Managing Leading and Lagging Indicators for Improved Internal Audit Performance

Managing Leading and Lagging Indicators for Improved Internal Audit Performance

Chief Audit Executives (CAEs) frequently utilize metrics like key performance indicators (KPIs) to monitor their team’s performance. The most common metrics focus on past performance. While these metrics are certainly important and help the CAE identify opportunities for improvement in the staff, another type of performance metric could add more insight as a predictor of future positive and negative conditions. The two types of metrics we are discussing are leading and lagging indicators. This article will shed some light on the two types of indicators, provide examples, and discuss the impact of using both types to improve performance within the audit department.

What Are Leading and Lagging Indicators for Internal Audit Performance?

Leading indicators are forward-looking metrics that provide early signs of potential changes in performance. They help predict future outcomes and can be used to take proactive measures. For example, an increase in the use of data analytics may indicate a future move toward continuous monitoring. 

Lagging indicators are backward-looking metrics that reflect what has already happened. They confirm trends and measure the results of past actions. Lagging indicators are important for evaluating past performance and identifying areas for improvement. For example, a team member’s performance evaluation may show a need for training on adequately supporting conclusions with evidence.

Using Leading and Lagging Indicators to Enhance Internal Audit

CAEs have gathered important performance data connected to lagging indicators for many years, especially through post-audit stakeholder surveys. A post-audit survey gathers management’s feedback on the recent audit in which they participated related to the team’s competence, communication, and other factors. The survey metrics can validate good performance if your team is doing well. Conversely, if a team is underperforming, metrics can help identify problems in the audit process that the CAE may need to address with individuals or the entire department. CAEs should consider including leading indicators and metrics in the survey in addition to lagging metrics. 

Lagging ExampleLeading Example
Was Internal Audit knowledgeable about the risks and processes included in the audit, and did they bring new ideas to help improve your process?Were internal or external SMEs used in planning the audit and identifying potential process improvements? If so, how many SMEs did the audit team engage, and where were they sourced?  Did the SMEs add value to the audit?
Did the audit manager communicate effectively during the audit?Did the audit team invite a representative from management to attend daily stand-up meetings? Did the audit team hold meetings at least every two weeks to review project objectives, successes, issues, and action plans?

In these examples, the lagging indicators track the stakeholders’ impression of the audit team’s competence and communication skills. The leading indicators show the team is bringing in experts when needed and moving toward agile auditing. 

To better forecast future success, the CAE can also analyze past metrics related to organizational engagement. By changing the focus from monitoring past performance to managing with an eye toward leading indicators, CAEs can significantly increase the chance of success and positively impact lagging metric results.

Lagging ExampleLeading Example
CAE monitors and reports the number of management requests received in a quarter. CAE sets a goal for the number of meetings held with various business leaders each quarter to seek out requests proactively.
Tracking the number of meetings needed to secure a request.Planning multiple management meetings based on past average meeting count to achieve the target goal of quarterly requests. 

The examples above show the CAE actively engaging the organization, anticipating the need for requested auditing and consulting engagements. Based on the lagging indicator data collected in the past, the CAE can set future goals and expand the department’s services.

Formalizing and Tracking Indicators with Technology 

If leading indicators do not currently exist, consider involving the entire internal audit team in creating them. Brainstorming leading indicators can be fun for the team, fostering ownership of the new metrics and better positioning internal audit for future success. With new metrics ready, a purpose-built audit solution simplifies the management and reporting of lagging and leading metrics. Setting goals based on leading metrics that push for future success and growth provides greater control over your team’s performance. Instead of dwelling on the past, the team is future-focused, prepared for what comes next, and eager to reach new milestones.

Tom

Tom O’Reilly is the Field Chief Audit Executive and Connected Risk Advisor at AuditBoard. In his role, Tom meets, collaborates, and shares Internal Audit and Connected Risk strategies and tactics with the AuditBoard Community and customers to help improve the practice of Internal Audit and how 2nd and 3rd line functions work together.