state of the internal audit profession 2016 · 4 state of the internal audit profession 2016 the...

Middle East Perspective State of the Internal Audit Profession 2016

WhitepaperSeptember 2016

Foreword 4Introduction 5Value – Staying effective in a changing world 6Leadership – 5 attributes of the most effective leaders 8Talent – Investing in capability and capacity 10Conclusion - Internal Audit Function 12About the Global research 13About PwC Middle East 14Contacts 15

4 State of the Internal Audit Profession 2016

The economic landscape across the Middle East is changing. While oil prices are beginning to climb from a low of $27 a barrel in February 2016 – albeit slowly – there is the growing realisation that lower oil and gas prices are here to stay. In a region where the economy has historically been dependent upon oil and gas, this new economic reality is already having a profound impact on the broader business environment.

All organisations face risks - reputational risk, supplier or market failure, health and safety, regulatory, political, financial and cyber risk are just some of the risks that can impact the decisions taken to manage and run a business. Technology and the

Foreword

globalisation of markets have transformed how we approach the commercial landscape, creating heightened scrutiny throughout businesses from both an operational and opportunity perspective.

Because we are living and doing business in such an increasingly complex, uncertain and rapidly changing world, how an organisation manages these risks is critical to success or failure.

The internal audit profession has a vital role to play in helping their organisations to identify and manage new risks, as well as adapt to change. Greater risks mean that, in order to effectively respond to these challenges, the internal audit

function needs to embrace a wider range of responsibilities beyond their traditional comfort zone of financial oversight - challenging current practice, championing best practice, and positioning the function as a catalyst for improvement - so that the organisation as a whole achieves its strategic objectives.

State of the Internal Audit Profession 2016 5

How are these trends affecting the work of the internal audit function and are they equipped to deal with the challenges known and unknown? And what does this mean for the Middle East?

In March 2016, PwC published its 2016 State of the Internal Audit Profession Study. This annual global survey gathered quantitative and qualitative insight from more than 1,600 Chief Audit Executives (CAEs) and their stakeholders worldwide, including senior management and board members, to understand perceptions of the performance and value of internal audit within their organisations.

A proportion of these insights came from across the Middle East. And while this proportion may not be statistically significant, it does offer us interesting indications of how the Middle East Internal Audit Function compares globally and provides a focus around 3 core themes that are impacting the performance and perception of internal audit throughout the region:

1 1 Value – how is the function staying effective in a changing world?

1 2 Leadership – what are the attributes of the most effective internal audit leaders?

1 3 Talent – what are the necessary skills and how do we find the right balance in capacity?

This report discusses these 3 themes and provides an agenda for action that internal audit leaders and their teams can take to make the kind of impact within their organisations towards which they should be aspiring.

Introduction


This is extremely encouraging for the profession, but there is room for improvement - 83% of our global respondents who received some value and 46% of those who received significant value still expect more value from internal audit. When we asked the same question of our Middle East survey participants, their answer was overwhelmingly ‘Yes’ (100% of Middle East respondents).

These responses are an indication that many stakeholders don’t always understand what’s possible from internal audit,

Staying effective in a changing world

Both the global and the Middle East responses to our 2016 survey tell us that, as a profession, internal audit delivers value (74% and 95% respectively); and for the Middle East, that value is significant (80%).

Value

Source: 2016 PwC State of the Internal Audit Profession Study

The journey towards value

Insight generator:

Proactively suggesting meaningful improvements & risk assuranceAssurance provider:

Objective assurance of the effectiveness of an organisation’s internal controls through execution of the audit plan

Trusted advisor:

Value-added services & strategic advice to the business

Problem-solver:

Analysis & perspective on root causes of identified issues so the business takes corrective action

particularly if their perception of internal audit ‘value’ rests on the traditional definitions of compliance, control and governance. Defining what the wider business wants and needs from internal audit is often not addressed, leaving a value gap that remains unfilled.

The journey to capture this unrealised value in internal audit can be articulated as the journey from assurance provider and problem solver to insight generator and trusted advisor to the business:


Yet our survey and accompanying interviews suggest that stakeholders remain stuck in their views that internal audit’s role is as a traditional assurance provider.

5 Essential steps for increasing value

Stakeholder expectations are rising – even for those who are already receiving significant value from the function – and internal audit can and should aspire to more. There is a real opportunity for internal audit to expand beyond its traditional assurance role and become a more proactive, collaborative partner to the business.

‘Internal Audit is still trying to find its feet as a profession…. [There is] a lack of business acumen [and] recommendations are not practical’. – Group Audit Executive, Middle East

Action Key questions

Articulate and agree expectations of the function with stakeholders

What do our stakeholders expect from internal audit?

Step outside of executional silos and integrate across the business

How can we step out of our executional silos and engage more widely across the business?

Build the capabilities of the team What capabilities do we need to build within the team in order to remain effective and deliver value?

Deliver internal audit excellence every time Are we delivering a high-performing internal audit function? How do we measure this?

