy is likely to be less effective.
4. Build a sense of inclusiveness and ownership
You know that managing risk is not a one-person job. This process involves different departments and colleagues. It is impossible to manage risk effectively if there is no communication and consolation with each colleague that is involved – with each stakeholder. To optimize the communication and consultation you need to make sure that each stakeholder understands, knows and agrees what is expected from them in relation to the management of risk.
By communicating on risk management, you will involve your colleagues and create inclusiveness and ownership. Ownership is important, because let’s face it: risks that are not owned are often not managed. Clarity on personal responsibilities is very important to prevent incidents from happening. There is no need to have accidents that could have been prevented through effective communication between stakeholders.
Audit International are specialists in the recruitment of Auditors and various Corporate Governance Professionals including Internal Audit, Cyber Security, Compliance, IT Audit, Data Analytics etc across Europe and the US.
If you would like to reach out to discuss your current requirements, please feel free to reach us via any of the following:
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Audit International recommend five ‘Under the Radar’ Areas to Audit that May Not Be on the Audit Plan.
As internal auditors, we all have a “spidey sense” of what we should be auditing.
Sure, we should, of course, conduct comprehensive risk assessments that drive our audit plan, and many of the usual suspects will end up on that plan: cybersecurity, regulatory compliance, financial reporting, third-party relationships, and you know the rest.
But there are things, we would strongly profess, that should be audited, even if we aren’t formally auditing them and they never make it to the actual audit plan. Just by being aware—casting that web, if you will—you should constantly informally “audit” a few critical areas.
What might be some of those things we should (lower case) audit, even if we aren’t (upper case) Auditing them? Here’s Audit Internationals take on five:
1
Culture: Are Disconnects, Even if Subtle, Surfacing?
So much has been written and said about doing culture audits and internal audit’s potential role in doing such a review. Perhaps, however, your organization doesn’t support internal audit doing a full-blown culture audit. Does that mean you throw your hands up and do nothing with the topic? Heck, no!
Look, we are among the very few in the organization who have the benefit of both grasping the desired culture and viewing the entire company because of our day-to-day work. So, why not leverage that and tune into what is going on around us and notice the organizational behaviors, actions, and attitudes that are consistent with, as well as (importantly) counter to, the desired culture.
So, what’s an internal auditor to do?
Some caveats, though. First, be sure you completely understand the desired culture, both what is formally stated through things like the organization’s listed core values as well as what is implied in the “how things are done around here” subtleties. The formal and the informal culture are equally important. Then, as you go about your work in various departments and interact with people at all levels of the organization, be cognizant of behaviors, language, demeanor, protocols, and other elements that seem inconsistent with what you expected.
Now, if you witness such imbalances, and you’ll know because it will make you a bit uncomfortable, talk with close colleagues or discuss it amongst your team. If something seems amiss, continue to keep your eyes and ears open and provide your internal audit function leadership with examples of what you are witnessing. If there are culture issues in a particular area of your organization, it is likely manifesting itself in a number of other issues as well. Your internal audit function leadership will guide you on what to do and may provide guidance on the next course of action. Chief audit executives will need to consider when and how to elevate such delicate issues. Yes, it’s a sensitive topic, but something that might be critical to address. Your spidey sense will guide the way.
2
Employee Engagement: Are People Checking Out?
While it has been a topic in the corporate world for more than 20 years, at least since the Gallup Organization and their Q12 employee survey instrument brought it into the lexicon, “employee engagement” has re-emerged these days. By now, we’ve all heard the new buzz phrase “quiet quitting.” While it’s a catchy label that has been slapped on what is, in essence, just disengagement, it’s not to be taken lightly. Employees who have become disengaged in your company’s mission, vision, and values don’t have passion to do their best. This should be deeply problematic to executive leaders and, in turn, to you. It is a significant and costly drain on everything your organization does.
So, what’s an internal auditor to do?
Just like with the culture topic, we, as internal auditors, interact with more of the organization across all levels (along with HR) than most anyone else in the entire organization. Therefore, we have our finger on the pulse when it comes to engagement and its evil twin, disengagement. Do we have a general sense though the course of our internal audit work that people care or if they are they just going through the motions? Sure, we do.
