Knowledge and Insights

In a fast-changing business environment, it is imperative that an organization’s internal audit department adapt and evolve in order to stay relevant to key stakeholders. In recent years, there have been major changes in corporate directors’ and managements’ expectations of internal audit — they are demanding far more from the function. There is no doubt that the range and nature of internal audit activity being performed within organizations has changed as a result of the increased demand for far more advisory support on strategic initiatives and a drive for broader and deeper internal audit coverage using more efficient internal audit techniques.

The overarching message here is that internal audit, like any other function, needs to be aligned with the strategic goals of the organization. Senior executives continue to be under pressure to maximize value from all areas of the business. Compliance, risk management and assurance functions should be treated no differently than any other part of the business in this regard.

The rise of the activist investor in the corporate world has contributed to heightened expectations. The typical activist investor is aggressive and pushes for leaders to drive shareholder value. Oftentimes, this results in the exit of the CEO and major changes in the direction of the business and strategy. Such heightened pressure trickles down throughout the organization. As auditors, we need to be aware of the potential ramifications of this stress. Deep cultural changes affect the control environment, including entity-wide controls that seek to rein in risky behavior that may jeopardize the entire organization. Netflix Inc, Yahoo, Sotheby (the auction house) and Cracker Barrel are some of the organizations that underwent major strategic changes as a result of activist investors’ influence.

Internal auditors now have greater tools at their disposal compared to yesteryears. The new COSO (Committee of Sponsoring Organizations of the Treadway Commission) and COBIT (Control Objectives for Information and Related Technology) models are all attempts to provide reference frameworks to evaluate and test an organization’s control environment. Unfortunately, these tools are rendered useless if auditors fail to understand the business strategy and pressures facing management and the company they lead. The latter are key drivers of decisions that impact the entire organization and it is important for internal auditors to keep pace.

Hence, this holiday season, we hope internal auditors everywhere are able to take a little time to ‘sharpen the saw,’ as so aptly suggested by Steven R. Covey in his legendary book, The 7 Habits of Highly Effective People.

We at Mercadien pride ourselves on staying ahead of the curve to help clients through these challenges. Contact The Mercadien Group at (609) 689-9700 or [email protected] for further information on how we can help you.