Building Internal Audit Credibility
CA. Narinder Jit Singh
The author is a member of the Institute. He can be reached at narinder@icai.org and eboard@icai.in.
“Credibility has been an important aspect of life. It touches every part of our daily living. Whether human or organisations, everyone loves to deal with another human or organisations which are credible. It gives peace of mind and satisfaction. People and organisations are willing to make concessions and go step forward beyond required, when dealing with another person or organisations with well-established credibility. Internal Audit credibility has similar significance. Every interaction Internal Audit has within organisations, leads to some formation of perceptions towards its credibility. Internal Audit needs to manage and build credibility, if it intends to excel. Read on…”
The origin of word credibility can be traced back to Latin word credibilis and Medieval Latin credibilitas in mid-16th century. As per Oxford dictionary meaning of the word credibility is the quality of being trusted and believed in. Merriam-Webster, whereas, explains credibility as quality or power of inspiring belief. The main components of credibility are trust and belief.
Credibility has been an important aspect of life. It touches every part of our daily living. Whether humans or organisations, everyone loves to deal with credible human or organisations. People and organisations are willing to make concessions and go step forward beyond required, when dealing with another person or organisations with well-established credibility.
Internal audit derives much of its force and credence from being internal assurance function as a part of legal requirements. However, this force and credence does not lead to actual acceptance in the organisations and building of credibility in the eyes of various stakeholders. Building credibility requires working on multitude of factors.
As the internal audit function evolves, the mix of skills, knowledge and attributes that determine professional success transform. Technical skills remain absolutely necessary but is not the only trait that is required. The most effective Internal Auditor should have a broad range of non-technical attributes (such as credibility, integrity, soft and interpersonal skills, relationship building etc.) in addition to deep technical expertise.
Three Levels of Credibility
Credibility can be viewed at three levels as given below:
- Individual level: How credible an individual auditor is perceived within the organisation.
- Collective or group level: How credible the internal audit department is being perceived within the organisation.
- Profession as a whole: The credibility of the Internal Audit profession across industries and governance frameworks.
If correlated with Internal Audit – Credibility can be taken at individual auditor level, how credible he is being perceived within organisation. Second level could be, how credible department is being perceived within organisation. Third can be taken as the Internal Audit profession as a whole. Deliberation on third level is beyond the scope of this article, as it requires participation from Institute of Chartered Accountants of India and Government. It includes host of interventions as setting standards, formulating laws and regulations bringing minimum expected standards and compliances. Our Institute has already come up with various standards on Internal Audit and tirelessly working towards upliftment of the internal audit profession.
Perception Dynamics and Stakeholder Matrix
One thing is clear, credibility is perceptual and might differ from person to person. Similarly, different stakeholders might have different opinion about how credible auditor or internal audit department is. This difference arises due to different interpretations of interactions and touch points. For Internal Audit at organisational level, following can be identified as the main/ direct stakeholders:
Formation of Credibility Perceptions
As stated earlier, credibility can be at three levels. But it is perceived and retained at the individual level, which has an impact on collective formation of the perception.
- Individual Auditor Interactions: Whenever an individual auditor interacts with any of the stakeholders, it leads to some impact on the stakeholder. This impact may be negative or positive. These interactions build or destroy individual credibility of the Internal Auditor.
- Departmental Perception: Multiple interactions of different Internal Auditors with stakeholders leads to the formation of Internal Audit department credibility in the eyes of a particular stakeholder.
- Collective Organisational Image: This formation of image can get a boost or can get hampered, when stakeholders interact with each other and share insights about individual auditor or department as a whole. This leads to formation of collective credibility in the eyes of organisation.
- Leadership Role: Internal Audit Leadership interactions also play important role in every aspect building perception for Internal Audit Department. Reputation of the department may get affected depending upon the leadership, ethics, commitment and consistency displayed by the Chief Internal Auditor and second in lead. Morale of team and its interaction with others is also greatly impacted by the leadership team.
Interactions which lead to formation of perception between internal auditor and stakeholders can be both formal and informal one. Similarly, interactions between various stakeholders can be at formal and informal levels. These perceptions can be far from objective reality. Number of factors may affect these perceptual interpretations.
Factors Impacting the Perceptual Context
Following can have an impact on perceptual context, which in turn have bearing on the credibility:
1. Internal Audit History
Internal Audit history plays an important role in the establishment of perceptual context for the credibility within the organisations. If internal audit has been life blood of the organisation for long time and has history of his own existence besides existence of the organisation, then it might have extra hold in terms of organisation’s working, culture and heritage along with repository of what it has achieved along the way. It’s common knowledge, you can’t just bank upon laurels of your predecessors, department needs to prove it’s worth along the way.
