The Key to Better Internal Audit Reports

In a year defined by the COVID-19 pandemic, it is hard to imagine much else of significance cracking my annual blog post on the biggest internal audit headlines for the year. While it is true that the deadly virus and its impact on business, society, and internal audit operations dominated our lives in 2020, other events also influenced the profession.

So, here are the top seven headlines that I believe defined internal audit in 2020.

Global Pandemic Reshapes the Risk Landscape
There have been few events in my career and lifetime that have had such a profound impact as COVID-19. I'm certain most others would say the same. On a professional level, the pandemic and its fallout significantly influenced the risk landscape in many ways.

It began by testing crisis management and business continuity and exposing strengths and weaknesses in organizational governance. It soon upended manufacturing, supply lines, inventories, and deliveries. The virus rewrote the book on the workplace, making work-from-home the norm, and it fundamentally changed consumer buying habits. It devastated some industries, such as airlines, tourism, and hospitality, while creating booms for others, such as package delivery, online consumerism, and home entertainment. It accelerated the adoption of technology in business, and changed the rules on talent management. The next challenge will be bringing employees safely back into the workplace.

The risks and opportunities associated with each of these significant disruptions are only now becoming clear, and new, unforeseen risks are sure to evolve from the pandemic's long-term impact on macro-economics, the geopolitical landscape, and society in general. Even with the rollout of vaccines in record time, the world still faces significant risks in 2021 related to COVID-19. It is likely that the next year's top internal audit headlines also will include some aspects of this pandemic.

IIA Publishes Three Lines Model
In the midst of this disruption, The IIA published the revised Three Lines Model. The timing couldn't have been better. The new model, which revised the trusted Three Lines of Defense, offered sound direction on improving organizational governance and encouraging communication and collaboration among the three key players in governance: the governing body (board), executive management, and internal audit.
Importantly, it helped delineate the roles for each key player, while discouraging the silos that often lead to governance breakdowns. As I wrote in a blog post shortly after the new model was published in July: 

The new model's principles-based approach is designed to provide users greater flexibility. Governing bodies, executive management, and internal audit are not slotted into rigid lines or roles. The "lines" concept was retained in the interest of familiarity. However, they are not intended to denote structural elements but a useful differentiation in roles. The areas of responsibility are generally described as: accountability by the governing body to stakeholders for oversight; actions (including managing risk) by management to achieve organizational objectives; and assurance and advice by an independent internal audit function to provide insight, confidence, and encouragement for continuous improvement.

Some have argued that internal audit should remain well within the third line, out of an abundance of caution to ensure its independence and the objectivity of its staff. However, the refreshed model clearly emphasizes that "independence does not imply isolation." As the update notes, "There must be regular interaction between internal audit and management … . There is a need for collaboration and communication across both the first- and second-line roles of management and internal audit."

Internal Audit Steps Up During COVID-19
While the whole world was attuned to the overarching risks that the pandemic presented in 2020, another pandemic-related headline didn't escape notice of our profession: How agile we were in responding to the crisis.

In light of the challenges posed by COVID-19, as well as the Three Lines Model's encouragement of internal audit to regularly interact with management, it was heartening to see how internal audit sprang into action to support organizational responses to the pandemic.

Early polling by The IIA's Audit Executive Center found internal audit functions were actively involved in their organizations' response to COVID-19. That included taking on special assignments, such as cost-saving identification projects, expense tracking, and risk mitigation.

I noted in an April blog post that findings from the poll reflected how internal audit functions modified audit plans to identify and mitigate pandemic-related risks. From the quick poll report:

"Overall, internal audit leaders are demonstrating flexibility and agility in response to the dynamic risk environment caused by COVID-19. Three-quarters of internal audit functions have updated their audit plans. Two-thirds are identifying emerging risks, and over half have already updated their risk assessment."

