Audit International realise that for many internal auditors, the audit committee is a bit of an enigma. Most of you help the chief audit executive (CAE) or other internal audit leader with materials and content to provide to this subgroup of the board of directors. Much of your work, in summary fashion, ends up there. But, for the most part, we only know what happens behind the closed doors of the boardroom if your CAE conducts a post-meeting debrief. Yes, we know that the audit committee is important. We know that they take our work seriously. But what do they really want from us?

For internal audit leaders themselves, the meetings can be intimidating. The majority of audit committee members are experienced executives from other companies and often serve on other boards. They are generally savvy, informed individuals, who spend a part-time role executing governance duties for the organization where we work. So, while they might, at times, be proactive—meaning, they raise questions or lines of inquiry based on something they initiate—mostly they are reactive, responding to what is presented to them. That means the onus is often on internal audit leaders to help them in their role by carefully choosing what to share with them.

Yet walking the fine line between providing too much detail and maximizing the little time we have with the audit committee can be tricky. Internal audit leaders often express anxiety about meeting with the committee. It can be difficult to anticipate what they may find important versus what they would consider a waste of time. Indeed, internal auditors can be forgiven if they just want to shout the famous Spice Girls refrain: “Tell me what you want, what you really, really want!” So, let’s give that a try: What does the audit committee really, really want?

First, What the Audit Committee Doesn’t Want

During an Internal Auditors career, you report functionally to an audit committee on separate occasions, with different companies. You might foolishly think that you would give them lots of information and let them decide what was important. It’s a trap that is easy to fall into. It takes time, experience, and some good mentors to gain the wisdom to realize that is absolutely the wrong tactic.

It is an evolutionary process to slowly realize that reporting to the audit committee is not about what you want to tell them. It’s only about what they need to know. To cite an often-used phrase: “be brief, be insightful, and be gone.” Keep it short, share the needed knowledge, and let others take their place on the agenda. It’s not about you; it’s about your audit committee members.

What the Audit Committee Does Want

Here are ten things that Audit International have learned that the audit committee of the board wants from internal audit. We hope they work for you when it is your turn to directly interact with the audit committee.

1) The essence of the quintessence: This phrase, “the essence of the quintessence,” was shared by a chief operating officer of a bank once, and it stuck with us. Basically, he was expressing that he and the other execs were busy folks and they want to get right to the bottom line. Don’t just tell me what you are telling me, but tell me why you are telling me. Get to the essence of the quintessence! And that’s what the audit committee wants too! So, if you feel you really must share something with the audit committee, ask yourself why it is so important that they know it. If you can start your phrase with, “this is important because …,” then they probably need to know it. They want the bottom line and the why. The rest is superfluous.

2) Not how you did something, but what you concluded: Have you ever asked someone how their vacation went and they start by telling you about the car ride to the airport? You are being polite, but all the while you wish they’d just answer the question. You want to know about the experience at the destination, not how they got there. Well, the same is true with the audit committee. All the work we did to arrive at our conclusions is important to us, but not to them. They only want to know the conclusion. So, cut to the chase. They trust you did all the right work to get there.

3) Your opinion, not just the facts: Internal auditors follow standards, confirm everything, and don’t spout wild, unsupported views on subjects. We are methodological in our pursuit of facts and the truth. So, when we have made a conclusion, we are usually armed with supporting facts. If not, we tend to refrain from going out on a limb with an opinion. Resist the urge, however, to stick only to the facts. You are not a robot; you are a person with a brain. You have a range of experiences to draw upon and see more of the organization than most anyone else. So, does the audit committee want a Joe Friday, “just the facts ma’am,” approach? Not really. They trust you have done the work and want to hear your views on various topics. If they ask your opinion, trust your instincts and give it to them. If you don’t, you really aren’t adding as much value as you can.

4) Your concerns, audited or not: Whether you are new to an organization or have been there for many years, your well-honed internal audit skills will leave you with an innate ability to have concerns about certain things, whether you have actually done internal audit work on the topic or not. If you had unlimited time and resources, you’d go check out all those nagging worries, and confirm or deny them. But you don’t. The audit plan may not have prioritized it, but that doesn’t mean the concern isn’t valid.

Now, the audit committee has no desire to hear lots of speculation or theories, nor are they interested in trivial things. But, believe me, if you have a good relationship with the audit committee, they want to hear your top concerns, even if you don’t yet have all the facts. You just need to be extra careful in how you position what you say, and you do so rather infrequently. But they do want to know. As they say, that’s why you get paid the big bucks.

