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​Disruptive Business

Internal auditors need to keep a finger on the pulse of change and advise their organizations accordingly.

Lisa Hartkopf, partner, EY
Rick Shriner, principal, RSM

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​What are the disruptions facing today's businesses?

HARTKOPF In today's transformative age, businesses are being disrupted from every angle. With changes to global laws and regulations, organizations are challenged to rethink how they comply. In addition, volatility in the global economy may be impacting companies' bottom lines. Paired with these shifts, sectors are also converging at lightning speed — creating new risks and opportunities for businesses in every industry. In the global digital world, digitally enabled companies have a competitive advantage over traditional industry incumbents. As companies move into new sectors and digitally native businesses dominate, acquisitions and divestitures are reshaping the focus and makeup of businesses. Big data is moving beyond being just a buzzword, and business leaders are using data to drive competitive insights and make big moves. Even the consumer is changing. With more access to information and the internet at everyone's fingertips, preferences and expectations are not what they used to be.

SHRINER Businesses are facing more fundamental uncertainty than at any time since World War II. Technology and automation are reshaping and, in some cases, replacing jobs in customer service, and with the advent of artificial intelligence (AI), even roles that require decision-making skills are under threat. The nine-to-five model, itself, is being challenged by the gig economy, with work "paid by the hour" replacing the daily effort of the long-tenured employee. The knowledge worker is being replaced by the data worker, developing and feeding the algorithms that make the predictions that drive an increasing number of daily experiences. Meanwhile, a war for data is being waged, with the spotlight on social media and technology companies. The internet's long memory of user interests — cookies — and the companies that monetize personal information are being challenged by the "right to be forgotten" and other data protection principles from regulators and from a concerned public. This war will intensify and be waged across countries with different social norms and legal frameworks. Within this environment, managers must motivate and direct, deliver products and services, and make plans for the future.

What are the risks posed by disruption?

SHRINER All businesses run the risk of failing to define and respond to competitive pressures or market needs. The dominance of technology mega companies will keep many established industries on their toes. Who thought that an e-commerce company would buy a premium grocery store chain? Further, an increasingly mobile workforce in a tight labor market means less innovative companies may be starved — or bled —​ of high performers with next-generation skills. In many respects, business disruption is a war for talent.

HARTKOPF It's important for businesses to continue to change and constantly innovate. Maintaining a status quo business model without regard for external influences — legal/regulatory, competitor, economic, technological — will put businesses at a disadvantage in the marketplace and potentially result in losses or penalties. Organizations that do not embrace new technologies — AI, robotics — will not be able to compete in the global digital environment. The additional challenge is that these new technologies may create an even larger talent gap as existing employees may not be best positioned to address them. It's important for companies to understand the potential impact of these risks and the influence of other external forces as they could negatively affect business outcomes.

How can organizations prepare for the new ways of working that go with business transformation?

HARTKOPF Organizations need to constantly update their strategic objectives and communicate them broadly. Embracing new technology can be a first step in transforming your busi​ness model, driving growth, and increasing efficiency. At the core of this transformation is the need to stay true to your business objectives, increase the company's agility, and establish a flexible model to help facilitate quick responses to external shifts. Perhaps the best way to prepare for new thinking is by tapping the right people for your business. Organizations need to place an emphasis on not only attracting, retaining, and advancing diverse talent, but also adopting a flexible workforce model that enables a business to engage the right resources, at the right time, and in the right place.

SHRINER Going on the offensive begins with understanding where your operations might be vulnerable. Companies are identifying specific areas of excessive complexity, lag, or cost in their operations, be it in supply chains, sales channels, customer engagement models, or back-office processes. Doing so gives organizations a glimpse of where operations may be most impacted by disruption — positively or negatively — and enables an evaluation of responses. But that's only part of it; companies will require great vision, adaptability, and commitment to allocate key talent and resources at the expense of shorter term value. Most companies are viewing these modernization efforts as a multiyear journey.

How can internal audit be involved in efforts to address disruption?

SHRINER Internal audit needs to be involved in its company's commercial activities, which will be most impacted by disruption from new regulations, technologies, or competitors. For example, helping navigate new data privacy law implications of acquired customer information is not only risk mitigating, but also incredibly helpful to the business' future acquisition strategy. Internal audit needs to ask itself, "Are we close enough to the sources of disruption?" Second, given the impacts of disruptive technologies will be profound, many internal auditors aren't waiting around to be surprised by the changes. They are talking to AI, automation, and data visualization companies now, often piloting the technologies, themselves, and facilitating business adoption along the way. Little of this happens, however, without an accommodative company culture.

HARTKOPF Internal audit is in a unique position to address and facilitate business disruption. The team should be actively involved in discussions concerning the organization's strategic plan — including objectives around strategic transactions such as acquisitions, divestitures, major system implementations, joint ventures, and alliances. In driving an organization forward, internal audit can coordinate frequent enterprise risk assessments to stay ahead of external forces and provide timely insights developed during reviews that focus on emerging risks. Internal audit should keep a finger on the pulse of changes occurring in the marketplace and conduct benchmarking to help management anticipate the impact on the organization.

Does internal audit need to disrupt or transform itself?

HARTKOPF Internal audit has been "transforming" incrementally over the last 20 years, but these changes haven't been disruptive. To keep pace with the changes affecting the business and provide forward-looking insights, internal audit will need to make some overarching changes, including:

  • Redesigning the operating model to be more flexible, timely, and focused on the risks that matter.
  • Understanding and embracing new technologies.
  • Tapping a flexible workforce model to deliver the most appropriate knowledge, experience, and skills.
  • Coordinating more effectively with the first and second lines of defense by having them embrace responsibility for initial validation and control monitoring, respectively.

SHRINER Let's face it: The business of internal audit is being disrupted in much the same way as companies overall. The next five years will present more change to our profession than did the past 15 years. Hints of those changes are evident today. For example, it's common to see internal audit functions comprising 10 percent to 20 percent "data people" in addition to accountants or IT specialists. These percentages will increase. The tools of our trade are rapidly evolving. It may not be long before data visualization tools eclipse PowerPoint for communicating audit results. Auditors will need to learn to detect process deviations or control issues from the output of automation tools or bot algorithms.

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