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20 February, 2013 by

Audit Department Performance Management

Audit serves many masters and each of them measure value on a different basis. Understanding and meeting the varied demands upon audit and the different measures of expected contribution challenges every Chief Audit Executive (CAE) as they seek to build a good set of metrics. CAEs must define a set of metrics into a balanced scorecard that avoid common pitfalls and drive optimal behaviours within their team.

CAEs must understand the expectations from their stakeholders and ensure their activity delivers value as measured by each key stakeholder group. For example, among their internal stakeholders:

  • Audit committees look for assurance over risk management, comfort over compliance and adequacy of asset / reputation protection;
  • Executive management seek assurance over internal controls, improvements in process effectiveness and sharing of best practice;
  • Operational management requires advice on control design and mitigating risks together with advisory support on projects, change initiatives and revenue growth.

CAEs report that performance measurement is a top-of-mind issue among their current personal objectives. They recognise that defining good Key Performance Indicators (KPIs) is needed to drive their department performance to support corporate strategy (while maintaining essential independence) , properly align staff priorities to support departmetn goals and effectively manage stakeholder relationships.

Audit executives must overcome three common challenges to ensure that performance measurement drives departmental goal achievement.

  1. Creating a cohesive system. Audit executives frequently fall short of linking their selected metrics to the corporate strategy and to the audit department’s mission as well as to individual staff actions, while also struggling to track progress diligently and consistently to support resource allocation decisions.
  2. Selecting input measures. Audit executives too often are backward-looking when selecting performance metrics, failing to ensure that metrics provide a window into the future with data that anticipates problems.
  3. Defining output metrics. Audit executives often fail to measure output in their highest-impact area due to misconceptions regarding the barriers of tracking them.

As performance measures serve two major purposes, CAEs must tailor their reporting to align the objectives with the varying focuses of internal constituents. Input metrics such as audit quality scores, report timeliness and staff experience / certification are more useful for the CAE and their audit management team. Conversely output metrics such as reduction in residual risk or surprise risk events, development of staff to become business leaders and costs recovered / saved as a result of audit work are of more interest to the Executive Committee and the Audit Committee.

To obtain insight into current and future goal achievement, CAEs must assess performance in the four areas critical to effective assurance work while avoiding countervailing metrics to minimise negative behavioural incentives. The four critical areas for a great balanced scorecard are:

  • People, for example – placement of auditors into the business and FTEs leaving the company
  • Plan, for example – proportion of time spent in high risk areas and proportion of assets / revenue covered
  • Process, for example – proportion of plan completed and QA scores
  • Resolution, for example – on-time resolution of issues and senior management survey results

What is CEB Audit Director Roundtable doing for members?

CEB Audit Director Roundtable webinars: Register here for the 27 February webinar Best of Performance Management for Internal Audit
CEB Audit Director Roundtable research
: Access the topic centre devoted to performance management and see how leading Audit Departments design individual and departmental performance metrics that support the achievement of corporate objectives

For further details on the Audit Director Roundtable resources, please visit our website.

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