5) Something of substance in executive session: One experience that is among the trickiest for a CAE to navigate is the executive session with the audit committee. During the typical executive session everyone who is not a board member leaves the room and the internal auditor meets with the audit committee alone. Over the course of a few years of executive sessions with the audit committee, I can say from experience that there are two things you never want to do: one is to have something to tell them in every executive session, and the other is to have nothing to tell them in any executive session. So, the goldilocks theory applies here, you want to strike the right balance. What to bring up, how to bring it up, and what you need to do both before and after you bring it up is a whole course in and of itself. It is an art, not a science. Don’t be trivial or cavalier about what you bring up. The audit committee wants you to bring things up, and they want them to be of substance.

6) Proof you really get the business and the strategic plan – Whether it is deserved or not, a common complaint by operating leaders and managers within many companies is that internal audit does not understand the business. The last thing you want is for the audit committee to second guess your conclusions. So, if you are confident that you know the business and the strategic plan (and you’d better be), let it show. It should show up in your audit plan, your priorities, and your explanation of internal audit’s observations and conclusions. Don’t risk having the audit committee doubt you. They want comfort that you know the business and are in lockstep with the strategic plan. Give them the confidence that you do.

Another point to make here is to remember that you are a businessperson. As we go about our internal audit work, we tend to put blinders on, as if the audit plan and the audit projects are the only reason for our existence. Of course, they are not. So, when we update the audit committee on what we are doing, what hat are we wearing? An auditor’s who happens to work for the business? Or a businessperson’s who happens to be an auditor? The audit committee wants the latter.

7) That you align with second line functions: Not always, but often the only way that second line functions (risk management, compliance, security, and others) coordinate and collaborate with internal audit is if internal audit (namely the CAE) initiates the coordination and takes a lead role in it. Apart from the added cost of redundant activities, the audit committee doesn’t want a bunch of disjointed terminology, reports, and conclusions coming from the various “risk and control” functions of your organization. They want you to coordinate and collaborate across the second and third lines. If they aren’t telling you that, they are telling someone else behind your back!

8) Courage: Like everyone else in the organization, days are always going to bring obstacles, difficult co-workers, things not going according to plan, changed schedules, broken promises, and other hurdles. But, more often than many other employees in other departments, you will from time to time be called on to summon up some courage. From an obstinate audit client that is making your job difficult to a senior audit client manager that is disagreeing with you no matter how right you are—not to mention fraud investigations, hotline accusations, and executives who are doing questionable things—you are going to come across matters that are so egregious that you must raise them, regardless of the consequence. They are, hopefully, rare, but if you are in internal audit long enough, those times will arise. They will require backbone and strength of conviction, and are not for the faint of heart. But guess what, that is exactly what the audit committee wants from you: a reservoir of courage and the ability to call on it when it matters most.

9) That you understand the politics, but are not political – All organizations are political by nature. Whenever people get together and resources are scarce, win-lose games happen. Corporate politics are a fact of life. As much as we’d all like to be apolitical and let the facts drive what the right answers are, if we don’t learn how to navigate the organization’s politics, we will not be able to get our jobs done effectively. Does that mean we need to use the politics to our advantage? Sheepishly, the answer is yes, but not in an underhanded way. It’s important to know who to talk to, about what, and when; how to position what you are going to say; who needs a heads-up on what; who are the influencers in the organization; and so on. We need to know all that and leverage it to our advantage. Our audit committee members are some rather experienced and savvy businesspeople, and they are also navigating the organization’s politics to do their governance jobs. So, yes, they do expect you to understand the politics to get your job done well and know how to report things to them with an understanding of how the politics works, but they also don’t expect you to be overly political.

10) That you know when you may not be objective: Objectivity is such an important tenet to what internal auditors do and how we do it that we need to be ultra vigilant and self-aware when there is a risk of our objectivity being impaired. Audit committees expect us to be self-aware of when our objectivity might be impaired, or even the potential appearance of it being impaired. So, park that ego, realize you are subject to your own biases, and be self-aware enough to advise the audit committee when your objectivity could be impaired. They expect you to do that.

Earning that Paycheck

Even though they may not tell you directly, take it from us that your audit committee wants you to: be brief, tell them only what they need to know, share your professional opinion, be open about your concerns, leverage executive sessions properly, understand the company’s strategic objectives and strategic plan, collaborate with the second line, be courageous, know the business, navigate organizational politics, and say when your objectivity might be impaired. Easy peasy. Well, not really. But, as we concluded, that’s why you get paid the big bucks.

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

Let’s face it. Even here at Audit International, we understand Internal audit still suffers from some rather negative stereotypes. There are plenty of companies or units where internal auditors are not welcomed with open arms. Audit clients may view internal audit with suspicion, expecting a “gotcha” mentality or may feel like they are under surveillance.

Sure, it’s often undeserved and some of it comes with the territory, but we may even be perpetuating such negative views with the words we use. Words and phrases that internal auditors consider just a normal part of the profession’s vocabulary may actually be words that trigger negative reactions in our audit clients. And often, internal auditors don’t realize they are contributing to the hostility by using them.