We don’t need to be scientific about it, and we don’t have to call anyone or any function, department, or location out, per se, but if we see that there is a trend developing toward greater levels of disengagement, let it be known. Make it a part of what we absorb about the organization on a daily, weekly, and monthly basis. Elevate the concerns, whether to HR, department levels, or even the senior management. In other words, don’t ignore it.
3
The Physical Facilities: Are Things in Disrepair?
As much as we may not all be going into a physical office as much anymore, many employees will still spend at least some time in the office or at company facilities. And, the physical state of the office location, branch, facility, or building space is important. Not only can facility disrepair be unhealthy or unsafe, but it can also just negatively affect employee psyche or customer impressions. Pay attention to what things look like and what is the state of the physical environment around you. It may signal deeper problems or an overall neglectful view of the business.
We all have stories about what we’ve witnessed. I remember walking past a locked closet and smelling a damp odor. I could have just ignored it, thought it was just me, or figured that someone else was probably aware of it. Instead, I decided to mention it to the facilities manager of the location. And, lo and behold, behind the rightfully locked door a roof leak had infiltrated the space and it was a wiring closet. It could have been a big problem if it were ignored for any length of time.
So, what’s an internal auditor to do?
Keep your eyes and ears open as you go about your work. Does something seem amiss regarding the physical location? Mention it to someone who could do something about it. What’s the worst that could happen? They tell you “thanks, we are aware of it.” At best, you help address an issue before it gets out of hand. Sometimes we all become blind to our physical surroundings because we’ve just been there for so long. But a fresh set of eyes and ears might just help the organization out and make employees and customers even more appreciative of the physical space they show up to and that the organization spends so much money on. Internal audit can have a unique perspective of noticing what gets unnoticed.
4
The Parking Lot Check: Is Fraud Hiding in Plain Sight?
Closely related to the physical state of the facilities is the state of the employees. Ever see a change in someone’s habits that don’t sync-up with what has gone on in the past, and you wondering “what’s up with that?” Perhaps someone is showing up to the office in a new luxury car, expensive clothes, or talking about some lavish vacation they went on?
Most often, there is a great explanation, and it is none of our business. But, also, any of us who have been around the block a few times will also know that, occasionally, these changed behaviors are clues that something is amiss and that someone may be on the take. You could call this “doing a parking lot audit.” So many frauds and embezzlements have left a trail of these clues as the perpetrator wanted to channel their ill-gotten gains into the fruits of luxury and apparent success. It’s not an outright indicator or fraud, of course, but it might be a red flag to dig deeper, especially if things weren’t adding up already.
So, what’s an internal auditor to do?
Just keep your eyes and ears open, being observant to uncharacteristic behaviors, purchases, and chatter could provide clues to someone who is taking advantage of their position and situation to pilfer from your company. No, don’t go around accusing people of things where you have no proof, of course. But eyes open and be vigilant. And, if you see something, say something to a trusted colleague within your internal audit department. If necessary, elevate it within your department and, if warranted and approved, do some follow-up in a clandestine manner. You may just catch something in its preliminary stages and head it off at the pass, so to speak. Most people steal from the company in small increments, and it escalates from there if they feel they are getting away with it undetected. But, in hindsight, there were usually always clues … perhaps no further away than in the parking lot.
5
Hotline Activity: Is Volume Up, or Has Volume Decreased?
Most internal audit functions have some role in monitoring their organization’s whistleblower hotline for employees, and sometimes also third parties, to file complaints. This may seem like a no-brainer, but you’d be surprised how often small complaints (that point to bigger problems) go unnoticed. Your internal audit function may have complete ownership of managing what comes though, you may partner with someone else in the organization, such as compliance, human resources, or legal, or you just get things passed to you for review or investigation as needed from one of these organizational partners. Regardless, you need to have some role in monitoring the volume of activity. What types of activity are coming through? Are there recurring issues? What are the trends? It doesn’t take an audit, but it does take awareness. Changes in volume can be very telling, and that could be changes in either direction (increased or decreased volume).
Increases in activity might spell some brewing issues of a more macro sense and, alternatively, decreases in volume may spell a level of distrust in the confidentiality of the hotline or a perceived lack of seriousness with which reported items might be getting addressed.
