How Disruption and Innovation Shape the Future of Internal Audit

Our profession is at yet another crossroads, and our choices now will determine the evolution of the profession in the future. The rapid speed of disruption and innovation will outpace our ability to respond unless we are prepared. As we move forward into 2022 and beyond, disruption and innovation will create different situations that will require new skills. How we prepare for risk-induced disruption and whether we embrace innovation when these occur will determine our chances for success. In this article, I highlight strategies auditors can use when dealing with disruption and innovation, and then we will discuss three possible scenarios that can result from the use of these strategies. 

Preparing for Disruption with New Skills

We all know how disruptive the pandemic has been to business and our lives, but COVID is just the most recent entry in a long list of risk events that have impacted businesses in the last 20 years. We have experienced a constant barrage of terrorist attacks, corporate scandals, regulatory upheaval, market crashes, and natural disasters. Even a pandemic could have been predicted since SARS, MERS, H1N1, and Ebola have had major impacts in different parts of the world.

The key to preparing for a disruptive event is to keep your eyes on the horizon, so you can see the next one coming. For example, inflationary pressures are growing in significance for many industries and organizations. We are likely to see economic conditions in the next year that could impact our organizations for a decade to come. Having been in the workplace and the audit profession long enough to have lived through a few recessions and even a few inflationary cycles, I can say from experience that these business cycles rarely resolve themselves as swiftly as they begin.

To address inflation-related risks, consider which skills we need to develop as a profession. If I were on the front lines, I would want to know how to audit for cost containment and expense reductions in the face of spiraling price increases. We can also add value by understanding the introduction of new competitors, industry changes impacting market share, and the impact of regulatory changes.

Embracing Innovation to Add Value

Before the pandemic, technology innovation was occurring at a steady, rapid pace. The need for specific technological innovation during the pandemic necessitated a leap forward. Research done by McKinsey found “organizations that experimented with new digital technologies during the crisis, and among those that invested more capital expenditures in digital technology than their peers did, executives are twice as likely to report outsized revenue growth than executives at other companies.” On the flip side, failure to embrace technology can have a detrimental effect since those organizations are not in a position to adapt as quickly or as effectively when the market demands change.

Preparing for innovation may require auditors to acquire new skills related to emerging technology. As organizations embrace the use of bots, artificial intelligence, or robotic process automation, internal auditors add value by reviewing the use and control of these technologies. In many cases, auditors are ahead of the curve and can provide insight and advice to management. Speaking up and employing our strong communication skills will often differentiate the trusted advisors from good internal auditors.

Three Future Audit Scenarios

As a profession, internal audit is at a crossroads, and the decisions we make now in response to disruptions and innovations will influence the direction of the profession. Depending on our response to the challenges and risks we face, we can end up in the decade ahead diving, gliding, or soaring. I will use a flying bird analogy to help illustrate the scenarios in front of us.

Scenario 1: Lose Momentum and Dive

Thinking about flying, if a bird stops exerting any effort to remain aloft, it loses all forward momentum and starts to dive. The same can happen for our profession if we become complacent. Many audit departments have done a wonderful job partnering with management and raising the function’s stature. Still, we cannot lose our momentum and expect things to keep going — we will start to dive. I mentioned the need for developing new skills in response to disruptions and innovations, but if we do not upskill to address new risks, we will not be prepared when these materialize. In this scenario, there is a good chance the internal auditors will overlook or be unable to address key risks, or at least others will think the internal auditors missed something.

Scenario 2: Glide Without Extra Effort

The second scenario, and probably the most likely outcome, is that we glide as a profession. You have seen birds that put forth the minimum level of effort to stay in the air, riding air currents and only moving their wings when needed. In this case, we simply stay the course we are on and address the issues and risks the same way we have in the past. When an audit department glides, it is forced into a reactionary position. When new risks emerge, the department will address those risks, but they may not proactively seek these out and have forward-looking conversations about the possible impact and exposure with the board. Likewise, the department will usually stay current with the minimum necessary investment in technology, but they are unlikely to seek new trends and techniques to gain deeper insights. The biggest risk to internal audit is that we are seen as valuable but not indispensable — and indispensability must be part of the ultimate quest for this profession.

Scenario 3: Leverage the Winds of Change and Soar

The third scenario is the most optimistic of the three. Internal audit can soar if we seize the opportunities before us as a profession and keep our eyes focused on the horizon. We are prepared for the strategic risk in this scenario and embrace these as opportunities through continuous assessment and dynamic audit plans. We have talent management strategies that leverage upskilling the existing staff, acquiring new skills, and future-proofing the value of internal audit through adopting an agile audit mindset. We also embrace technologies as enablers and as capacity multipliers. 

To achieve this best-case scenario, we have to be champions for strong governance within our organizations, and ready to put in the effort now so we are ready for the changes to come. Your actions today will determine if we will dive, glide, or soar as a profession. When we put all our energies into preserving and creating value for the organizations we serve, we have every opportunity to soar in the decade ahead.