The U.S. internal audit profession has navigated several watershed events in the past 40 years: the savings and loan crisis in the 1980s, the financial reporting frauds in the early 2000s, and the financial crisis/Great Recession barely a decade later. Without a doubt, the profession emerged stronger after each of those crises.
The dramatic effects of the COVID-19 pandemic of 2020 are leaving their mark on internal audit as well, according to a new survey from The IIA's Audit Executive Center (AEC). Responses from nearly 500 U.S. and Canadian internal audit leaders reflect deep reductions anticipated in internal audit travel and training, some staffing decreases, and a growing awareness that being agile, flexible, and tech savvy will be fundamental for all audit functions in the future.
At first blush, anticipation of dramatic cuts paints a troubling picture. One of the most startling findings is that 45% of respondents expect decreases in their overall budgets over the next 12 months. That compares with findings in July 2019, when just 12% of Pulse of Internal Audit survey respondents reported budget decreases in the previous 12 months.
But under current extraordinary circumstances, the damage could have been significantly worse. Results of AEC surveys earlier in this crisis showed that internal audit was already stepping up and providing an array of services and value, potentially mitigating budget cuts for many in the long run.
A deeper dive into the latest AEC survey data shows anticipated budget cuts will be focused largely in three areas: travel, training, and outsourcing. Sixty-five percent of survey respondents expect significant decreases in travel budgets, and 87% expect at least some cuts. This reflects not only the opportunity to reduce expenses during the dramatic economic slowdown, but also that internal audit practitioners are learning to operate remotely.
From a staffing perspective, around 66% of respondents expect levels to remain about the same, which is encouraging considering current and anticipated economic struggles. However, that figure drops significantly to 47% when respondents were asked about external sourcing. This suggests that internal audit leaders are working to keep their core teams intact. Interestingly, the number of respondents who expect significant decreases in external sourcing (16%) is about the same as those who expect increases in external sourcing (15%). This may reflect the anticipated need within some functions for specialized services as organizations navigate emerging and evolving risks associated with the pandemic's fallout.
Among the more positive survey findings is the increased focus on improving efficiency and effectiveness of internal audit functions. The lion's share of anticipated process changes reflects the new reality of more remote auditing, with 80% of respondents expecting more work-from-home options and 71% expecting less time spent auditing on site. Additionally, 73% expect more flexible audit plans. The survey data also shows potentially more significant process changes — those that may lead to long-overdue updates relating to technology.
There is abundant evidence available that shows opportunities abound for audit functions that embrace technology and agile audit techniques. Nearly half of respondents (49%) expect to increase their use of data analytics and 39% expect to increase their use of agile auditing techniques. Increased investment in automation (12%) and more use of robotic process automation (8%) lag significantly. However, that may reflect reluctance to make financial investments in the current environment and judicious scrutiny on what is really needed to move forward.
Accordingly, respondents are looking for competencies to help leverage those opportunities. More than 7 in 10 respondents see the pandemic increasing the need for communications, cybersecurity, and innovation and change competencies.
There is plenty of additional data in the survey report, including industry-specific breakdowns for each question in the survey.
I cannot close this post without commenting on one area I found troubling: The survey data shows that internal auditors are keenly aware of the need for "auditing at the speed of risk." Coming out of the pandemic, more than half of respondents (53%) expect to increase the frequency of risk assessments and 68% expect to increase the frequency of audit plan updates. However, only 34% expect to increase audit committee communication.
We are squandering a valuable opportunity if two-thirds of respondents expect to go back to the status quo on speaking to our stakeholders post COVID-19. Internal auditing's response to the pandemic has showcased its ability to provide great value to organizations in times of crisis, not only in its core competencies but also as a trusted advisor. We must leverage this opportunity by expanding the conversation with audit committees and management to strengthen our newfound and well-earned seat at the table.
As always, I look forward to your comments.