So, what’s an internal auditor to do?
It doesn’t have to be you, so long as someone in your internal audit function is attuned to the trends, both in terms of volume and types of activity. And, if there are notable changes in the trends, up or down, it might be time for a deeper understanding of what might be going on. This could be a signal of troubles brewing that are inconsistent with the desired culture.
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To be clear, internal auditors don’t need a formal audit plan initiative to keep abreast of important developments in the organization. It’s not easy, I know, as the formal audit plan has us busy enough, but a little observation may go a long way. Head up, eyes and ears open, use all your senses and leverage your well-honed intellectual curiosity and professional skepticism. Do some ad-hoc auditing of things you might not be able to (upper case) Audit and don’t necessarily make it to the formal audit plan. The organization will be better for it, and you will enhance your engagement and contributions innumerably.
As popularized in the Spiderman comics of yesteryear and said in more recent movies, “with great power comes great responsibility.” Wield it judiciously!
“Audit International are specialists in the recruitment of Auditors and various Corporate Governance Professionals including Internal Audit, Cyber Security, Compliance, IT Audit, Data Analytics etc across Europe and the US.
If you would like to reach out to discuss your current requirements, please feel free to reach us via any of the following:
Calling
– Switzerland 0041 4350 830 59 or
– US 001 917 508 5615
E-mail:
– info@audit-international.com”
There is a common joke among physicists that fusion energy is 30 years away … and always will be. You could say something similar about artificial intelligence (AI) and robots taking all our jobs. The risks of AI and robotics have been expressed vividly in science fiction by the likes of Isaac Asimov as far back as 1942 and in news articles and industry reports pretty much every year since. “The machines are coming to take your jobs!” they proclaim. And yet, all of us here at Audit International still head to the office or log in from home each weekday morning.
The reality is less striking but potentially just as worrying. Most people expect that one day some sort of machine will be built that will instantly know how to do a certain job—including internal auditing—and then those jobs will be gone forever. More likely, is that AI and smart systems start to permeate into everyday tasks that we perform at work and become critical parts of the business processes our units and companies conduct. (Indeed, many professions and industries have already been greatly disrupted by AI and robotics.)
Technology companies have been so successful over the last 30 years because of the common mantra of “move fast and break things.” And that was maybe just about acceptable when it meant you could connect online to your friend from high school and find out what they had for breakfast or search through the World Wide Web for exactly the right cat meme with a well-crafted string of words.
When the consequences now might mean entrenching biases in Human Resources processes, or mass automated biometric surveillance, not to mention simply not even understanding what a system is doing (so called ‘black boxes’), the levels of oversight and risk management need to be much higher.
The Regulatory Environment :
There is some existing regulation which covers aspects of this brave new world. For example, in the European Union, article 22 of the General Data Protection Regulation (GDPR) on automated individual decision-making, provides protection against an algorithm being solely responsible for something like deciding whether a customer is eligible for a loan or mortgage. However, the next big thing coming to a company near EU is the AI Act.
The proposal aims to make the rules governing the use of AI consistent across the EU. The current wording is written in the style of the GDPR with prescriptive requirements, extraterritorial reach, a risk-based approach, and heavy penalties for infringements. With the objective of bringing about a “Brussels effect,” where regulation in the EU influences the rest of the world.
Other western jurisdictions are taking a lighter touch than the EU, with the United Kingdom working on a “pro-innovation approach to regulating AI,” and the United States’ recent “Blueprint for an AI Bill of Rights” moving towards a non-binding framework. Both have principles which closely match the proposed legal obligations within the AI Act, hinting at the impact the regulation is already having.
Much of the draft regulation is still being discussed, with a final wording soon to be agreed. There are disagreements across industries and countries on whether some of the text goes far enough or goes too far. For example, whether the definition of “AI” should be narrowed, as the current wording could encompass simple rules-based decision-making tools (or even potentially Excel macros) or even expanded to greater capture so-called “general purpose AI.” These are large models which can be used for various different tasks and therefore, applying the prescriptive requirements and risk-based approach of the AI Act can become complex and laborious.
