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Mind of Jacka: An Uncomfortable Question

Blogs Mike Jacka, CIA, CPA, CPCU, CLU Mar 22, 2023

My apologies, but I’m going to beat a drum/throw out an idea/propose a “solution” that I have beat, thrown, and proposed before. But it is worth revisiting. And that revisitation brings up an important question we glide right past in our pursuit of getting the job done: Do we know what the job is that we are so frantically trying to do? Or as they said in the movie “Office Space,” “What would you say… you do here?”

Internal audit, outside of those situations where it is out-sourced, co-sourced, or whatever-sourced, is a department that exists within the organization. It is made up of employees and is part of the overall structure of the organization. And it reports directly to the organization’s leadership. (Hopefully that reporting is through very few layers – another old-time religion sermon for another time.)

It is one of the things that differentiates us from outsourcers, consultants, or external auditors. Even when they are working in the organization’s interests, they are not “of” the organization. We are akin to departments such as administrative services, customer service, human resources, marketing, building services, etc. (And, yes, any of these also can be outsourced. But let’s keep moving.)

So, if we are part of the organization, and the organization wants us, we must be providing some value. (Or are we so small and insignificant that the lack of value is unimportant for the small price they pay? Let’s not spiral down that black-holed bottomless pit.) So, what is the value that is being provided? And on to the follow-up questions, the really scary ones: How much is that value worth, and does it reflect the costs we are incurring?

While we could spend some time debating if and how we can provide dollars and cents on every finding (that way lies madness; another avoidable topic), I want to turn that question on its head.

What if each department had to pay for our service? Put another way, if they looked closely at what we were producing, would they think it was worth what it cost? And then the next scary question, can they go outside the organization and get better value for the same amount of money?

Let me tell you a story from an international conference many, many years ago. (And, if you have been reading or listening to me for several years, you may have heard this before.)

The presentation was by the leader of an audit department that was part of a company where all departments were considered profit centers. That is, each department had to run at a profit within the organization. (My apologies, I have searched and searched but cannot find which company or audit department that was. I wish I knew.) For internal audit, that meant that departments had to literally pay internal audit for their services. This required internal audit to understand its expenses and how these would be reflected in the billing of the audited department.

On hearing this, those attending the presentation went into a state of shock. Many could not understand how this could work, worrying about how it would impact relationships, how it would impact budgeting, how it would impact independence. etc.

But I think it is only a first step in the discussion of internal audit’s value. How about this? (And what follows may have been included in the presentation, but age clouds memory, and I have a lot of clouds and little memory.) No one is required to request an audit. However, if they do not, the board can be counted on to fill in gaps — request and pay for internal audits over high-risk areas. It makes sense that a department would much rather request the audit than have it come down from on high, and internal audit might receive a slightly better welcome. But, if a department feels that it can get the same or better work for the same or better price from outside the organization, then they will be allowed to outsource that particular review.

If value is not perceived, then internal audit might soon have no work, as well as no organization in which to work.

Auditors seem to fear this prospect. And I think it is because they have trouble articulating both the objective and the subjective value they provide. And they further fear the scrutiny such a spotlight might shine on a vacuous range of empty work and empty promises.

We want to think we provide value. But, when confronted with true competition, we hide behind the anonymity of being part of the organization and the false protection of the audit charter. (I defy you to find a section in your charter that requires internal audit to be staffed with the organization’s employees.)

The story above shows that calculating such value isn’t a mental exercise — a trifle to keep the mind occupied and then thrown out for the next, shiny Christmas thought-toy. No, someone once put this into practice. Successfully? I don’t know. But they reached the point where they were allowed to make a presentation during an international conference.

And it raises the most ugly of questions. Do you think your organization’s departments would be willing to pay for your services out of their budgets? Do they think your value is worth the cost?

And, if that question still scares you, and if the answer scares you even more, then you may need to revisit what it is you do around here.

Mike Jacka, CIA, CPA, CPCU, CLU

Co-founder and Chief Creative Pilot, Flying Pig Audit, Consulting, and Training Services (FPACTS), based in Phoenix.