Clearly articulate what ‘added value’ means to the business

Are we collaborating with the business to define what internal audit ‘value’ means to them?


‘The measure of a leader isn’t dependent on whatever today’s crisis happens to be. Trust, independence and credibility [are key]’. – Chief Audit Executive, Middle East

The 2016 State of the Internal Audit Profession Study conducted nearly 100 interviews, with a number of those interviews from the Middle East, as part of their research into the topic of leadership. They found that 5 key attributes consistently came to the forefront, and our Middle East survey and interviews echo those findings:

• Strategy and Vision

The most effective internal audit leaders possess a strong vision and develop an internal audit strategy that aligns with both their organisation’s strategic direction and their stakeholders’ expectations. Visionary leaders are able to see not only where they want to go butalso what they have to do to get there, fostering innovation within their function.

• Business Alignment

The most effective leaders focus on developing trust-based relationships throughout the business. By establishing close partnerships, they better understand what is happening in the business, align themselves and the internal audit function with change, and get ahead of risks while retaining independence and objectivity.

• Gravitas and communication

The most effective leaders possess gravitas; they are confident, composed, and authentic. They have the breadth of skills to bring bold perspectives, think broadly about the organisation, communicate powerfully as peers in executive forums and influence beyond the internal audit function.

• Position

Strong positioning within an organisation enables the most effective leaders to facilitate proactive discussions about strategic risks as well as influence others in order to build an effective culture of controls throughout the organisation. They drive value and champion change, and use their position to offer greater business contributions.

The PwC 2016 State of the Internal Audit Profession Study found a clear correlation between value and leadership. Simply put, strong leaders are the driving force behind internal audit’s ability to add value and deliver excellence beyond its traditional role.

So how are leaders in the Middle East performing?

While overall, almost 1/3 of Middle East respondents rated their leaders

‘[IA] lacks the strategic view…[they are]not functioning at the right level, too operational versus strategic’. – Group Audit Executive, Middle East

as effective (29%), only 14% rated them as very effective. The reverse is true globally, with almost 1/3 of global respondents rating their leaders as very effective (27%) and 20% as effective. However, a worrying percentage of responders (28%) rated their Middle East Leadership as being either Ineffective or Very Ineffective, compared to only 14% of their global counterparts.

When we delved deeper into what makes for effective leadership, we found strong indications of the connection between leadership, performance and value.

Please indicate your level of agreement with each of the following statements regarding the traits of your IA leader

Leadership 5 attributes of the most effective leaders


5 Essential steps for strengthening leadership:• Talent

The most effective leaders excel at the development and mentorship of their people. They develop a talent model that aligns with both the business and internal audit’s vision, delivering the right people with the right skills in the right locations at the right times, leveraging external resources as necessary to meet the organisation’s needs.

‘[Traits of IA leaders are] Emotional intelligence, communicator, motivator.’ – Group Audit Executive, Middle East


Articulate the internal audit vision and strategy, and share across the business

Do I have a clear vision and a strategy for the internal audit function, and how have I shared it across the business?

Map and begin to build the relationships necessary to take internal audit outside of its functional silo to better align with the wider business.

What relationships do I need to build throughout the business so that the internal audit function is aligned to wider business needs? Have I built and do I maintain a relationship matrix?

Create a personal development plan Do I personally possess the right blend of skills and behaviours to lead and influence broadly throughout the organisation? What do I need to develop?

Build business acumen How do I build my stature within the organisation? Do I deeply understand my business and the markets where we operate?

Assess/ develop an internal audit talent development programme

Am I developing the right skills and business perspective necessary for now and for the future within my team? How am I developing the next-generation of internal audit leaders?


The increasing complexity of risk and the changing nature of that risk highlighted the importance of talent throughout our survey and interviews. Internal audit functions have been actively reviewing their talent models within the past year, 71% globally and 80% across the Middle East.These reviews have led to major changes. Within the Middle East, the trend has been to change internal recruiting targets (36%) and increase the use of co-sourcing (27%).

Anecdotally, from our work with clients and through our interviews, we have found an increasing focus towards a broader skill-set that includes IT and Data, ERM and CyberSecurity. This skill-set is being accessed not only through recruitment but also with new sourcing arrangements that include formal co-sourcing as well as master service agreements with professional service firms that support the delivery of internal audit activity, recruitment and sourcing arrangements.

TalentInvesting in capability and capacity

Capacity – particularly in these new areas of risk - is also a challenge. Our interviews indicate that new models of resourcing are bringing real benefits to the internal audit function. The trend towards new sourcing arrangements is enabling internal audit to bring in new skills and perspectives, enabling a more flexible and agile function that can better respond to the rapidly changing and complex business landscape.

‘Guest auditor’ programmes have also been enhancing the value of the IA function by working collaboratively and in different ways.

One outcome of this trend is that internal audit budgets have also shifted focus – to increased expenditure on: co-sourcing (31%); training and development (24%); and investment in enabling tools and technologies (17%).