The uncertainty over the final wording has given companies an excuse to not make first moves to prepare for the changes. Anyone who remembers the mad rush to become compliant with the GDPR will remember the pain of leaving these things to the last minute. The potential fines, which may be as high as 6 percent of annual revenue depending on the final wording, could be crippling and have a cascade effect on a company’s going-concern.
What Can Internal Auditors Do?
As internal audit professionals we can start the conversation with the business and other risk and compliance departments to shine the light on the risks and upcoming regulations which they may be unaware of. It is our objective to provide assurance but also add value to the company and this can be done through our unique ability to understand risks, the business, and provide horizon scanning activities.
Performing internal audit advisory or assurance work, depending on the AI risk maturity level at the organization, can highlight the good practice risk management steps that can be taken early to help when the regulation is finalized. These steps could include:
1) Identify AI in Use: To be able to appropriately manage AI risks throughout their lifecycle stakeholders need to be able to identify systems and processes which make use of them. Agreeing on a definition of AI and developing a process to identify where it is in use is the first step. This would include whether it is being developed in-house, is already in use through existing tools or services, or acquired through the procurement process.
2) Inventory: Developing an inventory which includes information such as the intended purpose, data sources used, design specifications, and assumptions on how and what monitoring will be performed is a good starting point and can be added to, based on your company’s unique characteristics and any specific legal requirements that are implemented in the future.
3) Risk Assessments: Since a key aspect of the AI Act is it being “risk-based,” it is important to have a risk assessment process to ensure you take the necessary steps as required in the regulation, based on the type of AI used. For example, what level of robustness, explainability, and user documentation is necessary based on the risk tier provided. It is also important to consider the business and technology risks of using the AI. For example, machine learning using neural networks requires large training datasets, which can raise issues of data protection and security, but may also perpetuate biases that are contained in the datasets. Suitable experts and stakeholders should be involved in the development and assessment of the risk assessment process.
4) Communications: One area that is often forgotten is communication. It is all well and good having a policy or a framework written down but if it isn’t known and understood by the relevant stakeholders it’s worth less than the paper it’s printed on. Involving key stakeholders during the development of your AI risk management processes can help develop a diverse platform of champions throughout the business who can act as enablers as the requirements are communicated and regulation finalized.
5) On-going monitoring: Risk management is not a one-off exercise and this is no exception. Use cases, technology, and the threat landscape change over time and it is important to include a process for on-going monitoring of AI and the associated risks.
The machines may not be coming to take our jobs just yet, but the risks are already here and so are the opportunities to get ahead. There may be a long and winding road in front, as we all prepare for a world where AI is commonplace and new regulations and standards try to shape its use, but each journey starts with a step and it’s never too early to get going.
“Audit International are specialists in the recruitment of Auditors and various Corporate Governance Professionals including Internal Audit, Cyber Security, Compliance, IT Audit, Data Analytics etc across Europe and the US.
If you would like to reach out to discuss your current requirements, please feel free to reach us via any of the following:
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Here at Audit International, we have seen a significant shift in the way in which environmental, social, and governance (ESG) data has been perceived in recent years. It has gone from being an ‘add-on’ to being a vital opportunity for corporations to boost their competitiveness. As consumers become more discerning about environmental, social, ethical, and responsible business practices, organizations are increasingly starting to realize that reporting ESG data can have significant brand and reputational benefits.
However, this is just the beginning. The value of ESG data extends beyond reporting—when handled properly, it can unlock value for an organization in a variety of ways.
What is ESG and ESG Reporting?
It’s important to note that there is a distinction between ESG and sustainability. The terms are often used interchangeably, but there are important differences. Essentially, sustainability deals with how an organization’s operations impact the environment and society, whereas ESG has more to do with how an organization’s environmental, social, and governance initiatives affect its financial performance.
According to the Center for Audit Quality (CAQ), “ESG reporting encompasses both qualitative discussions of topics as well as quantitative metrics used to measure a company’s performance against ESG risks, opportunities, and related strategies.”
