The New Head of Internal Audit First 100 days as newly appointed Chief Audit Executive (CAE) kpmg.ch Editorial The appointment as the new Head of Internal Audit (IA) presents an array of exciting prospects and challenges for a Chief Audit Executive (CAE). Stepping into this role allows for a new perspective on how internal audit should be defined and executed within an organization and presents a unique opportunity to introduce fresh ideas and effective and sustainable change to the internal audit organization. However, as the newly appointed Head of IA one must also be aware of the high expectations of various stakeholders, be it the IA team, the broader organization, executive management or the board/audit committee. Luka Zupan Partner It is thus crucial for a CAE to build their credibility within the Head Internal Audit organization and quickly become operational. Risk and Compliance Services (IARCS) This paper provides guidance on how to navigate through the first 100 days as a newly appointed Chief Audit Executive (CAE). With topics ranging from the structure of the Three Lines of Defense, to the sourcing of your IA function as well as current and emerging risks for consideration; this paper provides various perspectives and ideas to guide you and provide insights on the upcoming journey. It suggests timeframes for key activities and a detailed implementation checklist to ensure that progress and momentum is achieved. KPMG as a professional internal audit service provider is enthusiastic to support you in your journey as CAE in setting up/re-organizing the IA function, assisting you to drive momentum and provide insights on industry and IA best practices. With a highly capable, multi-disciplinary and global team we can assist you with various service offerings including methodology that is aligned to the IIA standards and modern approaches such as data analytics; delivery of internal audit missions on a global scale; conducting enterprise risk management exercises; support in executing forensic and fraud prevention activities as well as assisting in driving the compliance agenda. Additionally, we can provide a quick and effective performance assessment on the current state of the IA function which can help you in the initial assessment of the IA function and identify areas for improvement. Content Top concerns of Audit Committees 4 Introduction 4 Setting the scene: The universe we face today 4 The three lines of defense: Risk governance 5 Where does your Internal Audit department stand? 5 Current issues and emerging risks for Internal Audit 6 Questions to ask about your Internal Audit department 8 The first 100 days 9 Executing the CAE agenda 10 Checklist and time line 12 How we can help 14 Quality assurance and performance assessment of Internal Audit 16 KPMG as Internal Audit partner 17 Sustainability of Internal Controls 18 KPMG thought leadership on Internal Audit 19 Closing perspective 20 As the head of an Internal Audit (IA) department one has to lead an independent department providing assurance to the Board of Directors Introduction (BoD) regarding risk management, control and governance processes. The Audit Committee (AC) of the BoD expects IA to be able to provide With companies navigating through a volatile meaningful insights and unbiased opinions, which add value and economic landscape, Chief Audit Executives improve an organization’s operations. The top concerns of ACs are (CAE) face difficult choices when addressing listed below: the evolving issues and related risk factors of their organizations. Changing stakeholder expectations and a new view of risk management have prompted an important shift in the role of IA in many organizations. New demands from the board, senior Top concerns of organizational leaders, and regulators require IA to refocus its efforts beyond regulatory compliance issues. As a result the task Audit Committees becomes all the more difficult for a new CAE to move forward in the role. 1. Strategy: Continuous development, implementation and monitoring of strategic objectives for the organization. 2. Corporate Governance: Enhancing the value and efficiency of corporate governance and compliance processes Setting the scene: including effective reporting to internal and external stakeholders. The universe we face today 3. Data Analytics: Fully utilizing the potential of data analytics, continuous auditing and robotics to improve business External factors driving change processes and audit efficiency. • Regulatory pressures 4. IT risk: Effectively managing emerging IT risks such as • Emergence of new business risks cyber security whilst also maintaining a cost-efficient IT • Increased focus on risk and controls from environment. shareholders and investors 5. Third parties: Optimized assessment, monitoring and • Demands for greater accountability from controlling of the risks, relations and returns related to stakeholders dealing with third parties. • Higher levels of macroeconomic and 6. Tax: Evaluating the organizational impact of the Corporate political uncertainty Tax Reform III including effect on financial results and • Financial market volatility potential tax function transformation. • Increased use of offshoring 7. Assurance: Independent, concise and relevant assurance reporting from both internal and external auditors on all key Internal factors driving change aspects required for informed decision making. • Increased focus on risk and controls by 8. Regulations: Ensuring a sustainable yet effective approach senior management and the board to regulatory compliance on a global, regional and local level • Focus on cost reduction and efficiency (e.g. FCPA, Dodd-Frank Act). • Market expansion (e.g. new product / 9. EU Audit Reform: Understanding and evaluating the impact service development) of the EU Audit Reform on corporations at a global and local • Geographic expansion level. • Emergence of new operations risks 10. Corporate culture: Ensuring long-term, sustainable • Stronger risk awareness culture instilled organization growth through ongoing enhancement of within the organization corporate culture and implementation of talent development • Postmerger process integration and employee-retention programs. 11. Risk Management: Ability of the risk management process to effectively identify emerging risks, provide accurate risk assessment and implement cost-efficient counter- measures. 12. Changing business landscape: Ensuring that the organization is well-equipped to respond to a changing environment, new operating models, emerging competitors and game changers such as the economy 4.0. or geopolitical influences (Brexit). 4 / The New Head of Internal Audit January 2021 The second line of defense summarizes the supervisory The three lines functions that typically support and monitor the management of key risks and report to Executive Management. Examples of functions include Risk of defense: Management, Compliance, Legal, Quality Control etc. Risk governance The highest level of assurance in terms of independence comprises the internal and external audit functions – The “three lines of defense” model helps to understand defined as the third line of defense. Their focus lies in relationships and interactions between the various layers of providing in-depth assurance to the BoD that the key risks an organization regarding risk and control ownership, of the organization have been identified, are effectively and facilitation/monitoring and independent assessment. efficiently managed by the first and second lines of defense. In addition to independent assurance provided by the IA The model outlines that the business as the first line of function, IA also helps organizations to create business defense is responsible to make sure that risks are managed value, i.e. insights into best practice, or identify process at an acceptable level and controls executed effectively. efficiencies. Risk Reports to Day-to-day business operations 1st line Risk identification and assessment, Feedback of defense risk management and risk reporting Risk Reports to Board of Board Directors Strategic management, policy setting Reports to 2nd line and oversight function of defense Guidance, monitoring and improvement Feedback (standard setters) Feedback Risk Risk Committee Audit Audit Reports to Management/ Executive 3rd line Independent challenge and assurance of defense (Internal Audit) Committee Where does your Internal Audit department stand? Get a grasp on the maturity of your IA department based on the characteristics of a leading IA organization. From an underperforming IA function… … to … … an excelling IA function Individual assurance silos, no Coordinated approach to Single view and understanding of key coordinated risk perspective understanding key risks risks across the organization Focus on internal controls (ICoFR) Risk-based assurance across Strategic value creation is actively assurance and partially on internal operations, financials and compliance incorporated into risk-based auditing compliance processes Misaligned skill sets, underleveraged Active talent management within the Operational experience, «skills on staff, limited career prospects, no organization and continuous demand» including guest auditor and rotation program development of skill sets rotation programs Ad hoc use of data analytics (DA) More frequent use of DA to assess Leveraging DA to assess the impact of processes business strategy; assess effectiveness Characteristics and efficiency of processes and controls; DA incorporated