2. Internal Audit Team Composition
History of how well a team is constituted, can also contribute to the credibility of the Internal Audit Department. Balanced composition of technical and professional experts can lend the required punch while carrying out assurance and advisory reviews. By having team composition and expertise, keeping in view nature and scope of organisation’s business, can contribute towards enhancement of organisational efforts in good governance and lending credibility to the departmental efforts.
3. Leaders Churned Out
In an organisation, if few prominent leaders are from Internal Audit department over a period of time, it will increase visibility and organisational understanding of its working. It sends right signals of equal importance tended to Internal Audit. As a matter of fact, Internal Audit should be given same preference as others, while deciding about succession planning of critical positions in organisational hierarchy. For this to happen, organisation and Internal Audit needs to imbibe right culture, which gives equal opportunities to everyone in the organisation. Usually few departments, depending upon organisations emphases, get undue advantage in career progression over others. It happens due to visibility accorded to them throughout the organisation and opportunities of the exposure they have.
4. Professional Composition of Leadership, Audit Committee and Board etc.
In general, organisations which have balanced composition of professional representations in leadership, audit committee and Board are able to take care of all organisational aspects comparatively better. They tend to give relatively more importance to Corporate Governance and Internal Audit. This situation lends more ear and better credibility to the voice of Internal Audit.
5. Period of Existence
In nascent stages of internal audit department setup, no one might be aware of working or utility of the department except for those taking decisions for setting up of the department. But over a period, Internal Audit might be able to build credibility by proving itself relevant to the organisation.
6. Major Historical Achievements and Contributions to the Organisations
Whatever said and done, major achievements and contributions which Internal Audit can exhibit to the organisation, is what creates real credibility. These contributions and achievements arise both through assurance and advisory assignments. These contributions could be in terms of strengthening control environments, product, process and technology improvement, bringing realignments in organisational structure etc. These contributions are possible only if there is a balanced blend of technical experts and professionals of different fields in Internal Audit.
“Internal Audit Leadership interactions also play important role in every aspect building perception for Internal Audit Department. Reputation of the department may get affected depending upon the leadership, ethics, commitment and consistency displayed by the Chief Internal Auditor and second in lead.”
Key Steps for Enhancing or Establishing Credibility
Few of above stepping/ corner stones might not be in the control of Internal Auditor or Internal Audit leadership when thinking to established or enhance credibility of the internal audit within organisation. Following are the steps which can be helpful in enhancing or establishing credibility:
a) Reality Check – Coming Out of Dilutions
First and foremost, step towards building credibility of Internal Audit department within the organisation, is recognition of the fact that Internal department is dwindling, not heard and losing its credibility with stakeholders. Number of factors may point out such situations about loss of credibility:
Based on above factors, an evaluation scale can be devised for taking stock of present situations. Otherwise also, from interactions, informed judgements can be made about existing conditions. Accurate and frank appreciations of current conditions will go to help in long way for identification of lacunae and plugging of the same to build reputation and credibility.
b) Adherence to Ethics
In any profession, reputations are built on continuous and unwavering adherence to the ethics. Ethical conduct leads to building of faith and trust. Internal Audit is also not an exception. Demonstrating and standing up for the values go in a long way to build credibility for the internal audit department. It is not only an individual internal auditor’s responsibility, but collective accountability within Internal Audit department to ensure that ethical behaviour is observed by one and all. Other members of the organisation might not point out but keep an eye that internal auditor and chief audit executive live up to ethical behavior. Every member of the internal audit team should understand that maximum respect is earned by adhering to ethical and unbiased behaviour.
c) Auditor Job Satisfaction
Job satisfaction has multitude of factors involved with it, besides the monetary aspect. These factors include:
- i) Opportunities for career progression
- ii) Opportunities to demonstrate knowledge and skills
- iii) Freedom to express views without retributions
- iv) Opportunities for personal and professional development
- v) Mentoring and guidance
- vi) Acceptance and acknowledgements for the contributions
- vii) Independence to work
- viii) Adequate monetary compensations
- ix) Job Stability
- x) Cohesive team environment, etc.