How companies can use ESG data to their advantage
When organizations treat ESG reporting as more than a box-ticking exercise to meet regulatory obligations, they stand to reap a number of benefits, as follows:
● Profitability and sustainability: Including ESG data in an extended planning and analysis (xP&A) strategy allows an enterprise to see how that data affects financial and operational data, which is key to making ESG initiatives sustainable and profitable.
● Risk management: Neglecting ESG issues can result in financial or reputational damage. Thus, all organizations should ensure that they incorporate ESG data into their risk management strategies. By voluntarily disclosing this information, they will demonstrate that they are taking sufficient steps to protect themselves and their stakeholders from ESG-related risks.
● Competitive advantage: Focusing on ESG can help an organization gain a better understanding of what matters to its stakeholders while also identifying opportunities. Furthermore, reporting ESG data will help stakeholders compare the organization with its competitors. This works in the organization’s favour if it is outperforming peers on the ESG front.
● Uncovering critical operational drivers for decision-making: ESG data can help an organization see where sustainable changes could improve efficiency and make its business more ethical and equitable. This can greatly enhance the decision-making process.
What are the main challenges to effective ESG Reporting?
ESG reporting is continuously evolving as governments announce new standards that companies need to comply with, as well as a new mandatory International Sustainability Standards Board (ISSB) standard that is expected to be announced by the end of the year (2022). It also touches every financial process. For these reasons, companies can find the whole ESG journey intimidating.
The following are some of the main obstacles that need to be overcome:
● Several ESG optional frameworks: The Global Reporting Initiative (GRI), Task Force on Climate-Related Financial Disclosures (TCFD), and the Sustainability Accounting Standards Board (SASB) are some of the more notable ESG frameworks, but there are plenty of others, many of which are specific to certain regions or industries. It can be challenging for companies, especially those operating in multiple countries, to know which ESG standards and frameworks to adhere to. This will all change when the mandatory ISSB standards are announced at the end of 2022.
● Complexity of data management: Whether meeting regulatory requirements or carrying out voluntary disclosures, companies need to be able to collect, translate, and process ESG data. This is a task that is complicated by the fact that the data is often siloed across different IT systems and is often stored in different formats. In addition, sustainability can be hard to quantify.
● Lack of ESG insight to inform decisions: Many organizations have difficulty seeing the connection between ESG data and financial results, especially when captured in spreadsheets, which means they are unable to use the data to improve their bottom line and sustainability initiatives.
“Audit International are specialists in the recruitment of Auditors and various Corporate Governance Professionals including Internal Audit, Cyber Security, Compliance, IT Audit, Data Analytics etc across Europe and the US.
If you would like to reach out to discuss your current requirements, please feel free to reach us via any of the following:
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Amidst issues like supply chain complexity, economic uncertainty, and increased digitalization, Audit International are finding many organizations are adding vendors or changing their existing relationships with those they currently conduct business with.
Working remotely has prompted many companies to add cloud vendors. Supply chain backlogs might have prompted your business to switch to local vendors. Or maybe you’ve added marketing agencies or other types of consultants that have flexible capacity, rather than increasing headcount.
These decisions can help businesses adapt to changing conditions and build resilience, but working with vendors may also introduce new risks. While you might feel like you have a handle on issues like in-house data security processes, you need to be sure that vendors also align with your needs in these areas.
Internal audit teams can play an important oversight role when it comes to vendor risk management. While they might not be making specific vendor management decisions, they can still be involved in making sure proper due diligence is followed when selecting vendors. And once vendor relationships are in place, internal audit teams can monitor these arrangements to ensure organizations aren’t opening themselves up to new risks.
What are the top vendor risk management issues?
Working with third parties like software vendors, managed service providers, cleaning companies, etc. can help businesses fill gaps in current capabilities, increase efficiency, and more. Yet, internal audit teams also need to make sure that their organizations are accounting for any and all potential risks:
Cybersecurity: Internal audit teams should review vendors’ cybersecurity practices to assess whether these meet your organization’s expectations, for example, data security controls and remediation capabilities.
Compliance: Third-party vendors can also create compliance risks, such as improperly storing customer data or engaging in illegal business practices. Even if these vendor issues do not lead to legal action against your organization, internal auditors should aim to get ahead of these issues to avoid reputational damage.
