ⓒ 2013 j csr. all rights reserved. “t rue ” v alue of i nternal a udit and d evelopment of...
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ⓒ 2013 J CSR. All Rights Reserved.
“TRUE” VALUE OF INTERNAL AUDIT AND DEVELOPMENT OF “CAPABLE” INTERNAL AUDITOR
IRCA Forum 2013
2013/06/23
Keizo Tsuchiya
President
Japan Registration Organization for Corporate Social Responsibility
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SIGNIFICANT INTEREST IN INTERNAL AUDIT
Amount of Information Uploaded to the Internet Importance of Internal Audit: 1,210,000 hits Credibility of Internal Audit: 1,260,000 hits Value of Internal Audit: 1,500,000 hits Effectiveness of Internal Audit: 1,860,000 hits
Are they a large number or small number? Corporate Value : 1,260,000 hits (the same as “Credibility of Internal
Audit”) Computer Virus (including virus) : 889,000 hits, which is far less than the
above !! Akashiya Sanma : 1,850,000 hits
Search results of “Yahoo! JAPAN“ on May 5, 2013
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VALUE OF INTERNAL AUDIT
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VALUE OF INTERNAL AUDIT Cost vs. Effectiveness (Value)
Calculate internal audit costs Annual cost of training to develop internal auditors or use of external
personnel as internal auditor Mandays of internal audit
- Mandays for audit planning, Mandays for audit execution (auditors/auditees), Mandays for analysis/wrap-up and reporting
Example:An organization with 200 employees and 10 Departments to be audited5 internal auditors (appointed from different Departments in the organization)3 internal audit teams (including 1 observer) Pre-audit training: 1 day(by an external tutor)
5 mandays + Tutor fee Preparation for internal audit (Collection of information and preparation of internal
audit plan): 1 day/team (6 mandays in total)) Internal audit: 3 days
Mandays on the auditor side: 6mandays Mandays on the auditee side: 6 mandays
Analysis/Wrap-up: 1 day/team (6 mandays in total) Reporting: 0.5 day/team (3 mandays in total)Total mandays + External tutor fee and all other expenses: 1.3 million yen
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VALUE OF INTERNAL AUDIT Effectiveness (Value)
Level of usefulness of information acquired by internal audit Level of usefulness for top management ・・ How well does internal
audit report meet expectations of top management?Example:Internal Audit ReportNonconformity: Record of xxx training was not kept in Department Y.Summary: 3 concerns and 8 opportunities for improvement
It was found that training records were not kept in some Departments; e.g. Study session about accidents taking place in competitors.
Interesting information Not interestedwas delivered
100 80 60 40 20 0 (%)
Value of internal audit for top management:
1.3 million yen x 30% = 390,000 yen
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VALUE OF INTERNAL AUDIT Value to provide top management with useful
informationMatured Audit results containing more
than 80 % of information that top management wantedValue: 1.04M ~ 1.3M yen
Valuable information that top management can use as useful information
Acceptable Audit results containing 60%~80 % of information that top management wantedValue: 780,000 ~ 1.04M yen
Less valuable information that top management can use just as reference
Immature Audit results containing 20%~60 % of information that top management wantedValue: 260,000 ~ 780,000 yen
Limited quality of internal audit that may overlook risks of accidents and miss opportunities for improvement in operations
Not Established
Audit results containing less than 20% of information that top management wantedValue: 0 ~ 260,000 yen
80% of information collected in internal audit is extremely low in value for the use of business management.
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VALUE OF INTERNAL AUDIT Internal audit must contribute to achievement of objectives and
targets of an organization. Internal audit must appropriately report changes in risks relating to
management of an organization. Internal audit must satisfy expectations of top management in
correctly reporting current status of an organization. Internal audit is not a means for certification, but an effective
means to implement a management system. Internal audit is also an activity to demonstrate validity of
autonomous management of an organization. Valid in terms of customer (public) expectations, competitiveness and
efficiency⇒ Internal audit also provides useful information for
communication with the third party. Internal audit is a professional work, but anyone can conduct it if
he/she is familiar with an organization. It is not difficult to create value. It is necessary, however, to appoint those who are highly ethical and trusted.
⇒ Enhance quality of assessment ! Enhance quality of analysis and evaluation !
