Gearing Up for Innovation

Internal audit should be a driver of change to ensure the organization keeps pace with shifting business needs.​

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​In 1965, Gordon Moore, cofounder of Intel Corp. — describing a trend that has since become known as Moore’s Law — predicted that computing power would double every two years. Amazingly, this forecast has held true for almost half a century, and the resulting growth has significantly altered our business, social, and personal lives.

This acceleration has left few, if any, organizations unfazed and has fundamentally changed the way many companies, industries, and professions do business. Internal audit has not been immune. The way internal audit performs tasks has changed, the tasks they perform have changed, and the needs of their customers have changed.

But there is some question about whether internal audit departments are changing fast enough. Many still find themselves entrenched in the status quo — fundamentally doing the same job the same way it has always been done. Only by adapting strategies that embrace innovation will internal auditors find new and better ways to do their jobs while still fulfilling the profession’s historic mandate. There are several strategies that will help any internal audit department lay the groundwork for innovation.

Creativity vs. Innovation

Often, the terms creativity and innovation are used interchangeably. While they are closely related, there is an important difference between the two.

Creativity represents the generation of new and different ideas; innovation is about finding practical use for those creative ideas. That means creativity is about quantity — developing as many ideas as possible no matter how crazy or impractical; innovation is about quality — finding the creative ideas that are worth implementing.

The Right People

Innovation starts with the right people. It requires diversity in thought, style, and background. Many audit departments have learned the value of hiring individuals with experience in areas other than accounting and internal audit. However, it is just as important to ensure the department includes individuals with various personalities.
Risk takers provide the extra nudge needed to explore new things. Quieter personality types stabilize the effect of change. The right mix of personalities helps compensate for the individual strengths and weaknesses of each type and builds an environment that supports innovation.

In one example of how diversity in personality types benefits innovation, an audit department was holding its annual conference, which brought together the 120-person audit staff to one location. The CAE started the three-day conference by having everyone take personality tests. For the remainder of the conference, groups for breakout sessions were populated with these personality styles in mind, ensuring an appropriate balance within each group. The CAE indicated that this resulted in the most robust and innovative discussions he had ever experienced. Revolutionary ideas were brought forward, some of which resulted in important changes in the way the department did business.

Internal audit departments tend to be composed of individuals who are analytical and controlling — traits beneficial to the completion of audit work. Internal audit leaders are recognizing the need for more extroverted and expressive individuals to provide a balance and are using personality profile tests such as TRACOMM, Myers-Briggs, and DiSC to identify the strengths and weaknesses within their departments. Just as a department might analyze skill sets and recognize the need to hire someone with a financial background, some departments are looking to hire individuals with personalities that will best balance the existing group.

Even when an audit department is staffed with the right people, innovation is no different than any other trait — there must be training. But the training that supports innovation is much broader than the specifics of innovation and creativity. Innovation thrives on input from various and sometimes seemingly unrelated sources. Training to enhance an atmosphere of innovation includes training on all aspects of work — the job, the organization, the profession, the industry, and business in general. In addition, auditors should be encouraged to explore their personal areas of interest. It is hard to say why embracing an auditor’s interest in cooking will help the department, but it is also hard to say that it will never come in handy.

Understand the Customer

Innovation can be defined as creating customer value by implementing new ideas. This definition emphasizes two important aspects of innovation: the development of new ideas and the implementation of those ideas. The key component of this definition is its emphasis on customer value. Ideas that do not create customer value are useless. Accordingly, for an internal audit department to become innovative, it must first understand who its customers are and then identify what those customers value.

Many internal audit departments live under misconceptions about their customers, not having looked at the full impact of their work and who it affects. Any audit department can benefit by committing to a reassessment of its customer base, starting by determing who those customers are.

Customer identification can start with steps as simple as reviewing audit report distribution lists, organization charts, and meeting attendees. But it must reach further, identifying those individuals, departments, and other organizations that benefit from internal audit’s services. For example, does internal audit’s customer base include the board, all executives, all management, all line employees, the regulators, the assurance providers, and the organization’s customers? While internal audit will impact some of these customers more than others, all should be considered when determining the value internal audit can provide.