ESG: Environmental, social, and governance (ESG) scrutiny is increasingly extending into supply chains and can also create reputational risk. Internal auditors will want to assess how vendors align with their own ESG goals. This may in turn lead to implementing additional controls, for example, around data sharing practices so that your organization will be able to verify issues like vendor emissions.
Quality: Don’t automatically assume that vendors will provide the quality you’re expecting, even if they come recommended or are widely known. Internal auditors need to ensure that their organizations still conduct proper due diligence to see whether working with that vendor will provide the quality of work you’re expecting. Managing risk can also include looking at vendor performance controls to see if existing third-party vendors maintain appropriate quality standards.
These are just some of the many critical risks that can come from working with third parties. Keep in mind that vendors may also have their own networks of third parties, which could ultimately affect your organization.
While it might not be possible to know every connection point that your vendors have with other third parties, you would likely want to assess what their own third-party risk management practices look like.
How can internal auditors improve third-party risk management?
Internal auditors shouldn’t be the only ones responsible for vendor risk assessments, but they should be mindful of the aforementioned vendor risk management issues and collaborate with other departments to stay on top of these risks.
For example, internal auditors can collaborate with IT leaders to create a vendor security due diligence checklist. From there, internal audit controls can make sure that this checklist is used across all vendor reviews.
Internal audit leaders can also integrate analytics into audit processes, such as collecting performance metrics on third-party vendors, to assess whether they meet your organization’s quality expectations on an ongoing basis.
Too often, however, adding analytics to audit reports is a manual, labor-intensive process that can create its own risks, like data errors. TeamMate Audit Benchmark found 79% of internal audit teams manually leverage data from other applications.
Audit tools like TeamMate+ can help internal auditors get the third-party data they need through automated API exchanges with other platforms, which makes continuous monitoring of risk more feasible. They can then create automated reports to share insights with other departments to stay on top of third-party risk.
By aligning with these steps and staying on top of evolving vendor management risks, internal audit teams can help their organizations stay safe while getting the most out of their third-party partnerships.
“Audit International are specialists in the recruitment of Auditors and various Corporate Governance Professionals including Internal Audit, Cyber Security, Compliance, IT Audit, Data Analytics etc across Europe and the US.
If you would like to reach out to discuss your current requirements, please feel free to reach us via any of the following:
Calling
– Switzerland 0041 4350 830 59 or
– US 001 917 508 5615
E-mail:
– info@audit-international.com”
In this final article of the series, Audit International focus on the third element of ESG- Governance risk. This differs from the first two elements – Environmental and Social – in that several governance risks have long been recognized and included in our audit plans. However, many more have recently gained prominence. Therefore, it is important that internal audit understands these risks and is well positioned to provide assurance.
Governance risks :
Some governance risks are broad in nature. Others, are very narrow. Some have little in terms of universal benchmarks, while others have well-established frameworks or regulations. Here are some of the main risks that should be considered:
– Shareholder rights and engagement – are there any limitations on certain classes of shareholders, and does the business engage effectively on important issues?
– Board structure and diversity – are there independent directors, and does the board have sufficient diversity of experience, style, and background? Increasingly, neurodiversity is a consideration, and in some countries a workers’ representative is a requirement.
– Executive compensation – is this structured to be in line with corporate objectives, and is it consistent with peers in comparison to the wages of other staff?
– Anti-bribery and corruption – many countries have a comprehensive legal framework.
– Tax transparency and policy – what is the organization’s approach to tax, and particularly the jurisdictions it operates and pays taxes in?
– Ethics and culture – a broad topic, ethics encompass all the above and more. Culture has become a hot topic over the past 15 years with the link between a strong organization-wide culture and performance becoming increasingly apparent.
– Data protection – often also included as a social risk, good information governance is relevant here as well.
– Typical impacts for the organization will be reputational, legal and regulatory, people, financial, and ultimately strategic.