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DEVELOPMENT OF INTERNAL AUDITOR
~ A MEANS TO DIRECTLY ENHANCE VALUE OF INTERNAL AUDIT ~
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HOW TO DEVELOP INTERNAL AUDITOR? The quickest way is to have a candidate internal auditor experience a
good internal audit. But opportunities to practice internal audits are limited in number.
⇒ The limited opportunities must be effectively organized.
To organize a good internal audit → To put in place the four conditions:Condition 1 : Top management’s support and commitment to the public, people and business Condition 2 : Training of internal auditorsCondition 3 : Cooperation of Departments to be audited Condition 4 : Establish PDCA of internal audit which facilitates development of internal auditors
Utilizing the limited opportunities of internal audit effectively, an organization, based on the above conditions, encourages a candidate internal auditor to experience a good and successful internal audit.
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CONDITIONS TO ORGANIZE A GOOD INTERNAL AUDITCondition 1: Top management’s support and commitment to the public, people and businessOrganization in which internal audit
makes a valuable contribution
Organization in which internal audit does not make a valuable
contribution
Top management recognizes benefits of internal audit and actively supports internal audit.
Top management is not interested in internal audit.
Top management commits to address all the problems.
Top management does not address problems.
Top management does not distort the truth. Top management disguises facts
Good internal auditors are developed as internal audit is respected as precious information source. Internal audit will become effective in providing information that top management wants.
Top management approach to internal audit accelerates departments’ uncooperative response to internal audit. When being appointed as internal auditor, people try to find a reason to decline the appointment.
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CONDITIONS TO ORGANIZE A GOOD INTERNAL AUDIT
Condition 2: Training of internal auditors Participate in practical training
Lectures, no matter how much they are, do not yield a positive effect.
Practical training is essential to develop a good internal auditor. Understand a practical image of internal audit
- How to conduct interview- Audit trail- Collection of evidences
Respond to information obtained in internal audit to deepen understanding about internal audit - Workload has increased suddenly ・・・ What would you assess?- The organizational structure has ben changed ・・・ What would
you assess?- Customer requirements have been changed ・・・ What would you
assess?- Processes have been changed ・・・ What would you assess?
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CONDITIONS TO ORGANIZE A GOOD INTERNAL AUDIT
Condition 3 : Cooperation of Departments to be audited Internal auditor must make maximum use of limited
opportunities of internal audit and identify “key to success.”
It is important for an internal auditor to improve his/her own ability and brush up auditing skills, but Condition 3 helps him/her compensate for the lack of the skills. Make it a priority to give an internal audit “successful
experience” Enjoying delicious dishes is essential for a cook to develop his/her
skills.Cooperation of Departments to be audited
Actively participate in identification of problems Provide sufficient information on both positive
and negative facts Trust internal auditors
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CONDITIONS TO ORGANIZE A GOOD INTERNAL AUDIT
Condition 4 : Establish PDCA of internal audit which facilitates development of internal auditors Plan - Preparation of internal audit Do - Execution of internal audit
⇐ Carry out internal audit based on Conditions 1 ~ 4・・ (Wishing for success)
- Analysis/reporting of internal audit results Check - Evaluation of quality of internal audit Act - Feedback of the evaluation results leads
to development of capable internal auditors
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PREPARATION OF INTERNAL AUDIT (ESSENTIAL TO ENHANCE EFFECTIVENESS OF INTERNAL AUDIT)
Preliminary information collection Understand objectives of the internal audit ・・・
(Support of top management) Define information that needs to be collected from
Departments to be audited and relevant Departments in order to satisfy the internal audit objectives
Changes, targets, processes/procedures, events (incidents/accidents, what is done well/what is not done well/what is concerned), challenges・・・( Cooperation of Departments to be audited )
Organize preliminary information so as to make it useful in internal audit Identification of key processes Sub-processes, conditions, criteria, qualification and training
which affect the key processes Risks and expected problems What needs to be assessed?
- What will be sampled and how much samples will be taken?- What information needs to be extracted?
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ANALYSIS/REPORTING OF INTERNAL AUDIT RESULTS
Try to produce an internal audit report to have people say “Good Job!!”
Analyze internal audit results as much as possible and examine the analysis results
Example of Analysis: Internal audit results generally have the following two
aspects:1. Management system (procedures and rules )2. Performance (degree of achievement of targets )
Analyze and examine the results based on the combination of the above two aspects:
A) Rules are strictly observed and targets are achieved. B) Rules are strictly observed but targets are not
achieved.C) Although rules are not observed, targets are achieved.D) Rules are not observed and targets are not achieved.