Once these customers have been identified, internal audit should then determine the value these customers can obtain from the department. The best way to get this information is to go out and talk to the customers. Remember, this is not a discussion of what internal audit can do for them — it is not the time to be talking about what internal audit thinks the customer needs. That is a conversation for another time. Instead, this is a conversation focused on customer needs and what they would like to get from internal audit.

Part of the challenge of such a conversation is getting past the customer’s preconceived notions about internal audit. A good portion of the discussion may focus on learning about and refuting those prejudices. More than one discussion will probably be necessary, but this information is vital to understanding how internal audit can be innovative. And constant, positive communication is the best way to get this information.

In one situation, a decentralized audit department recognized that, because internal audit was spread throughout the United States, the auditors did not have a complete understanding of their various customers. Brainstorming sessions were held with auditors in the 12 different locations where internal audit was located. In the one-day sessions, participants were first asked to come up with as many internal audit customers as possible. Once identified, participants were then asked to come up with what they thought those customers’ needs were.

At the conclusion of the sessions, audit leadership used the information to begin development of a more comprehensive approach for communication with its customers. This included a specific focus on how customer needs aligned with internal audit’s conception of those needs. In addition, the entire audit staff had gained a better understanding of the broad scope of customers served by internal audit.

Understand the Culture

Innovation is not a switch that can be turned on and off. For a department to be truly innovative, innovation must be a constant fact of life — a part of the department’s culture. This does not mean every person must be looking for ways to change everything every time anything is done. But it does mean that, when appropriate, innovation should come naturally.

The first step toward building an innovative environment is ensuring that a culture exists that will support generating new ideas, putting those new ideas forward, and taking risks to implement those new ideas. This cannot happen unless there is a culture of honesty, openness, freedom, and trust.

This may be one of the tougher aspects of building an innovative environment, because it means doing a complete and honest assessment of the department’s culture. Internal audit leaders cannot ignore the employee surveys, disregard complaints filtering in from open-door meetings, or dismiss negative comments as the reflections of a few naysayers. They should work closely with the human resources department to ensure there is an atmosphere that supports innovation, taking all necessary steps to build that trust.

The Physical Environment

Walk into most audit departments and the last words that spring to mind are “creative” and “innovative.” While a department cannot decorate its way to innovation by throwing up motivational posters, hanging flying pigs from the ceiling, or piping rock music through the sound systems, there should be organic evidence of the department’s desire to be a catalyst for change. People should be able to express their individuality and bring in outside influences to the cloistered world of internal audit. As people feel free to make their personal marks on the department, the overall effect will be a positive reflection of an innovative environment, and not just another corporate flavor-of-the-month add-on. Freedom is necessary for true innovation.

Individuals in one audit department decided it was time to take pride in the extensive travel required by their jobs. They began sending postcards to the department from various audit locations. After a few were put on the wall, the entire department began to participate and the walls were soon covered with postcards. Not only did this show the pride the department had in its work, but people began visiting to see where the auditors had traveled and to watch the collection grow.

In addition, any audit department should reflect the collaboration that is necessary for innovation. A key component of innovation is the exchange of ideas, and cubicles do not promote this kind of interaction. An innovative physical environment has open areas where people can meet and talk. There also should be private areas available where groups can spontaneously meet to discuss issues. If the only areas available are overbooked meeting rooms with waiting lists, try to find alternatives. Get one meeting room assigned to the audit department, implement a mandate that anyone can be kicked out of their office if a meeting room is needed, or designate a spot outside the building where people can meet. Openness and availability are key, because no one knows when the next good idea is going to sneak up on them.

Freedom to Fail

One of the toughest realizations for auditors is that embracing innovation means embracing the risk of failure. Innovation is about trying new ideas. But there is no guarantee of success. (If success was guaranteed for every innovation, everyone would be doing it.) Therefore, the department has to be willing to accept that it will be taking on risk and that there will be a corresponding potential for failure.

