In Aligning Internal Audit: Are you on the right floor?, our 2012 State of the internal audit profession study, we explored the rising importance of risk management and the increasing expectations of internal audit's contribution to the effort of managing risk. This year, 1,530 executives from a number of industries and countries participated in our annual survey. While our previous studies surveyed only chief audit executives (CAEs) on current issues and challenges, this year's survey expanded to include key stakeholders such as executive management, audit committee chairs and board members. The survey was also complemented by a number of one-on-one interviews with CAEs and stakeholders, enabling us to develop a complete outside-in view of the profession for the first time. In our global study, an overwhelming 80% of the respondents felt that risks to their organizations were increasing. While we found that traditional risks continue to evolve, new risks are also emerging.
The survey also explored the stakeholder and CAE perception of how well internal audit is at managing risks, and where internal audit needs to expand its focus. Finally, the survey results helped us identify the changing expectations for internal audit and the new "floor" or standard that internal audit needs to work towards. This paper highlights key similarities and differences between the Canadian and global results, and what it may mean for internal audit functions in Canada. Additional findings related to the global study can be found at www.pwc.com/ca/iastudy.
Today's complicated risk landscape
Risk is getting more risky in Canada
In Canada, 85% of the respondents felt the risks to their organizations were increasing, which is relatively aligned to the global results of 80%. It's interesting to note that while Canada fared better than many global economies during the downturn, a slighter higher percentage of Canadian respondents perceive their risks as having increased. This could be due to the relative and historical stability of the Canadian financial markets. Due to this, organizations may exhibit a lower appetite for risk and are not commonly faced with risks arising out of instability.
The 15 most critical risks facing many organizations (see figure 1 below) that global respondents were surveyed on, are also of concern to Canadian respondents. In particular, the top seven most frequently cited risks in Canada are regulations and government policies; economic uncertainty; financial markets; competition; talent and labour; reputation and brand; and data privacy and security.
Expanding the scope of risk
Talent and labour risks are gaining importance, and globally it was identified as being a key risk that receives too little attention from internal audit. Many organizations are finding that there's a lack of talent with specialized skills to address new and complex issues such as data privacy and security threats.
An interesting observation was that in Canada, none of the stakeholders (compared to 30% globally) and only 5% of the CAEs (compared to 18% globally) believed that talent and labour risks were being managed well. Why is it that this risk is perceived as not being managed well in Canada? The results may be a reflection of the lack of measures taken by Canadian companies to mitigate the risk of the retiring baby boomer generation. In PwC's 14th Annual Global CEO Survey last year, 55% of the respondents from Canada, compared to 35% globally, indicated that the retiring boomer generation was a key challenge they expected to face over the next three years, which further highlights the importance of this issue for Canadian organizations.
With a significant percentage of the Canadian population slated to retire over the next decade, organizations could face a severe talent crunch, which may have multiple repercussions. There could be a talent deficit, resulting in increased salaries or even reduced performance. There's also the possibility that the next line of executives may not be ready in time to take over these newly vacant roles if succession planning isn't in place. These are major risks for organizations, especially when we look at the scale.
Canadian CAEs and stakeholders responses were aligned around most risks and how well they are being managed with the exception of regulations and government policies. While 58% of Canadian CAEs believed they were managing regulations and government policies well, only 10% of stakeholders had the same response. This disparity could be explained by a lack of communication between the CAEs and stakeholders, or a different understanding of the many Canadian regulations and policies at play. Regardless of the reasons, it's important for Canadian organizations to keep in mind that alignment around the most critical risks is essential for prioritizing and enabling effective allocation of resources. A misalignment in either direction would cause CAEs to improperly direct resources to the areas stakeholders consider most critical and miss the opportunity to deliver value to the organization.
While Canadian stakeholders agreed, for the most part, that internal audit is focusing on other top risks and emerging risk areas, they emphasized that internal audit can't lose focus on traditional risk areas such as controls within processes and fraud and ethics. They expect internal audit to be very good at managing these traditional risks, and then look beyond this and manage new risks as well.
Stakeholder expectations of internal audit
Besides the focus on risks, Canadian stakeholders would like internal audit to expand their role and deliverables. While the primary role for internal audit has traditionally been providing assurance services, stakeholders indicated that they would like internal audit to take on a more advisory role by adding insights to their findings. Stakeholders would like internal audit to come up with a point of view and practical solutions in their reports.
In our stakeholder conversations, we heard ongoing discussion and debate on the amount of controls and compliance work that internal audit should do compared to advisory work. What is that magic percentage – 60%, 40% or a different percentage? An interesting comment to this dilemma was that the line between the assurance and advisory role for internal audit is blurring.
Our interviews have also disclosed that it's often challenging for internal audit to support several stakeholders with different perspectives and feedback on prioritizing risks. Some Canadian CAEs point out that they are challenged due to the size of the organization and the number of stakeholders and activities that they have to deal with.
Rising to a new floor
The basic role of internal audit has always been providing assurance for compliance and financial risks. However, risks have shifted and the expectations for internal audit have increased under the backdrop of a changing landscape. Internal audit functions now need to rise to a new floor (i.e. standard), by providing assurance on a broader range of risks, communicating deeper insights and staying in alignment with stakeholder expectations. Internal audit capabilities and practices that were considered leading just a few years ago are now part of the new floor of performance.
