When circumstances change dramatically, but you just don’t see how the changes impact you personally or professionally, it’s wise to stop and reflect. It could be a sign that something audit of a ledgerprofound is happening and you’re missing it.

This October 1st is the 105th anniversary of the introduction of the Model T Ford in 1908. The development of the transportation industry at the beginning of this century, I believe, is comparable to the technology innovations of the last few years. And I suggest that the same fundamental choices that had to be made then by blacksmiths must be made now by internal auditors.

If you were a blacksmith in 1908, you could either consider yourself in the horseshoe business, or you could consider yourself a part of the transportation industry.

If you were in the horseshoe business, you probably responded to the invention of the automobile by aiming to please your customers with better horseshoes or even, as Henry Ford once reportedly said, “faster horses.”

If you thought you were in the transportation business, you probably turned your attention to the rapidly evolving transportation technology and learned how to drive, design, build, or maintain either the motor vehicles or the tools and technology the transportation industry required.

Like the shortsighted blacksmiths who were left behind, internal auditors today may be missing the opportunity to redefine their role in the face of recent technological innovations.

Is technology making auditors redundant?

In business, what you measure is what you get. Internal auditors today measure “audits.” They plan audits, track audits, report on audits, supervise audits, review audits, and assemble work papers on audits performed. They measure their performance by the speed and quantity of audits produced. They measure quality by conformity to standards in these areas. It’s all about audits.

Internal auditors are in the audit business. They use technology to help them perform and manage audits. Internal auditors are struggling to find ways to adapt current technology to help them audit. Today’s technology doesn’t make audits easier or better. It has the potential to make them redundant—like horseshoes

Redefining the role of internal audit

A logical alternative for internal auditors today is to shift from the auditing business to the knowledge business. I would argue that internal auditors were always intended to be in the knowledge business. Up until now, performing an audit was the best way to get knowledge, and an audit opinion was the best way to express it. That’s no longer the case. The problem is that “audits,” which were originally a means to an end, have become the end result.

Fortunately, internal auditors have as guidance a fairly enlightened definition of internal auditing to work with:

“Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.” (IIA Standards and Guidance – IPPF, Mandatory Guidance, Definition of Internal Auditing)

(I frankly can’t even find a definition of what an “audit” is in the IIA Standards. The word “audit” is almost always used as an adjective rather than a noun in the Standards. But for internal auditors, it’s almost always a noun. Call me picky, but I see a problem there.)

A case for the knowledge business

Let me suggest another role that I think would fulfill the definition of internal auditing much better.

The role of Internal Auditors is to create, interpret, and disseminate as widely as possible reliable, fact-based knowledge on the status of risks and controls that impact business performance.

With this change, the auditing role becomes very different, affecting not only the tools used to gather and manage knowledge but also the way internal audit performance is measured. I will explain in more detail what these changes look like in my next blog, Redefining the Role of Internal Audit: Becoming Knowledge Based.

How can you tell if your audit department should consider changing? Do you measure performance by the number of audit reports you issue, by the number of recommendations you make, and by the percentage of the work plan you complete? Or do you measure the extent to which you support improved business performance?

Do you measure the number of departments and processes you audit, or do you align your work with the business value drivers?

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