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​​Internal Auditing and the Fourth Industrial Revolution

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I was recently quoted in a Forbes magazine article on whether artificial intelligence (AI) could one day replace the internal audit profession. My message was that the growing ability of sophisticated technology to monitor large and complex systems won't replace internal auditors. Instead, it will enable them to become more efficient and effective in helping organizations solve problems and meet goals.

While I remain convinced of this, what wasn't addressed in the article is how AI along with other digital and technological breakthroughs will fundamentally change how business is done and in turn how that will change the demands placed on internal audit.

We are at the forefront of what is being referred to as the fourth industrial revolution. Whereas the three previous industrial revolutions — steam power, electrification, computerization — led to linear improvements in efficiency and productivity, the fourth portends exponential change.

One definition of the fourth industrial revolution, or 4IR, is the fusing of the physical, digital, and biological worlds that can impact all disciplines, economies, and industries. From ending the world's dependence on fossil fuels to the melding of humans and machines, 4IR promises not just inspirational innovation and digital disruption, but a paradigm shift in business, socioeconomic norms, government, and the human experience. This seismic transformation will rewrite the unspoken contract between business and customers.

What is troubling is that most organizations aren't ready for it. Take for instance digital disruption. Nearly three in four (72 percent) executives responding to an IBM and Harvard Business Review (HBR) survey said they are susceptible to digital disruption by competitors in the next three years. What is more disturbing is that a third of the 600 business executives responding to the survey rated their organization as ineffective when it comes to adopting new technologies.

The survey report, From Data to Disruption: Innovation Through Digital Intelligence, describes digital disruption as competition led by organizations that "leverage digital technologies to understand the customer, sense market shifts, and innovate faster than the competition."

The IBM/HBR report identifies three steps to becoming a digital innovator:

  • Create a strategy that embraces risk taking.
  • Adopt an agile, iterative approach to innovation.
  • Promote a data-driven culture throughout the organization.

Chief audit executives should consider incorporating these steps within their own functions and whether they would recommend them to management and the board for adoption throughout their organization. The first recommendation — create a strategy that embraces risk taking — is likely the most difficult for practitioners of a profession built on the art of managing and mitigating risk.

But risk taking is fundamental to business. Every business created, every new product launched, every entrepreneurial innovation that puts you one step ahead of the competition is built on taking a risk.

Imagine where the profession would be had it not embraced operational auditing in the 1960s and 1970s. The profession had been around for decades, but was widely seen as an extension of the finance function. We were firmly focused on the effectiveness of financial controls in the past. In many companies, we were seen as a necessary burden — hardly the basis for generating real value. Then risk takers and pioneers in our profession took risks, took off the "green eyeshades," and started providing assurance on controls other than those strictly financial.

Imagine, too, where the profession would be if early adopters had not embraced the new technology that computing offered. As recent as the early 1980s, the most sophisticated tool we had in my internal audit department was a calculator. The computer age has reshaped the way we performed internal audits, drastically reducing the use of sampling, improving our ability to monitor organizational interactions and transactions, and greatly enhancing efficiency. Today, organizations routinely deploy sophisticated software running continuous auditing methodologies focused on key controls. It is hard to overstate the importance of technological advancement to the profession.

These are but two examples of how our profession has been reshaped, yet they may be dwarfed by changes that lie on the horizon. Digital disruption only begins to scratch the surface. Combined with AI, robotics, the Internet of Things, autonomous vehicles, 3D printing, quantum computing, nanotechnology, and other emergent technologies, 4IR will forever change the world we know.

My views on the potential disruption AI presents for internal auditing are evolving as rapidly the potential for AI itself. As I tweeted recently, "Heads up internal auditors: Artificial Intelligence presents a huge opportunity for hindsight, some for insight, and little for foresight." I am sure many experts would argue that "foresight" is a prime candidate for AI, too. IIA leaders also recognize the potential disruption that AI presents for the profession, and providing research and advice on the future of AI and internal auditing will become an important priority in the year ahead. In the meantime, watch for more commentary on AI and internal audit in my blogs in the coming weeks.

As always, I look forward to your comments.​

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