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Going digital: internal audit's role as companies transform

30 / 08 / 2019

Digital transformation has become a key priority for many businesses. Worldwide spending on hardware, software and services for delivering digital projects is expected to reach £1.5 trillion by 2022.

These developments are having a knock-on effect for internal audit departments. A recent PwC report emphasised the importance of developing a 'digitally fit' audit function to keep pace with the digital changes occurring within their businesses.

In this article, I'll unpack the concept of 'digital fitness', including why it matters and what the best internal audit functions are doing to stay abreast of market developments. But first, let's establish what people mean when they say 'digital'.

Defining 'digital'

McKinsey & Company, quite rightly, points out that the term 'digital' is used in different ways across the commercial spectrum.

When many businesses use the word, they are referring to the specific technologies and platforms they use to better engage with customers and optimise consumer experiences. However, some professionals have a broader interpretation and use the term to describe the impact of disruptive and evolving technologies more generally. Others still fall somewhere in between or don't have a clear-cut idea.

McKinsey says these diverse perspectives lead to a lack of alignment and piecemeal transformation initiatives. Instead, the company uses its own definition, which comprises three parts: 

  1. Creating value at new frontiers: Being open to re-examining the way you do business. This includes unlocking value by understanding the opportunities and threats presented through new marketplace developments.
  2. Creating value in core businesses: Rethinking how customers are served through digital capabilities, with journey-focused innovation and contextual interactivity.
  3. Building foundational digital capabilities: Establishing the technological and organisational processes that enable companies to become faster and more agile. This includes the use of data analytics to optimise decision-making.

PwC's description of 'digitally fit' audit functions draws upon some of these broader concepts and refers to departments that are more digitally evolved than their competitors. The Big Four firm measures digital maturity in two ways:

  1. Having the right skills and competencies in place to provide strategic advice to stakeholders and offer assurance regarding digital transformation risks; and
  2. Changing internal audit's own processes and services to ensure the function is technologically capable of aligning with the organisation's strategic risks and responding appropriately.

Why is a digitally aware audit department important?

PwC's research revealed 54% of departments are still at the very early stages in their digital journey (Beginners), while less than a fifth (19%) can be described as 'Dynamic' or 'digitally fit'.

A further 27% - deemed 'Actives' - are taking some strides towards improving their abilities, although they still have some way to go. But why does digital fitness matter? According to PwC, the best audit departments move beyond simply delivering a reliable technology audit. More than three-quarters (76%) of businesses with Dynamic audit teams meet or exceed better decision-making goals overall, compared with just 45% of Actives and 39% of Beginners. Two-thirds also match or beat revenue growth expectations, versus 43% and 26% of Actives and Beginners, respectively.

"Internal audit needs the dexterity to pivot quickly and to keep up with the digital pace of the business, and the knowledge and skills to provide advice and strategic assurance in this new arena," the Big Four firm explained.  "Internal audit functions that increase their own levels of digital fitness will be far more effective at meeting that challenge."

What is preventing digital transformation progress?

Businesses appear to be struggling to convert digital investment into measurable gains, perhaps due to the dizzying pace of technological evolution and an over-optimistic attitude towards what digital advances can realistically achieve.

Capgemini research shows there has been no clear advancement at an organisational level with regards to how confident businesses are in their digital transformation capabilities over the last seven years. In fact, the only area where optimism has improved is customer experience. Advances in consumer-facing technologies mean 40% of respondents feel they have the abilities to perform well in this area, rising from 36% in 2012 when Capgemini originally conducted the survey.

Just 39% of businesses believe they have the necessary level of digital capabilities to follow through on transformation initiatives, which is the same percentage as in 2012. Meanwhile, only 35% feel they have the right leadership in place, down from 45% seven years ago. The proportion of businesses that are confident in their operational capacity slumped from half in 2012 to 36% last year.

The figures relate to digital transformation at an organisational level rather than internal audit specifically, but these problems are likely causing a trickle-down effect for departments across the board. Building a more digitally aware and capable internal audit function could also help organisations identify digital risks and facilitate better decision-making among stakeholders, spurring digital transformation.

How can internal audit departments improve digital fitness?

Internal audit may not be as far along with their technological development in 2019 as some analysts anticipated in previous years, but this appears to be a trend across organisations in general.

Some departments are setting an example, however. PwC states that digitally fit audit functions stand out in five key areas from the competition:

  1. Stakeholder engagement;
  2. Vision and roadmaps;
  3. Ways of working;
  4. Services model; and
  5. Operations. 

Of these, the largest gap between the most and least capable departments relates to vision and roadmaps. Beginners have an average digital maturity score of 40 out of 100 in this area, while Dynamics achieve closer to 90.

So, how can audit departments improve? PwC has identified the key habits of digitally fit functions. These departments are more likely to:

  • Go all-in on a digital plan: Understand the organisation's digital strategy and ensure the function remains fully aligned with it.
  • Upskill and inject new talent: Source and retain the skills needed to drive digital transformation forward.
  • Use the right emerging technologies: Automate and streamline audit processes to expand risk coverage.
  • Act on risks in real time: Contribute to a framework where assurance can be provided and acted upon as quickly as possible.
  • Engage with digital decision-makers: Stay abreast of the latest digital developments, both within the organisation and across the audit industry.
  • Align well with other departments: Integrate activities effectively across other lines of defence. 

Is your audit function striving for digital excellence?

Finding the right talent is a crucial part of building a digitally capable audit department. Unsurprisingly, IT and cyber skills are in high demand and short supply; 44% of hiring managers for audit positions said a lack of technical skills was the biggest recruitment hurdle they faced last year.

Interpersonal skills are also highly sought after, with stakeholder engagement and communication between other lines of defence becoming increasingly important for auditors. Yet, 32% of employers struggled to find candidates with suitable soft skills last year. The upshot is that 48% of internal audit departments feel inadequately resourced in 2019. Seven in 10 employers said they are hiring this year, but 29% are not entirely satisfied with their current recruitment model.

Attracting and retaining the professionals needed to provide assurance regarding digital transformation isn't easy. Often, this requires specialist support from expert recruiters who have considerable experience with internal audit roles and the wider corporate governance market. At Barclay Simpson we can provide this guidance and much more. To discuss your internal audit recruitment needs, please contact me on 020 7936 2601 or send an email to rb@barclaysimpson.com.

Our 2019 Market Report combines our review of the prevailing conditions in the internal audit recruitment market with the results of our latest employer and candidate surveys.

Image credit: Joshua Sortino via Unsplash
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