Words matter and good internal auditors choose them carefully. But auditors are also as prone to using professional jargon as anyone. These are words that have become so commonplace that we might not think too much about what they really mean, especially to others. We all use them. Yet, how they might be interpreted may not be how we intended. So, what can we do about it?

Here are seven words that we should consider their meanings more closely and either use them more carefully or strike them from our vocabulary completely.

1. “Finding”
Most internal auditors call what we consider reportable (in writing and verbally) a “finding.” Think about that for a moment, though. It’s not as if the vast majority of our audit observations were hiding or lurking in some hard-to-discover, dark and foreboding place, and it took our best Indiana Jones skills to unearth them. Lo and behold, ah ha! We have a “finding.” The word relates a context of sleuthing and uncovering things that were hidden, perhaps intentionally.

So put yourself in the shoes of your audit clients. We come along and have all these “findings,” as if they weren’t doing their jobs and it took us to find these gems of reportable conditions. Worse yet, we are often reporting as “findings” what audit clients told us directly. How would you feel if someone walked through your house and told you at the end of their visit that they found the carpets needed vacuuming, the furniture needed to be dusted, and relayed a few other of their insufficient housekeeping “findings.” You’d likely be inclined to never invite them back.

Try using the words “observations,” “conclusions,” or “conditions,” rather than “findings.” You may find they work better in your organization. Audit clients will feel less like they are being accused of hiding information or that they didn’t see something that the auditors later uncovered.

2. “Weakness”
When we observe an issue, we also sometimes couch that issue by using another troubling word, “weakness.” We may not be able to avoid calling breakdowns in internal controls, as they relate to SOX-like work, “control weaknesses” if the controls are not working as they should (or at all). But we should avoid calling observations outside of controls “weaknesses,” if possible.

Think about it. You go into the manager’s office during an audit, and you say, “excuse me, if you have a few minutes I’d like to go over a few weaknesses that have come to our attention during our review of your area.” Expect immediate defensiveness. We might as well be criticizing their first-born by pointing out weaknesses in how the child looks or plays with others. The word connotes physical ineptitude and can strike a visceral blow to any manager’s ego.

Like weaknesses, “deficiencies” isn’t any better for all the same reasons. So, perhaps, try “opportunities,” or “matters for attention,” rather than “weaknesses.” Even “challenges” or “difficulties” will garner a better response from audit clients.

3. “Material”
While the term “material” has been part of auditing language forever and, although tough to really quantify, is an important and meaningful word. I mean, if it’s not material why look at it or consider it at all? We also have the SOX-related nomenclature of “material weaknesses” (which people want to avoid as best as possible). Look, if you tell someone something is “material” and it truly is agreed that it is “material,” that’s a big deal.

Yet when we tell someone who is the owner of something that we want to talk with them about a matter that is “material,” what would be the natural reaction of the person on the receiving end of that word? Disbelief, denial, and outright defensiveness are natural human reactions when told something is “material,” in a bad way, which affects them or their responsibilities. Think about being in the doctor’s office because you have not been feeling well. After a bit of consultation and tests, the doctor comes in the room and tells you that there is something “material” to discuss. You are likely to act with disbelief, denial, and defensiveness, naturally. The word conveys an urgency we might not intend. Do we really want our clients to react that way, now or in the future?

Note that “material” has an important legal context. The Securities and Exchange Commission defines “materiality” as anything a reasonable investor would deem relevant to their decisions about whether and how to invest. While it’s important to use this word carefully in this legal context, it’s also easy to adopt the word and use it outside this context, which can result in misusing it. Another problem with “material” is that it implies that everything else isn’t important or that other aspects of an audit client’s work are meaningless, which is not a great sentiment to convey.

So, perhaps, when you don’t really have to use the word “material” (or “significant” for that matter) in consultation or in writing, maybe consider some different language. Hey, there’s something important I want to run by you when you have a moment, and maybe we can write about the top matters for attention without calling them “material” (unless, of course, we must).

4. “Disclosed” or “Uncovered”

Like the word “finding,” the word “disclosed” (or the word “uncovered’) has a similar connotation. It’s as if the issue was hiding and no one knew about it or would ever find it without you, and your brilliance—the internal audit superhero with x-ray vision. OK, sometimes things were truly hidden, unintentionally or, worse yet, purposefully, and we did use our internal audit superpowers to uncover it and then we get to puff our chest and—cue music here—disclose it. But, come on, that’s rare.

Yet, we use the terminology all the time. For example, resulting from of our testing, it was disclosed that blah, blah, blah. Or, based on our review of the area, it was uncovered that yada, yada, yada. Now, if you’ve got sneaky and underhanded clients, who are going around hiding stuff from you that you truly uncovered and want to disclose to the world, then fine. But most clients don’t do that, and you want to collaborate with them in the future.

