Like the speed of risk, the end of 2018 is approaching very rapidly. That means many of you are putting the finishing touches on your 2019 annual internal audit plan. I am sure that your process has been exhaustive, and you are preparing to present a plan for your audit committee that will reflect the risk-based priorities appropriate for your organization. However, before the ink dries on your plan, I thought you might find it useful to take an early look at the priorities your peers are planning to address in the year ahead.
Risk defines the world of the internal auditor. Ultimately, risk is what shapes our audit plans, directs our stakeholders, and determines our success or failure. That is why we spend so much time and effort helping our organizations identify, understand, and mitigate or leverage risks. Understanding the unique mix of risks our organizations face, and the risk appetites of our stakeholders, is crucial to internal audit adding value.
A number of organizations produce annual reports that attempt to peer at the horizon to identify risks in the coming year. Sometimes, it is easy to predict what those risks will be, as some major ones are long term, if not perpetual. The challenge is to identify or anticipate unexpected, emerging, or atypical risks that may mature in the coming weeks or months, in hopes of preparing to gird against them or use them to benefit the organization.
Two recently published reports, one from Gartner Inc. and the other from the European Confederation of Institutes of Internal Auditing (ECIIA), identify a familiar foe as the top risk for 2019: cybersecurity. Over the years, this challenge to organizations has consistently climbed up the risk hierarchy in annual reports. It also has opened our eyes to other risk categories, as our understanding of cyber becomes more sophisticated and our approaches to managing it mature.
Indeed, the focus on cybersecurity has helped us to understand that technology and data are inexorably intertwined, and it has increased our awareness of risk related to data governance and data privacy. It has driven us to be more cognizant of risks related to third-party relationships, IT governance, and culture.
For example, four of the top five risks in the Gartner report arguably stem from our focus on cybersecurity – cybersecurity preparedness, data privacy, data governance, and third-party risk. Risk in Focus 2019, the report developed and produced by the ECIIA, groups cybersecurity, IT governance, and third-party risks into one category. Another category in the ECIIA report is data protection and strategies in a post-GDPR world.
Data and technology also are central to risk discussions on digitalization, automation, and artificial intelligence. These discussions neatly demonstrate the challenge of balancing risk and opportunity. As the ECIIA report points out:
"The cost and efficiency benefits of automation and other digital processes can be transformative, if harnessed to their full potential. But organizations must also consider the risk associated with such transformation."
Data collected since 2016 by The IIA in its annual Pulse of Internal Audit surveys reflect the same focus on cyber. The percentage of North American chief audit executives (CAEs) who rated cyber as a top risk to their organizations grew from 60 percent to 68 percent between 2016 and 2018. Over the same period, the percentage of CAEs rating IT as a top risk grew from 39 percent to 53 percent, and third-party relationships showed modest growth as well.
The Gartner report, which surveyed 144 CAEs, found two-thirds of respondents said they had experienced either a third-party-related disruption in the past two years or lacked sufficient knowledge of third-party activities to identify a disruption.
What is known is that third-party risks are growing more complex as digitalization, data sharing, and weak oversight of third-party relationships threaten to expose organizations to reputational harm.
It is easy to fixate on data- and technology-driven risks, but others certainly exist, as the two risk reports agree. Gartner identifies ethics and integrity as a risk that has evolved from culture risks identified in its 2018 report. The ECIIA report also identifies workplace culture as a risk.
In 2018, the #MeToo movement redefined how organizations see risks associated with sexual harassment and inequality in the workplace. While those two areas were known risk categories, the explosion of serious allegations against high-profile entertainment industry executives and the subsequent reputational damage to their organizations have significantly raised this risk level. The significant role of social media cannot be overstated. Here again, technology is influencing how we view risk.
The Cambridge Analytica scandal provides another example. Facebook and its iconic founder, Mark Zuckerberg, suffered significant reputational damage for allowing the British company to mine personal information of millions of the service's users. It also raised awareness of the ethical responsibilities associated with data protection and privacy that now is viewed as a significant risk in both the Gartner and ECIIA reports.
As we look toward 2019, the risk landscape will likely focus on cybersecurity, data governance and privacy, third-party risk, and the evolving hazards associated with technology's impact on organizational ethics, culture, and integrity.
As you prepare your internal audit plans for the coming year, you should ensure that you have considered all of the risks facing your organization and discuss them with your audit committees and executive management. The list is by no means comprehensive or necessarily applicable to all organizations. However, it does provide a useful benchmark as you contemplate what may lie ahead in 2019.
As always, I look forward to your comments.