Analytics combines data querying with sound statistical concepts and subject-matter knowledge to test hypotheses or make predictions. They can help make sense of large volumes of data by highlighting patterns or anomalies, thereby turning everyday information into useful and actionable insights that inform decision-making. Analytics have become more sophisticated as technology has evolved, and today many internal audit departments use software tools to help extract and analyze data from their organizations' systems.
In recent years, there has been a vast increase in the amount of data that is stored electronically. This fact, combined with the increasing sophistication of enterprise resource planning systems and data analysis tools, has the potential to transform the internal audit process through the use of advanced analytics. Internal auditors now have the ability to gain insights from, and test correlations with, a vast array of information on the Internet, which can be as diverse as competitor information, regulatory filings, and conversations about social media.
Today, analytics assist internal auditors with a variety of capabilities from planning and risk assessment to fieldwork. They also enable internal auditors to provide more compelling business insights. Analytics can be classified into three broad categories:
- Retrospective statistical analysis, used to gain deeper insight into important subprocesses in financial and operational areas of the organization.
- Forward-looking models, built to predict which areas of the business are riskier or simply require a greater level of focus.
- Advanced visualization analytics, used to help transform the organization by providing deep analytical insights and actionable information.
In short, analytics have rapidly evolved from allowing internal auditors the ability to provide perspective in hindsight to helping them anticipate the future — with foresight.
Greater Business Insights
Data analytics provide internal auditors with the potential to dramatically increase the value of the insights they can provide on business risks, issues, and challenges. The first step in deploying analytics effectively is recognizing the business problem that needs to be solved — what is the issue? Once an issue has been identified, analytical capabilities can be used to source facts, drive understanding, and generate knowledge by addressing three questions:
- What data can be leveraged to understand the business issue and improve performance? It is important to understand the source of the data and the systems and processes that produce it. Effective data management and governance supports data accuracy, completeness, and reliability.
- What is known about the business issue? What has happened and why? What should be done about it? Analytics can play an important role in answering these questions and optimizing current performance.
- How can organizations look to the future and build analytical insights directly into business processes? Analytical insights draw predictions from the discovery and analysis of data and resulting trends. Analytics look at data from within the organization and outside it, with a focus on patterns, data mining and optimization, data visualization, advanced algorithms, neural analysis, and social networks.
How to Use Analytics
One of the most important uses of analytics is to enhance risk management. Analytics help provide a clearer understanding of risks and insights as to how they can be mitigated. Ultimately, the objective is to develop and implement an analytics capability that provides internal audit with greater insight into the risks associated with each audit.
A second important use for analytics is to develop a deeper understanding of potential audit issues. Once a potential issue has been identified, analytics can source the facts (e.g., what does the data tell us about the issue?), drive understanding of the facts (e.g., what is happening?), and generate knowledge (e.g., why is it happening?) to provide more effective recommendations.
A third area for internal auditors to consider is whether and how to leverage analytics performed for the audit throughout the organization. In this regard, internal audit can become an important change agent, driving business insights throughout the organization. Business managers and leaders of other risk functions have a need to understand risks and correlations between data. In many cases, analytics developed for use by internal audit can be valuable business tools and ownership can be transferred to business or functional leaders for ongoing use.
Internal auditors beginning to implement analytics should focus on six guiding principles:
Link goals to clear business drivers. Establish a clear understanding of expected benefits from analytics and ensure linkage to audit planning. This should translate into clear objectives that drive the strategy and long-term vision and surface near-term opportunities.
Know the data. It drives the insights that fuel the benefits from any analytics program. It is important for auditors to understand both the data they have and the data they don't have when determining how and where to begin. This knowledge also prioritizes efforts to collect what's missing for future analyses and enhancements to the analytics program.
Start simple. Starting with a targeted, ad hoc analytics program will likely yield greater benefits in terms of speed to insights, learning, and value. Take the time to learn first and then deploy necessary capabilities across the organization later.
Leverage existing insights. These insights may provide clues related to the risks and business areas to start with, and can jump-start the program and build consistency with prior initiatives.
Make it actionable and measurable. Develop a plan to take action and measure results accurately early. The organization, systems, and processes that support execution must be able to take action with the insights that are generated.
Test and learn. Test different approaches and areas of the business. Learn from the results.
Internal auditors are at the beginning of a new era in the use of analytics to enhance the internal audit process. Taking the steps outlined above can help internal audit departments realize gains in effectiveness and efficiency while providing greater business insights.