Role of Internal Audit in a performance orientated

culture Experience and Challenges ahead

Conference of Public Sector Internal Auditors of

The Republic of Slovenia

Ljubljana, 20 October 2017

Overview of European Commission's IAS

• We are the European Commission’s internal auditors;

• We were founded in 2001 after the Reform process in the Commission; today we are a mature public sector audit service;

• We give recommendations, opinions and advice to Commission Directorate Generals and EU agencies;

• Our independence is provided for in our Mission Charter, adopted by the Commission.

We audit:

Outline of Presentation

PART 1: Performance & Culture

o The performance challenge

o Performance – Commission's journey

o IAS Performance Timeline (Historical)

o Performance Framework & how IAS audits it – Example

PART 2: Challenges

PART 3: Future Trends

PART 1: Performance & Culture

5

The performance challenge

Every action we take delivers maximum performance and value added.

People want us to achieve results. They also want to know

how we spend the tax payer’s money.

Jean-Claude Juncker President of the European Commission

Elements

What is Performance orientated culture ?

Elements required:

• Performance framework

• "Tone at the top"

• Alignment of staff with policy objectives

Performance – Commission's journey

• Progressive development as the Strategic planning and programming/Activity-based management (SPP/ABM) cycle featured more elements of performance measurement

• 2012 Synthesis Report – the Commission commits 'to deepen the performance framework'

• 2014-2020 MFF - Management Programmes (MPs) integrated the performance framework of the programmes

• 2015 – Junker Commission sets political priorities, performance management should be extended to all of our activities – Junker 10 Priorities

2015

1989 2001 2011

European Court of Auditors'

recommendation for an internal audit function

The IAS and IACs(*) are

born

Creation of Audit

Progress Committee

2016

IAS Overall Opinion

Methodology and tools

development

IAS Certification

External Quality Review

IAS/IACs coordinated

planning

IAS " Performance Timeline" (1)

1990

DG XX Financial Control

Ex-ante visa

DG XX/2 = IA unit

Performance audits

Centralisation of European

Commission's internal audit

Abolition of IACs

IAS as sole IA function for

European Commission &

Executive Agencies

2017

IAS Certification

External Quality Review

Financial/compliance audits

(*) Internal Audit Capabilities

Example: IAS Audits on Performance Management Systems (1)

Overall objective:

To assess whether the DGs have an adequate performance management framework/system for their day-to-day operational and administrative activities (internal) and/or for the delivery of their policy objectives (external).

Scope:

the setting of objectives and performance indicators and their quality;

the arrangements in place to monitor the achievement of objectives;

The reporting on the performance of activities.

Example: IAS Audits on Performance Management Systems (2)

IAS audit conclusion The performance management system in place in the audited Services, to plan, monitor and report on the achievement of objectives need to be significantly enhanced to strengthen its effectiveness. Significant weaknesses have been identified in terms of:

a) Strategic vision and clarity of the intervention logic

b)Quality of objectives and indicators

c) Monitoring and reporting on achievement of objectives.

PART 2: Challenges for Internal Auditors in the Public Sector

• Governance issues • Reporting to whom

• Stakeholders expectations – Who are they and do we know what they think

• Internal auditor independence – Charter is essential

• Role of auditing in public sector governance (see Bibliography)

• Internal Audit Capability Model for Public Sector (see Bibliography)

• Structural/Organisational issues • Large centralised system versus decentralised, federated

network

• Coordination. Coverage of Audit Universe

• Recruitment, retention and upskilling of staff • Going beyond 'compliance' requires different skills

Centralisation of Internal audit function in 2015 • EC IAS is sole internal audit provider since 2015

(following decision to centralise the internal audit function)

• New business model for the IAS successfully implemented, including increased staffing level

Main advantages: • Economies of scale. Application of standardised audit

procedures. Reinforced centralised QAIP programme with active follow-up.

• Increased IT capability - very effective in a cyber-orientated world

Risk mitigation • Reinforced role of audited service 'correspondent' to ensure closer

ongoing relationship

PART 3: Future Trends

o IAS Performance Timeline (Future)

o Seat at the table – what does it mean

{Trusted Advisor}

o EC IAS Conference 2017 – some points to

ponder

o Business 4.0 revolution

o Impact of Globalisation and Automation as

drivers of change

IAS "Performance Timeline" (Future)

• Proactive and responsive ''3rd line of defense''

• Digitally aware IAS

• More time on analysis (e.g. big data) than traditional audit techniques

• "Seat at top table"

• Trusted Advisor

IAS Conference "Innovation & Creativity in

Internal Audit" 2017

Performance audits

Financial/compliance audits

Data analysis techniques and innovative practices

Seat at the table – Trusted Advisor?