‘[We’ve] reduced headcount and [are] co-sourcing now…recruiting senior level experienced managers [in-house]’.

– Senior Vice President Internal Audit, Middle East


Essential steps for talent management:


Assess and revitalise the talent model When did we last assess our talent model? What changes do we need to make?

Map existing talent against required skill-sets and experience

Do we have the correct balance of business acumen, skills and experience within the function? Is our talent model sufficient/aligned to the needs of the business, now and into the future?

Identify talent gaps What new skills do we need within the function?

Articulate cost/benefits for recruitment versus co-sourcing and other new sourcing arrangements

What are the benefits of in-house versus co-sourced talent? Do we have the right balance?

Assess and improve our training programmes

Are we investing in the right training opportunities and tools/technology in order to develop our people and progress our function?

‘[We have] a continuing and strengthened focus on professional qualifications.’ – Chief Audit Executive, Middle East

‘Co-sourcing has proved its value…[through] the quality of technical expertise [and] intellectual content.’

– Chief Audit Executive, Middle East


Towards a more effective internal audit function

Our survey and in-depth interviews highlight the three core themes of internal audit - value, leadership and talent. And we’ve discussed within this report key steps that can be taken now to improve the function’s effectiveness within each of these themes.

However, these three themes are fundamentally inter-connected and there are five key mind-sets that are necessary when embarking on the journey towards a more effective function:

11 Aspire to added-value

By developing a vision and a strategy beyond the traditional internal audit oversight activities of risk governance, compliance and control – and aligning to the wider business - the internal audit function will be able to move from ‘assurance provider’ and ‘problem-solver’ to generate more meaningful insight and strategic advice that will contribute to business growth.

21 Embody leadership

With such strong connections between leadership, performance and value, internal audit leaders – and their teams - have the opportunity to build a culture and platform that not only understands and identifies risk, but also creates an environment where the business is better able to proactively mitigate new risks and adapt to change.

31 Understand and embrace the wider business agenda

A business-aligned internal audit function will be better enabled to provide broader business perspectives, deeper insights and identification of recurring or thematic issues that might impact the organisation.

41 Engage throughout the organisation

Developing relationships and collaborating across functions outside of the usual internal audit process builds trust, enabling not only a better understanding of the business

but also responsiveness to change as the commercial landscape shifts and new risks emerge.

51 Build skills and expertise

A flexible and agile talent model that invests in training and development as well as new tools and technologies within the organisation will be better prepared to meet the challenges of an increasingly complex business environment. In addition, supplementing the core team with sourcing capability and capacity will bring in new skills, abilities and perspectives that can drive additional internal audit value.

Conclusion


About the Global research

The 2016 State of the Internal Audit Profession Study combines qualitative and quantitative research. An online survey generated response from 1,679 executives, of whom 58% were internal audit leaders and their direct reports and of whom 42% held management or board titles. Participants spanned a wide array of industries, geographies, and company sizes.

To gather qualitative data on the topic of leadership, PwC also conducted one-on-one interviews with nearly 100 stakeholders and chief audit executives across North America, Europe, the Middle East and Asia. In addition to reviewing those interviews in detail, PwC used a tool that enables analytics on unstructured data to identify the frequency of keywords and themes across the interview set.


Our commitment: Deliver value, with you, every day

Established in the region for 40 years, PwC has more than 4,000 people in 12 countries across the region: Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Oman, the Palestinian territories, Qatar, Saudi Arabia and the United Arab Emirates.

Our team operates across the Middle East bringing international experience delivered within the context of the region and its culture. We bring the collective knowledge and experience of more than 208,000 people across the entire global PwC network in advisory, assurance and tax to help you find the value you are looking for.

http://www.pwc.com/m1/en.html

About PwC Middle East


Middle East

Andrew GarrettHead of Internal Audit Services, Middle EastTel: +971 50 614 [email protected]

Craig AtkinsonFinancial Services Internal Audit Leader, Middle EastTel: +971 04 304 [email protected]

Firas HaddadGovernment Internal Audit Leader, Middle EastTel: +971 2 694 [email protected]

John SaeadPrivate Sector Internal Audit Leader, KSATel: + 966 56 007 [email protected]

Motaz SalehGovernment Internal Audit Leader, KSATel: + 966 12 610 [email protected]

Nabil DiabInternal Audit Leader, EgyptTel: +2 2759 [email protected]

Paul PilkingtonInternal Audit Leader, OmanTel: + 968 2455 9110 [email protected]

Amr El GendiInternal Audit Leader, QatarTel: +974 4419 [email protected]

Daryoush Mohammadi PourInternal Audit Leader, KuwaitTel: +965 227 [email protected]

Michael OrfalyInternal Audit Leader, JordanTel: +962 6 500 [email protected]

Contacts

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon theinformation contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to theaccuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability,responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication orfor any decision based on it.

© 2016 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity.Please see www.pwc.com/structure for further details.

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