Best practice in this area is to develop a culture that rewards risk taking no matter what the outcome. Accordingly, it is an excellent time to reevaluate how the department is measuring success. Just as innovation should focus on customers, so should the departmental goals. And, if there is to be a culture of innovation, then innovation and the willingness to take risks toward innovation should be key components of those goals.

An example of a department unafraid to fail relates to an issue many audit departments face — the quality of audit report writing. A decentralized audit department was having trouble with the report-writing process. The decision was made that, for one year, each office could write reports any way it wanted. They were still required to comply with IIA standards regarding content, but the format and structure could be of their own choosing.

The risk of failure was great. The audit report is often the only output many internal audit customers see. And it was acknowledged by audit leadership that, in some situations, these experiments would result in reports that did not succeed. But leadership had faith in the overall professionalism of the department (exhibiting the trust that is so important to an innovative environment), and they recognized that, despite the failures, there was an opportunity to achieve something better than had previously existed.

For the next year, a wide variety of reports flooded in. Some were good and some were quite a bit less than good. But the CAE continued the experiment in spite of the potential consequences.

After one year, the home office brought together the best and the worst of what had been tried. Lessons were learned from the worst, and the best became the basis for the new departmental standards. The final reporting approach turned out to be significantly better than anything that had been previously issued by the department. In addition, those audit staff members who had taken the boldest steps (whether successful or not) were recognized for their efforts.

Starting the Innovation Movement

Nothing speaks louder than tangible results. The first step anyone can take is to look for innovative opportunities in everything he or she does. An auditor may have been assigned the most mundane of audits (think “petty cash”), but that does not mean he or she should shy away from finding something different within that assignment that provides new value to the customer.

Also, nothing moves innovation along as much as that first success. Look for opportunities in the processes or operations that are not working or do not make sense. Bring a group together and brainstorm. Identify the problem, generate new and different ideas about how to make it better, and then implement them.

While it is counterproductive to overengineer the innovation process, best practice is to have some system for ideas to be elevated and approved. One suggested approach — based on the SHARP (Specific, High impacting, Achievable, Relevant, and Problem solving) Idea system developed by Larry Robertson, director of human resources for the American College of Healthcare Executives — is to establish a regular meeting for presenting such ideas. The presentations can be made to audit leadership or to a group of internal auditors. All presenters should be able to answer five basic questions:

  1. What is your idea and how would it work?
  2. What problem does your idea or proposal solve?
  3. What customers would benefit from the execution of your idea?
  4. Has this been tried before and, if so, why is your approach better?
  5. How long will this take?

It should be noted that, even if a formalized approach is not established, every innovation initiative should include answers to these questions.

Once an idea is approved, it is the presenter’s responsibility to put together the necessary team and complete the project within established time lines. This builds empowerment within the innovation framework and provides the initiative with a champion who has a vested interest in the project’s success.

The Real First Step

All of this means nothing, however,  if there is not the initial recognition that innovation is the solution. Recent research shows that Moore’s Law may, indeed, be slowing down — that growth will “slow” to doubling once every three years. But such a slowdown will feel negligible, and it means that the pressure on internal audit will only increase.

There has to be a commitment to change and innovation. Audit leadership needs to let the entire department know that internal audit will be a driver of change. This might be reflected in a vision or mission statement, it might be incorporated in the strategies and objectives of the department, or it might be integrated into every meeting the department holds. Audit leadership must truly embrace this commitment and ensure that the support for change and the support for taking risks are reflected in all its actions.

Even those who are not in leadership positions have the responsibility to be innovative and take steps to build innovation within the department. Any of the strategies described herein can be implemented on an individual basis. It is possible (though a little harder) to lead innovation from below. Find like-minded people and start discussing opportunities. And look for opportunities in everything you do.

It is only by each auditor taking responsibility to be innovative — to recognize that the profession needs innovation to progress — that internal audit can be assured of keeping up with the fast pace of change. Every person should look for the opportunities, surround themselves with fellow innovators, and be willing to take the risks.

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