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EXAMPLE OF ANALYSIS:A) Rules are strictly observed and targets are achieved.
B) Rules are strictly observed but targets are not achieved.
C) Although rules are not observed, targets are achieved
D) Rules are not observed and targets are not achieved.
Targets Achieved
Targets not
Achieved
Rules Violated Rules Observed
C) + α possible cases :1.May not have achieved targets if
rules were observed2.May have set too easy targets 3.May disregard rules4.May turn to “D” when some specific
conditions are added
D) + α possible cases :1.May have achieved targets if rules
were observed2.May not have achieved targets
even if rules were observed3.May have set too aggressive
targets compared with capability4.May have problems in awareness5.May have problems in equipment
capability
A) + α possible cases :1.May be able to find more effective
processes2.May have set too easy targets3.May turn to B, C or D when some
specific conditions are added
B) + α possible cases :1.May have flaws in rules2.May have set too aggressive
targets compared with capability3.May have problems in equipment
capability4.May have problems in willingness
to achieve targets5.May turn to A when some specific
conditions are added
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REPORTING OF INTERNAL AUDIT RESULTS Report isolated failure of achievement or violation as a
deficiency Top management does not pay attention / It is Departments
that are expected to address such deficiency / It is not necessary to report each one of such deficiency
Also report magnitude of impacts Top management becomes aware of need for prioritization.
Also report analysis results Top management understands a need to take initiative; e.g.
allocation of resources. Also report those areas focused in the internal audit
Top management understands credibility of the results and problems in the process to derive conclusion.
Also report considerations on risks The report helps top management develop a next strategy.
→ “Good Job!!”
Drill down and Sort out
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EVALUATION OF QUALITY OF INTERNAL AUDITSelf-Evaluation Quality of preparation
Was preliminary information acquired effectively? Was the organized preliminary information useful? Were key processes identified correctly? Were risks to an organization identified properly? Was practical image of internal audit useful?
: Quality of internal audit
Was progress of target achievement in audited Departments assessed? Was degree of process maturity assessed? Were strength and weakness of an organization assessed? Was sufficient assessment conducted to meet the objective of the internal
audit? Was cooperation of audited Departments sufficient?
: Quality of analysis/reporting
Was the information obtained in the internal audit analyzed based on facts to identify relevance and risks?
Was the internal audit report compiled in a way to effectively communicate what needs to be communicated?
:
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EVALUATION OF QUALITY OF INTERNAL AUDIT Evaluation of internal audit by audited Departments →
Questionnaire survey, etc. Internal audit is a service to Departments to be audited, and
therefore quality of internal audit can be regarded as service quality.
Such a technique as “Servqual” that is widely used to evaluate service quality is considered to be used to evaluate quality of internal audit.
SERVQUAL SERVQUAL is a technique to evaluate service quality by measuring a gap
between a service “expected” by users and an actual service “perceived” by users. In this technique, 22 questions are asked for five dimensions determining perceived quality (evaluation on the scale of one to seven). Five dimensions
Tangibles: physical facilities, appearance of equipment and employeesReliability: capability to execute a committed service accuratelyResponsiveness: willingness to assist customers and promptly provide a
serviceAssurance: employees’ knowledge, politeness and capability to provide
confidence and trustEmpathy: consideration given to customers and care for each individual
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SUMMARY Significance of enhancing internal audit
Raise value of input to top management
Development of internal auditors is a key to the enhancement of internal audit.
Organizing a good internal audit is essential for development of internal auditors.Condition 1: Top management’s support and commitment to the public, people and businessCondition 2: Training of internal auditorsCondition 3: Cooperation of Departments to be auditedCondition 4: Establish PDCA of internal audit which facilitates development of internal auditors
A good internal auditor is developed by utilizing limited opportunities of internal audit, experiencing a good and successful internal audit based on the organized good internal audit conditions, and receiving feedback of internal audit quality evaluation results.
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ASSISTANCE TO ENHANCE INTERNAL AUDIT VALUE
Use of the IRCA’s OEA (Organisations employing auditors) program http://www.irca.org/ja/OEAs/
J CSR provides information on audit of organizations through the website of Auditor Bank.Thank you very much for your kind attention.
http://www.auditorbank.com/