Dissatisfactions churn below average performance along with employee turnover. Continuity and stability are key factors contributing towards performance. Internal auditor’s job satisfaction too is governed by the above-mentioned factors. Organisation and leaders responsible for deciding Internal Audit destiny, needs to build conducive working environment for auditor’s job satisfaction. With existence of these essential parameters, optimum performance can be expected from the auditors. Optimum performance will lead to building of the credibility in the organisation.
d) Internal Audit’s Organisational Structure
Importance of reporting structure within Internal Audit and its alignment across organisation can’t be neglected. Getting an optimum return from Internal Audit efforts, its structure should be built on factors which take care of organisation needs and environment along with internal skills and capabilities rather than haphazard structuring on the whims and fancies of those at helm of the affairs. It should also consider vertical and horizontal diversification of the organisation along with its geographical spread and internal audit skill-set that the organisation wants to develop. If internal audit department is carefully structured keeping in view various factors, it will go a long way in streamlining efforts and building credibility among stakeholders.
e) Competency and Quality of Auditors
No credibility is possible to build unless and until, Internal auditors are knowledgeable, skilled and competent keeping in view organisation’s area of operations and requirements. Building knowledge, skill and competency is thought provoking and long drawn process. Routine training relating to internal audit and related seminars might help to develop understanding about internal audit. To develop deep understanding about business and various functions, specialized training and courses are required to give a different perspective to the auditor aside from regular training. These training and courses will help auditors to understand and speak language of the business, which is very essential to build any credibility in their eyes along with own functional knowledge.
f) Developing and Using Internal Auditor Strength Matrix
Having good delivery is of prime importance and can’t be relegated to backstage. Developing and maintaining Internal Audit strength matrix is one of the ideas for great output delivery to the organisations in terms of assurance and value add. Strength matrix would help in informed decisions regarding allocation of work as per strength of the auditors. To train budding auditors, they can be appended to experienced and more knowledgeable auditors for enhancement of their capabilities for the future. Expert pool can be developed within Internal Audit and organisation as a whole for guidance and fall back mechanism.
g) Leaders in Internal Audit Department
Great many battles are lost due to incompetent leaders. Selection and placement of leaders in Internal Audit department requires careful deliberation, rather than pushing anyone who fails to deliver anywhere else in the organisation. Any manager can have good output and performance from an exceptional team. But only good leaders have a capacity to take exceptional output and performance from below average or average teams. Having goods leaders with an understanding about functioning and requirements of Internal Audit and organisations are needed to build much required credibility. Having a weary Head Internal Audit will jeopardize the functioning of the department.
“Internal Audit Head needs to check his action and behaviour which promotes biases, hyper competition, subjugation of individual auditors, promotes lack of cooperation and suspicion among team members.”
h) Internal Department Relationship
Building a conducive and cooperative relationship within department can lead to great output and greater job satisfaction on the part of the auditors. It is the most challenging task, as it involves managing human relationship. It requires conscientious efforts on the part of everyone involved especially departmental Head. Internal Audit Head needs to check his action and behaviour which promotes biases, hyper competition, subjugation of individual auditors, promotes lack of cooperation and suspicion among team members.
i) Cultural Alignments and Fittings
Aligning Internal audit culture with organisational culture is also required to avoid undue friction and frustrations. Any misfits need to be ironed out. To do it, efforts are required on the part of both Internal Audit department and organisation.
j) Building Stories
Building success stories is a great way of developing internal and organisational bonding. Many organisations build stories and share across organisation. These stories help to establish connection between stakeholders and organisations. On similar lines, internal audit stories can help to build desired long-term connection with various stakeholders.
k) Stakeholder Relationship Management
In most of the organisations, Internal audit is a mandated activity. Rarely those charged with leading internal audit activity find any need for stakeholder relationship management except for managing direct reporting responsibilities. Stakeholder relationship management is as critical as managing direct reporting responsibilities even though results might not be as visible or lucrative as in the case of direct reporting relationship management. While meeting in any case are conducted for deliverables but it’s also good to meet over cup of tea with various stakeholders. It might give, we are on the same team feeling along with developing and strengthening bond.
l) Participation / Marketing Audit Work
As earlier highlighted, internal audit is mostly a mandated activity. So, very few think of stakeholder’s participation and marketing of the internal audit work except for direct reporting line and audit committee. How to manage stakeholder participation and marketing audit work, is a difficult proposition, but if managed properly, it can lead to the greatest reap of harvest in building credibility.
m) Deliverables
For any function, quality deliverables are pre-requisite for building credibility. Internal Audit is also not an exception. Ensuring quality deliverables in terms of assurance and value add, goes without saying for achieving any credibility in the eyes of stakeholders. Volumes of information and auditors’ trainings are available on enhancing quality of internal audit deliverables.
n) Power Politics – Can’t Stay Away – Need to Manage
Last but not the least, leaders and auditors alike, need to manage organisational power politics. Better if, internal audit can stay away from politics. Any power play politics should be timely addressed, managed and rooted out in an unbiased manner in the interests of organisation as a whole.