At its best, an organization's internal audit function adds value to that organization by constantly improving its risk management, control and governance processes. But it's not that simple — leadership plays a key role in the effectiveness of internal audit functions.
According to a new study of more than 1,600 chief audit executives (CAEs), senior management and board members released by professional services specialist PwC yesterday, internal audit functions that have very effective leadership perform better and add greater value to their businesses.
PwC's 2016 State of the Internal Audit Profession study found that more than half of participating stakeholders now believe internal audit is contributing significant value to the business. That's up six points from PwC's 2015 study. PwC also found that 62 percent of stakeholders expect more value from internal audit, and 55 percent expect internal audit to be a more proactive, trusted advisor within the next five years.
The value of leadership
"We're seeing a close correlation between strong leadership and internal audit's ability to add value and deliver high performance," Jason Pett, PwC's Internal Audit Solutions leader, said in a statement Tuesday. "To continue fostering internal audit functions to become more trusted advisors within their organizations, stakeholders should promote strong internal audit leadership while audit executives work to elevate the performance and perceptions of their respective functions."
PwC identified five characteristics consistently exhibited by the most effective internal audit leaders that all CAEs should adopt:
- Create and follow through on a vision. PwC found that very effective internal audit leaders possess a strong vision that aligns with both a company's strategic direction and stakeholders' expectations. These leaders translate their visions into strategic plans and invest in capabilities in support of their vision, especially data analytics and technological tools that allow them to innovate on process.
- Source and retain the right talent. According to PwC's study, CAEs identified talent shortages as the most significant barrier to increasing their contributions as leaders. Additionally, as business transformation continues to evolve, additional new skills are needed. PwC says the most effective internal audit leaders exhibit two talent behaviors that stand out from the pack: a focus on mentorship and talent development, and an ability to source the right talent when needed. PwC says very effective internal audit leaders also have a "no hierarchy in the room" policy, which facilitates staff development through open discussion and working as a team to solve problems. Fully 73 percent of these leaders use co-sourcing as part of their talent strategies.
- Empower the internal audit function. Organizational position and the support of stakeholders plays an important role in the effectiveness of internal audit leaders. PwC found that 78 percent of very effective internal audit leaders are vice presidents or hold senior positions in their organization. Additionally, PwC found stakeholders are gravitating toward more senior leadership talent to fill the CAE role, noting their responsibility to empower the CAE by setting a culture that supports the importance of a strong control environment.
- Demonstrate executive presence. Underscoring the need for leadership talent in the CAE role, PwC found that 90 percent of very effective internal audit leaders excel in demonstrating executive presence. They bring bold perspectives and think broadly about the company. PwC notes that internal audit leaders must inform, educate and influence stakeholders as well as earn their trust. One of the trickier challenges internal audit leaders face is communicating with a variety of internal and external stakeholders who each have different expectations of the function.
- Partner with the business in meaningful ways. The most effective internal audit leaders set themselves apart by partnering with the business in meaningful ways. PwC says internal auditors should be able to stand out in three specific behaviors to become a very effective leader:
- Develop relationships built on trust.
- Build partnerships across the lines of defense to play greater roles in coordinating risk management across functions.
- Use those connections to raise their level of engagement across the organization, taking on leadership roles in working with management, compliance, legal and other assurance functions to develop an integrated assurance strategy.
PwC notes that some very effective internal audit leaders have taken to renaming the internal audit function (e.g., to audit services) to rebrand it as a collaborative functions that partners with the business.
Seeing clear and strategically
"It's through close alignment with various stakeholders and owning internal audit's role as a leadership function within the organization that can allow internal audit to help their companies keep up with the changing business and risk landscape," Pett said. "But all this can't be said and done without a clear vision, supported by a strategic plan and enabled with top talent.