As internal auditors, we are experts at analysing process design, policy implementation, and project execution. We readily grasp the big picture and identify potential improvements to organisational governance, risk management, and internal control. However, we are less good at applying these same skills to our own work. We know how to conduct a value-for-money audit, but use only rudimentary measures of our own economy, efficiency, and effectiveness.
If we want to be credible and be seen as trusted advisors rather than just an overhead, then we must lead by example. In one of Aesop’s fables, by issuing the following challenge, an astute fox exposes the deceit of the wrinkled and blotchy frog who claims he can cure any ailment: “If you are so talented, I say, physician, heal thyself.”
I want to share some of our experiences at SWAP that have led us to a deeper appreciation of our performance. It starts with a critical analysis of the internal audit value chain which supports honest and meaningful dialogue with the audit committee about the best use we can make of our resources.
This is part of our journey of continuous improvement. When Dave Brailsford was hired as performance director of British Cycling in 2003, Britain had only won one cycling Olympic medal and had never won the Tour de France. Brailsford pioneered the principle of marginal gains: by making small — sometimes apparently insignificant — improvements to everything (seats, diet, grease, training schedules, clothing, tyres), he transformed the team into the pre-eminent force in cycling.
This is my vision for internal auditing, and this article concludes with practical steps you can take along this same journey.
Key to this analysis is the ability to consider the true costs of inputs. We are accustomed to thinking in terms of auditor days as our unit of input, but this is a very blunt measure. For one thing, not all audit days are made equal. At SWAP we have a day rate for auditors according to their grade, experience, and expertise.
However, sole focus on audit days ignores the other inputs, such as supervision, training, IT, and office overheads. Absorption costing enables us to identify the true cost of our work. We apportion all input costs to units of output. The indirect costs must be calculated in aggregate for the year and then apportioned to outputs based on expected volumes of activity. The simplest method is to spread costs equally by dividing by total chargeable staff hours. Variances inevitably occur due to differences in prices and volumes of activity and they form an important part of our analysis.