Getting started – Determining the key risks :
Compared with environmental and social risk, it is much more difficult to take a holistic approach to governance risk, given the breadth of topics. However, it is likely that many activities and risks are already in your audit universe. A governance code may have been adopted by your organization, although these may only cover some of the issues described above. Understanding the relevant governance code(s) –mandatory or optional – is a good starting point. This will depend on jurisdiction(s), market listings, regulators, and industry practices. Governance codes can be principle-based or more prescriptive, and will typically define some or all of the following, often on a “comply or explain” basis:
– Clarity of purpose
– Leadership
– Integrity
– Board composition and division of responsibilities
– Board effectiveness
– Decision making
– Risk management, internal controls, and audit
– Accountability, transparency, and reporting remuneration
In understanding governance risks, you should also take into account what specific legal or regulatory requirements there are around any of these issues. This may include reporting requirements around diversity or executive pay or matters which must regularly be reported and considered by the board. Also, consider what other stakeholder expectations are relevant. This is likely to focus on investors, as they have been increasingly vocal and prepared to vote against boards that do not adequately address specific issues.
With this background information, along with your consideration of the issues highlighted earlier in this article, you can ensure your risk assessment incorporates relevant governance risks.
How internal audit can make an impact :
As always, we should leverage work done by the first and second lines in considering where we can make the biggest impact. We should consider our risk assessment alongside any new information we have about regulatory changes, emerging issues in our sector, or jurisdictions, and investor interest.
Some Examples :
– Governance framework
– Governance codes were mentioned earlier in this article. Whether your organization has adopted a code in full or developed its own framework, it will need to produce a regular (typically, annual) report of compliance with the code. Assessing the processes supporting this reporting is often a good way to execute broad audit coverage of governance risks. Such reports are expected by regulators, provide assurance to the board, and are sometimes published (at least in part in the annual report). – Therefore, it is important that they give an accurate picture.
Reports may take many forms and will often include qualitative assertions and specific data or examples. It is important that any data reported is accurate, but equally as important that narrative assertions or examples are supported by evidence. Internal audit can provide assurance over the processes to collate this evidence, ensuring it is complete and accurate and that the right oversight controls are in place. We can also review the report and verify that the conclusions reached fairly reflect the evidence available. Generally, we take a combined approach to provide comprehensive and broad assurance.
Board composition :
Board composition has been under the spotlight, and while practices have improved there is often still a lack of transparency in recruitment, objective evaluation, and diversity. This is a sensitive audit which needs to be conducted by experienced auditors. When done well, it provides real insight and impact.
It is important not to make this about the individuals currently serving on a board, but about the effectiveness of processes around recruitment, structure, skills-determination, and performance evaluation. Consider some or all of the following:
Is there an evaluation of the skills required on the board and an up-to-date skills matrix? Is this specific enough to ensure the board members possess the right range of skills and experience but sufficiently flexible to attract a diverse pool of candidates?
Do recruitment processes include defining an ideal candidate profile, pre-determined selection criteria, and stakeholder involvement in the exercise? Are candidates sourced in a way that ensures a wide pool of candidates, recognizing that there may be a need for confidentiality?
How are conflicts of interest identified and managed?
What are the rotation policies/term limits for non-executive board members?
How is board performance evaluated? Is there a self-assessment process and a periodic independent assessment?
Is there a training plan for the board and individual board members? Is there an individual appraisal process?
Does the committee structure support effective delegation but ensure the board maintains its responsibility for strategy and oversight?
How effective is the relationship between executives and non-executives? Does the structure facilitate both support and challenge?
Is there an effective process for succession planning?
Do boards allow time for open discussions and strategic thinking, as well as formal meetings?
Some of this can be done by document review — including board papers and minutes, skill matrix, recruitment process documents, etc. But much of this will also require interviews with board members and those who support the board, such as the corporate/company secretarial or corporate governance team.
This article concludes the series on what internal audit should know about ESG risks. If you missed the first two articles, be sure to go back and read our previous blogs, to get you up to speed on our suggestions on how internal audit can approach environmental and social risks.
“Audit International are specialists in the recruitment of Auditors and various Corporate Governance Professionals including Internal Audit, Cyber Security, Compliance, IT Audit, Data Analytics etc across Europe and the US.
If you would like to reach out to discuss your current requirements, please feel free to reach us via any of the following:
Calling
– Switzerland 0041 4350 830 59 or
– US 001 917 508 5615
E-mail:
– info@audit-international.com”