The quick poll also looked in detail at the kind of work internal audit functions were doing in the first month after the pandemic's impacts were felt in the U.S. The results show many internal audit functions operated nimbly, with the flexibility needed for an "all-hands-on-deck" approach. From the report:

"Over half of respondents have discontinued or reduced scope for some audit engagements and nearly half have canceled some audit engagements. Where internal audit leaders are demonstrating agility is noted in the fact that nearly 4 in 10 respondents have added new engagements due to COVID-19 and 4 in 10 have redirected staff to put aside their normal audit work to assist their organizations in this time of crisis by doing non-audit work."

Russian Cyber Hack Endangers U.S. National Security
Recent revelations about a "massive and ongoing" cyberattack promises to create a bevy of new targets for internal audit's coverage. According to reliable news accounts, cybersecurity experts believe a well-organized group of hackers exploited a loophole in products developed by an IT firm that provides technology software for government agencies and hundreds of large companies.

The successful March attack gave the cybercriminals access to sensitive information and allowed them to monitor the communications of dozens of companies and agencies that use the company's software. This includes the U.S. departments of Treasury, Commerce and Energy, as well as the Los Alamos National Laboratory, which oversees nuclear weapons.

The attack, while carried out as a cyberattack, was more akin to espionage, because the hackers were able to monitor communications of corporate and government officials for months. As we have witnessed before, headlines that break late in the year tend to persist long after the New Year dawns. So, internal auditors should keep this and other cybersecurity risks circled for their 2021 audit plans.U.S.

Election Results Promise Regulatory Uptick
As we have witnessed repeatedly in the 21st century, U.S. presidential elections that usher in new administrations often significantly disrupt the regulatory landscape. While the outgoing administration has focused on systematically rolling back regulations and decreasing the size of federal agencies that oversee regulatory compliance, the incoming administration is under significant pressure to boost regulations, particularly in areas relating to climate change, international trade, immigration, and the social safety net.
 
As I have observed on many occasions, new regulations beget new compliance risks, and new compliance risks must be on internal audit's radar.

GE Ends Internal Audit Rotational Staffing Model
In an effort to streamline operations, GE announced the elimination of its Corporate Audit Staff (CAS) program in November. The program, described in a Wall Street Journal article as a "rigorous multiyear rotation through various divisions that the conglomerate has long used to groom future leaders," was a mainstay for one of the oldest corporate internal audit functions in the U.S.

I first studied the GE model back in the 1990s, when I was leading a re-engineering initiative of the U.S. Army's internal review (audit) program. I saw extraordinary potential in the program, which ended with participants moving into various business roles in the company. The GE model would eventually be considered the gold standard for rotational staffing programs. The concept proliferated, with similar approaches adopted by companies like The Home Depot and Chrysler. While not without its critics, the model helped raise awareness of internal audit's value by showing how a deep understanding of risk and the risk mitigation process is fundamental to good governance.

It would be highly speculative to assume that GE's actions will have broad ripple effects on the internal audit profession; however, there is no denying that this news was a top internal audit headline for 2020.

IIA-Australia Introduces Internal Audit Better Practice Guide for Financial Services
Stemming from findings by Australia's Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, IIA-Australia stepped up to create the Internal Audit Better Practice Guide for Financial Services in Australia, a significant tool to position internal audit as a critical player in financial services.In a year defined by the COVID-19 pandemic, it is hard to imagine much else of significance cracking my annual blog post on the biggest internal audit headlines for the year. While it is true that the deadly virus and its impact on business, society, and internal audit operations dominated our lives in 2020, other events also influenced the profession.
So, here are the top seven headlines that I believe defined internal audit in 2020.Global Pandemic Reshapes the Risk Landscape
There have been few events in my career and lifetime that have had such a profound impact as COVID-19. I'm certain most others would say the same. On a professional level, the pandemic and its fallout significantly influenced the risk landscape in many ways.
It began by testing crisis management and business continuity and exposing strengths and weaknesses in organizational governance. It soon upended manufacturing, supply lines, inventories, and deliveries. The virus rewrote the book on the workplace, making work-from-home the norm, and it fundamentally changed consumer buying habits. It devastated some industries, such as airlines, tourism, and hospitality, while creating booms for others, such as package delivery, online consumerism, and home entertainment. It accelerated the adoption of technology in business, and changed the rules on talent management. The next challenge will be bringing employees safely back into the workplace.
The risks and opportunities associated with each of these significant disruptions are only now becoming clear, and new, unforeseen risks are sure to evolve from the pandemic's long-term impact on macro-economics, the geopolitical landscape, and society in general. Even with the rollout of vaccines in record time, the world still faces significant risks in 2021 related to COVID-19. It is likely that the next year's top internal audit headlines also will include some aspects of this pandemic.IIA Publishes Three Lines Model
In the midst of this disruption, The IIA published the revised Three Lines Model. The timing couldn't have been better. The new model, which revised the trusted Three Lines of Defense, offered sound direction on improving organizational governance and encouraging communication and collaboration among the three key players in governance: the governing body (board), executive management, and internal audit.
Importantly, it helped delineate the roles for each key player, while discouraging the silos that often lead to governance breakdowns. As I wrote in a blog post shortly after the new model was published in July: 