Similar to the global responses, Canadian stakeholders also expect internal audit to rise to this new floor and raise their performance. As stakeholder expectations of internal audit rise, there's significant pressure for internal audit to do more. In Canada, 61% of the respondents indicated that there will likely be an increase in the budget for internal audit, compared to only 42% globally. There's an opportunity for Canadian organizations to get the most out of this increase in expenditure and lead the way in meeting rising stakeholder expectations.
Considerations for Canadian businesses
Based on the survey results and our discussions with stakeholders and CAEs in Canada, we've explored some of the key considerations for Canadian businesses.
Managing emerging and expanding risks: alternative service delivery
Similar to global findings, Canadian respondents indicated that audit plans are often built based on the internal resources that they have and not on top-down risk assessments to help manage critical risks. It's likely then that the expansion of internal audit's risk management profile is limited by the resources that it has available.
With many organizations potentially increasing budgets, there's an opportunity to leverage specialists from outside the organization. This co-sourcing or outsourcing approach can address complex risks that are constantly shifting as well as boost performance levels. In addition, a few of the organizations we interviewed told us that they have staff rotations programs in place — an approach that could work well for organizations across many sectors. This practice helps companies leverage talent when talent is scarce, giving high-potential employees broader experience and exposure within the company, and brings business skills into internal audit.
Earning a seat at the table
Stakeholders expect internal audit to play a bigger role in the management of critical risks. This is the time for internal audit to seize the opportunity and increase their overall importance and role within the business. The business also gains from internal audit being an equal partner and providing a level of assurance and insight over risk management. If internal audit can truly provide a valuable point of view on matters such as what people are doing in other industries, and comes up with practical solutions and insights, then it doesn't matter if they are performing assurance or advisory duties as long as they are adding depth and value to their organizations.
Internal audit has to be nimble and quick to change so that they can shift gears quickly to address the needs of its many stakeholders and their various points of view that we mentioned earlier. This also helps internal audit address changes and critical issues as they occur, especially when the current risk landscape is growing and rapidly changing. Another way to stay agile is by simplifying reporting so that more issues can be addressed along the way, and time is not spent on processes that may not add as much net value to the organization.
Building trust and increasing dialogue
Both audit committee chairs and CAEs view face-to-face meetings as the most valuable form of communication that allow both parties to respond quickly to critical issues. While audit committee chairs understand the value that internal audit brings, internal audit also gains from audit committee chairs' experience and counsel. When internal audit informally reaches out to audit committee chairs for advice and insight, rapport can be built, leading to better decision-making and collaboration. The same holds true for internal audit managing relationships with other stakeholders.
Improved communication helps mitigate some of the misalignment in perspectives that exist around internal audit's performance and management of risks. For example, the survey results showed a lot of disparity in the perception of how regulatory and compliance related risks were being managed by Canadian organizations. With effective communication, internal audit and stakeholders are more likely to hold a similar view of the requirements and performance.
The tone-at-the-top establishes the organizational culture and helps build trust and on-going dialogue. Our interviews revealed the importance of the board, CEO and audit committee chair in empowering and providing support to internal audit. However, in our most recent 15th Annual Global CEO Survey, only 53% of Canadian CEOs expected to change their approach to risk compared to 67% globally. With a significant percentage (85%) of CAEs and stakeholders perceiving risks as having increased, more support for internal audit and recognition of the risks will be required from Canadian CEOs.
Only if this support is in place, can internal audit activities and stakeholder expectations be aligned and critical business objectives met. In our experience, to build trust and respect for internal audit, organizations should also select a CAE who is ideally a visible and respected leader from within the senior management team. This level of support empowers the internal audit function to expand their scope and rise to the new floor.
For the most part, Canadian results were in alignment with global results, though some differences emerged. In Canada, 85% of the respondents viewed their risks as having increased, which was slightly higher than the 80% globally. It's important for the CAE to be a key member of the leadership team, and to receive top-down support in order to manage these expanding and emerging risks. Canadian stakeholders would also like internal audit to expand the role it plays to keep up with emerging risks while continuing to focus on traditional risks.
They want to see internal audit perform an advisory role in addition to its existing assurance role. This can be achieved if internal audit seeks to add value by providing more insight in its findings. It's important for internal audit to communicate closely with the audit committee chair and other stakeholders to be able to meet their expectations.
With the changing risk landscape and increasing stakeholder expectations, internal audit functions need to rise to the new "floor" or standard in terms of performance by expanding their role, communicating well and being more agile. This will help them earn a seat at the table — one audit at a time.
For more information and to read the global study, please visit www.pwc.com/ca/iastudyto download a copy of the PwC's 2012 State of the internal audit profession study.
The 2012 State of the internal audit profession survey was conducted in the fourth quarter of 2011 and the first quarter of 2012 and includes 1,530 respondents across the globe. More than 660 global non-internal audit stakeholders shared their points of view through participation in the 2012 State of the internal audit profession survey in addition to approximately 870 global CAEs across the globe. Nearly 100 global CAEs and stakeholders, including 10 of Canada's leading organizations also participated in one-on-one interviews, enabling PwC for the first time to share a comprehensive outside-in look at the profession.
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