Imagine how you’d feel if the external team you hired to do your Quality Assurance Review (QAR) started telling everyone, verbally and in writing, what their work (and only their work) disclosed and uncovered in your internal audit department? How would you react to that? “Disclosed” implies that something was formerly a secret and now you are airing the dirty laundry out for the world to see.

So, maybe we need to back off the “disclosed” and “uncovered” language, at least a bit. Options might include, “along with management, we identified …,” “taking full stock of the evidence, it can be concluded that …,” “testing demonstrated that …,” or similar language. Just don’t use “revealed” instead. That’s just as bad.

5. “Entrance” and “Exit”
OK, you may need to bear with me a bit on this one.

We’re going to start an audit project, and our first meeting with the client is called, in many companies, an “entrance meeting.” Then, when we’ve concluded all our fieldwork, what do we call the last meeting with the client to wrap things up and ride off into the sunset to work on the audit report for weeks on end? The “exit meeting.” They are decent terms, descriptive of exactly what they are … our entrance (ugh, the auditors are here) and our exit (yes, they are leaving, let’s party).

Let me ask you this, though. Is this audit, the one you are doing an entrance into and an exit from, the first and last time you will ever see these folks? I sure hope you have an ongoing relationship and are interacting all year long, or at least on occasion. If that’s the case, there is no entrance and there is no exit because, like the song Hotel California, you may never leave. And, if you’ve done your relationship management right, they are happy about that.

The point is that “entrance” and “exit” are old-school terms from when we did things on a cyclical basis and may or may not come back. Back then, relationship-building was less important and audits had a fixed beginning and end. So, maybe we need to stop calling them “entrance meetings” and “exit meetings,” and just call them something else that isn’t so clinical and auditor sounding. Schedule your Project Introduction Meeting at the beginning and, maybe, your Project Wrap-Up Session at the end, or something like that. And, if you are well down the path of an agile implementation, all that entrance and exit stuff becomes moot anyway.

6. “Consulting”
Back in 1999, the Institute of Internal Auditors introduced the well-accepted and globally codified definition of Internal Auditing as: “An independent, objective assurance and consulting [emphasis added] activity designed to add value…” Back then, the word “consulting” was viewed positively. And, for internal audit to be positioned to not only provide assurance, but to also be viewed as a consultant? Well, to borrow a ’90s term, that would be “da bomb!”

But, somewhere along the way, the word “consulting” came to be viewed less positively, and we’ve started to insert the word advising to soften the term. Should we blame consultants for tarnishing a good word, and making people view consultants and, in turn, consulting, negatively? Perhaps, but that’s not the point.

We all want to be advisors, and the gold standard, the place to be, the coolest accolade, would be to be trusted and be an advisor. So, in our pursuit of being that vaulted trusted advisor, let’s drop the word consulting from our vocabulary, once and for all. Look, your clients might want to “consult” with you, but hopefully you are “advising” them.

7. “Satisfactory”
Often, we as auditors don’t want to overcommit, and use words that might get us into trouble later if something is determined to be different than our work concluded. There is just so much we can evaluate and then we must draw a conclusion and move on. So, we settle on words like “satisfactory,” even if things are notably better than the word implies. From an internal audit perspective, we are hedging out bets. We don’t want to be overly flowery with praise, and just conclude something is either “satisfactory,” “needs improvement,” or “unsatisfactory.”

Put yourself on the other side of the table. Let’s say, for instance, you’ve worked hard at something, gone the extra mile, and made sure it was done exceptionally well. Then, someone comes in, looks it over, and decides that things seem “satisfactory.” Ouch, gut punch! You put in a ton of effort, expected to get an “A” grade, and the professor gives you a “C.” That’s kind of deflating.

Let’s not forget that the word “satisfactory” means acceptable or good enough, but not outstanding or great. Yes, there are reasons to fall on the crutch of concluding, placing our highest auditor grade on something, that it is “satisfactory.” But, perhaps, if we can avoid it, we take the risk, rely on our work, and conclude that something better than a measly “satisfactory.” Don’t be afraid to say if something is exceptional, great, works well, or exceeds the requirement.

The Last Word
There is a lengthy list of good reasons, justifications, and rationalizations for why we use the words we do as internal auditors. Many of them have stood the test of time. Many are in use, and still exist, because we are hearing the world through our own ears, and not our clients’.

If we stop for a minute, and consider what these words sound like and what they actually mean, and the impressions they may leave on the ears of our clients who hear them, perhaps they are not the best words to use. Perceptions are reality, and if you want to change perceptions, maybe one way to do that is to change our vocabulary. In other words, say what you mean and mean what you say.

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”

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:
Calling
– Switzerland 0041 4350 830 59 or
– US 001 917 508 5615
E-mail:
– info@audit-international.com”

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:
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.

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