The new model's principles-based approach is designed to provide users greater flexibility. Governing bodies, executive management, and internal audit are not slotted into rigid lines or roles. The "lines" concept was retained in the interest of familiarity. However, they are not intended to denote structural elements but a useful differentiation in roles. The areas of responsibility are generally described as: accountability by the governing body to stakeholders for oversight; actions (including managing risk) by management to achieve organizational objectives; and assurance and advice by an independent internal audit function to provide insight, confidence, and encouragement for continuous improvement.


Some have argued that internal audit should remain well within the third line, out of an abundance of caution to ensure its independence and the objectivity of its staff. However, the refreshed model clearly emphasizes that "independence does not imply isolation." As the update notes, "There must be regular interaction between internal audit and management … . There is a need for collaboration and communication across both the first- and second-line roles of management and internal audit."Internal Audit Steps Up During COVID-19
While the whole world was attuned to the overarching risks that the pandemic presented in 2020, another pandemic-related headline didn't escape notice of our profession: How agile we were in responding to the crisis.
In light of the challenges posed by COVID-19, as well as the Three Lines Model's encouragement of internal audit to regularly interact with management, it was heartening to see how internal audit sprang into action to support organizational responses to the pandemic.
Early polling by The IIA's Audit Executive Center found internal audit functions were actively involved in their organizations' response to COVID-19. That included taking on special assignments, such as cost-saving identification projects, expense tracking, and risk mitigation.
I noted in an April blog post that findings from the poll reflected how internal audit functions modified audit plans to identify and mitigate pandemic-related risks. From the quick poll report:

"Overall, internal audit leaders are demonstrating flexibility and agility in response to the dynamic risk environment caused by COVID-19. Three-quarters of internal audit functions have updated their audit plans. Two-thirds are identifying emerging risks, and over half have already updated their risk assessment."

The quick poll also looked in detail at the kind of work internal audit functions were doing in the first month after the pandemic's impacts were felt in the U.S. The results show many internal audit functions operated nimbly, with the flexibility needed for an "all-hands-on-deck" approach. From the report:

"Over half of respondents have discontinued or reduced scope for some audit engagements and nearly half have canceled some audit engagements. Where internal audit leaders are demonstrating agility is noted in the fact that nearly 4 in 10 respondents have added new engagements due to COVID-19 and 4 in 10 have redirected staff to put aside their normal audit work to assist their organizations in this time of crisis by doing non-audit work."

Russian Cyber Hack Endangers U.S. National Security
Recent revelations about a "massive and ongoing" cyberattack promises to create a bevy of new targets for internal audit's coverage. According to reliable news accounts, cybersecurity experts believe a well-organized group of hackers exploited a loophole in products developed by an IT firm that provides technology software for government agencies and hundreds of large companies.

The successful March attack gave the cybercriminals access to sensitive information and allowed them to monitor the communications of dozens of companies and agencies that use the company's software. This includes the U.S. departments of Treasury, Commerce and Energy, as well as the Los Alamos National Laboratory, which oversees nuclear weapons.

