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PHOTO: Jules Bassoleil

Richard Chambers, president and CEO of the global Institute of Internal Auditors (IIA), is a friend whose leadership at the IIA and of internal audit practices I value and respect. He recently wrote a blog, One Mistake Internal Audit Cannot Afford to Make in 2020.

Please read it and then consider an alternative view.

Value Is in the Eye of the Beholder

If we are focused on communicating what we consider to be our value, are we not boasting? Do you respect people or organizations that boast about their value?

I completely agree with Richard that internal audit should “obsess about the value we deliver.” I also agree that there are “countless internal audit departments that were simply ‘checking the box’ in executing their mission.” If they are checking the box and not focused on delivering what they are capable of, they are not going to be valued by the board and executive management of the organization. They will be a target for downsizing, or at least unable to get the funding they need even in good times, because leaders don’t see the business benefit.

But what is that value? How should it be identified and valued?

The value of internal audit can only be measured through the eyes of our customers. The value of anything is only what the customers would willingly pay for it, because of the benefit it provides.

Richard gets it right when he writes: "Your key stakeholders have the last word on whether you are doing your job well. And they judge an internal audit function not by how well-run it is, but by the value it generates for them."

When I finish a speech or training class, the organizers often ask me how I think it went. My answer is always that we will find out when we hear from the audience, my "customers." Do I tell my customers how much value I just gave them? No. I ask them how much value they derived from my presentation.

The same thing applies to internal audit.

Related Article: Why Does Internal Audit Need to Be Agile?

Learn What the Board and Management Values

If you feel you have to tell the board and top management how much value you have delivered, it seems obvious (and sad) that they don’t already know.

They don’t already know:

  • The value of the assurance you have provided them of the adequacy of the systems for managing risk and internal control, and whether the more significant risks are addressed by effective and appropriate internal controls.
  • The value of the insights and advice you have provided, both formal and informal, to management  (at all levels) and the governance body.
  • The value of the actions that your work has stimulated. Not the recommendations in your reports, but the actual change that was made. Recommendations that are not seized by management as opportunities have little value. In fact, recommendations that are ignored because they don’t seem "right" to operating management have a negative value on the reputation and standing of internal audit.

While we might have an idea of where we have added value, even some idea of the magnitude of that value, only the customer can place a value on our work with any degree of accuracy. Providing a report or other communication to leadership that tells them our valuation of the work we have done is not only boasting but lacks credibility.

Your value is what people would be willing to pay for it. It is not what you say it is.

So let’s turn the question around for a minute.

Instead of asking whether the board and top management know what our value is, ask do we know what our value is to them — in their eyes? If we do, are we maximizing that value? If we don’t ....

Richard raises the fact that different people in leadership judge the value internal audit delivers based on their "value premise." But instead of telling them what we consider to be our value, we should find out how we can be of greatest value to them.

If they don’t understand the value we can contribute, we should have a conversation with the objective of obtaining a mutual understanding of how internal audit can and should add value to the organization as a whole and to each of them individually.

Don’t just tell them. Discuss, listen, tell your story and your ideas, and agree. Help them see what you can do while understanding what you can do (differently, perhaps) to create value in their eyes. And then obsess about delivering that value, rather than on promoting (boasting) how good we are.

The best way to make sure the board and top management understands the value is to:

  • Deliver the value (i.e., execute) and
  • Have happy customers who boast about it.

I remember a time when the retail arm (primarily Circle K stores) of my company (Tosco Corporation) was going through some tough times. I was at an executive committee meeting when somebody asked if internal audit was going to be asked to cut our budget. Several executives spoke up, telling the CEO and others that rather than cut internal audit, they wanted to increase our budget.

When we had an audit committee meeting to discuss a serious issue, I had the operating unit executive attend and we jointly communicated both the severity of the issue and the actions that we would or have already taken. (I say "we" because internal audit is part of the organization, despite what some assert or imply about our independence.) Both executive management and the board members can see us adding value — but only they can place a value on it.

That’s not to say I don’t make sure that my customers get the information they need to understand our value.

I don’t think we can put a value ourselves on assurance, advice, insight, or even business process change. But we can ask the customers if we are adding value. Often we can find a way to have them put a value on it. Then we can ensure that information is summarized for top management and the board.

At Tosco, I had a large part of my organization (28 people) auditing contractors. The team agreed with our customers on the value of each contract audit, generally the monies returned or costs avoided, and this was summarized in periodic reports to management and the board.

Related Article: What Risk Managers Need to Communicate to the Board

Which Will It Be?

I close with three stories.

At Tosco, I asked the CFO for his assessment of the team’s performance and value over the last year. Jay Allen, a brilliant man with a dry sense of humor, said, “Keep it up or you're fired.” He then gave me a huge bonus, so I could value my work.

I asked the chair of the Tosco audit committee about the team’s performance. He said, “You help us sleep through the night.”

The CEO of our largest division told the governor of the state of New Jersey that internal audit gave Tosco a competitive advantage.

I value those appraisals, as well as the fact that our customers continued to fund internal audit faster than the rest of the organization.

What do you think? Obsess about communicating value? Or, obsess about understanding and then delivering the value our customers want — and letting our customers understand and appraise it?