At recent ECIIA Conference in Basle Richard Chambers

presented on 'Trusted Advisors – Leveraging trust to

foster organisational success"(21 Sept. 2017)

His new book is entitled "Trusteed Advisors – Key attributes of

outstanding Internal Auditors"

His parting thoughts in relation to "Remaining the

Stakeholders' Confidant" were:

• Internal audit must evolve, or it will perish

• Today's heroes can become tomorrow's has-beens

• The future is awe-inspiring

• Trusted advisors must continually challenge and reinvent themselves

EC IAS Conference 2017 – some points to ponder https://ec.europa.eu/info/events/internal-audit-service-conference-2017-2017-oct-05_en

• The impact of technology on innovative auditing, Robert HODGKINSON • ABCD = Artificial Intelligence (AI); Blockchain; Cybersecurity

risk and Data (big data and data analytics)

• Presentation: The impact of technology on innovative auditing – Marc Vael, President of ISACA, Belgium • Artificial Intelligence "Just like us. Only better"

• Presentation: Transformation in the Internal Audit function – Neil White "Business 4.0 revolution" (see next slide)

LEGEND

Industr ial Revolut ion

Ear ly Stage Technology

Mature Technology

Future Event

1- Robotic Process Automation Source: Industry 4.0: Challenges and Solutions for the Digital Transformation of Exponential Technologies, Deloitte AG, 2015 and Deloitte proprietary research

1700s

1st Industrial Revolution

• 1784: First mechanical weaving loom

• Introduction of mechanical production facilities with the help of water and steam power

2nd Industrial Revolution

• 1870: First assembly line

• Through introduction of mass production with the help of electrical energy

3rd Industrial Revolution

• 1969: First programmable logic control system

• Through application of electronics and IT to further automate production

BPM

Systems

Early

Stage

RPA

Early Stage Cognitive

Capable RPA1 Solutions Deployed

Widespread Cognitive Augmentation and Automation

Dependence on Global Horizontal Category MLPs – (Possibly Regulated)

4th Business 4.0

• This revolution redefines what it means to be a professional

• RPA will have commenced deployment in most large businesses by 2017

• RPA and Cognitive Automation will be ubiquitous in business by 2020

• Horizontal Machine Learning Platforms (MLPs) become ubiquitous by 2025

1-3 4.0

2015

Within 10 Years

Digitization of white collar jobs via robotic and cognitive automation, and advances in data science

have sparked the Business 4.0 revolution

We are on the cusp of “Business 4.0”

Impact of Globalisation and Automation as

drivers of change

• Globalisation:

• Free Trade Agreements. Mutual recognition of standards, both technical and ethical (e.g. origin of goods/services)

• Internal audit profession - IIA Global, 180,000 members, 170+ countries. We are a globalised profession!

• Automation: • Both a Threat and an Opportunity: Joseph Schumpeter, the "gale of creative destruction"

• Streamlined industrial processes. Example: Adidas, 'Speedfactory' in Bavaria. Only 160 persons will be employed. The upside is that the whole manufacturing process will require highly skilled people to design, plan, operate and maintain such industrial plants.

• Entering a 4th Industrial Revolution with tools which will increase our productivity but also aid our decision-making with such concepts as Artificial Intelligence and Robotic Process Automation. This is akin to moving from the 'robotised' factory to the 'robotised' office'!

• Implications: Political – Possible upsurge of populist, inward-looking views. Increased State expenditure.

Economic – New ways of raising tax revenues, to fund State expenditure. Are current systems 'fit-for-purpose'? Talk of CCCTB or innovative ways of taxing the new '"Big 4" or GAFA !

However, the globalised world is where we live and it has contributed much more to economic growth than is credited! Remember Threats and an Opportunities

Being brave & innovative - some quotes

• First is from Peter F. Drucker, "the founder of modern management".

• “If you want something new, you have to stop doing something old”

• Second from Roger Von Oech (USA author, specialising in creativity)

• “Remember the two benefits of failure. First, if you do fail, you learn what doesn't work; and second, the failure gives you the opportunity to try a new approach.”

Bibliography

• IAS 2016 Annual report to European Parliament and the Council (Art. 99.5 of the Financial Regulation) – available in all languages, including Slovenian

• http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:52017DC0497

• IAS 2016 Annual report – Staff Working Document Ref. 52017SC0306 to European Parliament and the Council (Art. 99.5 of the Financial Regulation) – available only in English

• http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52017SC0306

• Supplemental Guidance: the role of auditing in public sector governance, 2nd Edition, page 10: Release Date: Jan. 2012

• https://global.theiia.org/standards-guidance/Public%20Documents/Public_Sector_Governance1_1_.pdf

• Internal Audit Capability Model for Public Sector {IA-CM} (2009)

• https://global.theiia.org/iiarf/Public Documents/Internal Audit Capability Model IA-CM for the Public Sector.zip

• Driving Success in a Changing World: 10 Imperatives for Internal Audit Written By: Larry Harrington, CIA, QIAL, CRMA, CPA, and Arthur Piper

• https://global.theiia.org/iiarf/Pages/CBOK-Research-Resource-Library.aspx

• Navigating Technology’s Top 10 Risks -Internal Audit’s Role {CBOK report 2015}

• https://global.theiia.org/iiarf/Pages/CBOK-Research-Resource-Library.aspx

Questions?

Contact the Internal Audit Service:

ias-europa@ec.europa.eu