The attack, while carried out as a cyberattack, was more akin to espionage, because the hackers were able to monitor communications of corporate and government officials for months. As we have witnessed before, headlines that break late in the year tend to persist long after the New Year dawns. So, internal auditors should keep this and other cybersecurity risks circled for their 2021 audit plans.U.S.

Election Results Promise Regulatory Uptick
As we have witnessed repeatedly in the 21st century, U.S. presidential elections that usher in new administrations often significantly disrupt the regulatory landscape. While the outgoing administration has focused on systematically rolling back regulations and decreasing the size of federal agencies that oversee regulatory compliance, the incoming administration is under significant pressure to boost regulations, particularly in areas relating to climate change, international trade, immigration, and the social safety net.
 
As I have observed on many occasions, new regulations beget new compliance risks, and new compliance risks must be on internal audit's radar.GE Ends Internal Audit Rotational Staffing Model
In an effort to streamline operations, GE announced the elimination of its Corporate Audit Staff (CAS) program in November. The program, described in a Wall Street Journal article as a "rigorous multiyear rotation through various divisions that the conglomerate has long used to groom future leaders," was a mainstay for one of the oldest corporate internal audit functions in the U.S.

I first studied the GE model back in the 1990s, when I was leading a re-engineering initiative of the U.S. Army's internal review (audit) program. I saw extraordinary potential in the program, which ended with participants moving into various business roles in the company. The GE model would eventually be considered the gold standard for rotational staffing programs. The concept proliferated, with similar approaches adopted by companies like The Home Depot and Chrysler. While not without its critics, the model helped raise awareness of internal audit's value by showing how a deep understanding of risk and the risk mitigation process is fundamental to good governance.

It would be highly speculative to assume that GE's actions will have broad ripple effects on the internal audit profession; however, there is no denying that this news was a top internal audit headline for 2020.

IIA-Australia Introduces Internal Audit Better Practice Guide for Financial Services
Stemming from findings by Australia's Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, IIA-Australia stepped up to create the Internal Audit Better Practice Guide for Financial Services in Australia, a significant tool to position internal audit as a critical player in financial services.

More than a year in the making, the guide lays out six key principles to support sound independent assurance that only internal audit can provide. Importantly, the first of these principles is to position internal audit for success. "The primary purpose of internal audit should be to assist the Board and senior management to protect the assets, reputation, and sustainability of the organization." The sixth urges adoption of appropriate methodologies for auditing risk culture.

Published in November, the guide has 32 specific recommendations of general application intended to implement the principles. Additional commentary provides guidance on the recommendations and cites the International Standards for the Professional Practice of Internal Auditing, where applicable. The guide is an important step forward in recognizing internal audit's value in supporting organizational goals, strong corporate culture, and effective corporate governance.
 
The headlines examined in this post, while varied, all focus on risks and trends that emerged or evolved in 2020 and internal audit's ability to support organizations' efforts to mitigate and leverage risks. The coming year will continue to pose significant challenges to the profession and the organizations it serves. Practitioners should be prepared to act boldly and decisively to support their organizations while remaining true to the profession's core principles.

As always, I look forward to your comments.

More than a year in the making, the guide lays out six key principles to support sound independent assurance that only internal audit can provide. Importantly, the first of these principles is to position internal audit for success. "The primary purpose of internal audit should be to assist the Board and senior management to protect the assets, reputation, and sustainability of the organization." The sixth urges adoption of appropriate methodologies for auditing risk culture.

Published in November, the guide has 32 specific recommendations of general application intended to implement the principles. Additional commentary provides guidance on the recommendations and cites the International Standards for the Professional Practice of Internal Auditing, where applicable. The guide is an important step forward in recognizing internal audit's value in supporting organizational goals, strong corporate culture, and effective corporate governance.
 
The headlines examined in this post, while varied, all focus on risks and trends that emerged or evolved in 2020 and internal audit's ability to support organizations' efforts to mitigate and leverage risks. The coming year will continue to pose significant challenges to the profession and the organizations it serves. Practitioners should be prepared to act boldly and decisively to support their organizations while remaining true to the profession's core principles.

As always, I look forward to your comments.