Is Your Risk Assessment Stuck in Time?

Richard Chambers, CIA, CGAP, CCSA, CRMA, shares his personal reflections and insights on the internal audit profession.
There have been plenty of articles and lectures given on continuous auditing in recent years. There is no question that technology is making continuous auditing a powerful tool for both internal auditors and managers, alike. However, despite the growing popularity of continuous auditing, I believe one of the true challenges in the next decade will be to continuously assess risks.
As I have observed before, management and the audit committee look to internal audit to ensure there are “no surprises.” While it can be argued that this is an unrealistic expectation in a dynamic environment (particularly in companies with vast complex business models), it is nonetheless an expectation that must be addressed. The key to avoiding surprises is to maintain a watchful eye on new or emerging risks. This requires a continuous focus on the part of management and internal auditors.
Yet, if we follow traditional practices, how likely are we to avoid surprises when we are routinely conducting internal audit engagements based on an audit plan that’s six months or a year old? Unless we also have a robust approach for continuous risk assessment, we are in danger of continuously auditing the wrong things. We need to not only assess risk continuously, but to also use this information to keep audit plans up to date at the speed of doing business.
One of the most common excuses I hear from internal auditors for not designing a continuous component to their risk assessment is that it is difficult and time consuming. Many of us have trouble finding the time for even one enterprise-wide risk assessment each year. But several simple techniques can be used to help keep the risk assessment updated throughout the year, and continuous risk assessment is just too vital to ignore.
When you consider making a move to continuous risk assessment, you may be thinking only in terms of the more formal methods of assessing risk — those in which you identify a set of key risk indicators annually and monitor the indicators often to determine whether you need to realign your indicators. Formal methods for continuous risk assessment can be highly effective, but they are not your only option.
Another method for keeping your risk assessment and audit plan up to date is what I like to call “risk assessment by walking around.” This method relies on developing strong working relationships with key members of senior management so that you know about new risks as soon as they do. Risk assessment by walking around might lack the discipline and structure of more formal assessments, but it can still be a powerful way to keep in touch with what’s happening in your organization, and it might reveal new risks that your formal key risk indicators do not address.
A third approach to continuously assessing risks is simply to keep your antenna set as high as possible to detect industry changes, economic trends, and other external factors. Industry publications, seminars, and professional association meetings can be invaluable sources for this type of risk assessment. Can these external sources of information really make a difference in your company’s risk profiles? You bet. Just think:
  • Before the recent Wal-Mart accusations and the other dozens of U.S. Foreign Corrupt Practices Act (FCPA) scandals in the last year or two, many internal auditors at multinational companies believed their organizations had little or no risk regarding the FCPA.
  • Auditors who worked in the oil and gas industry a few days before the BP oil spill might have evaluated their key risks entirely differently only a few months after the spill.
  • E-commerce auditors consider Internet fraud differently today than they did just a few months earlier, when the Facebook click fraud allegations surfaced.
So what’s the best type of continuous risk assessment program for keeping up with the speed of doing business? Unfortunately, none of the above methods is truly complete in itself. Any of these methods can yield results that are far superior to those obtained merely by establishing an audit plan once each year and then following it regardless of changing circumstances. But given the speed at which risks are changing, I believe we need to use a combination of methods. Formal methods are best for staying on top of previously identified risks; risk assessment by walking around helps identify new internal risks; and keeping our antenna set on high for new external risks can help us start to address problems even before they are an issue at our organizations.
That’s my opinion – yours might be different. Is there a different type of risk assessment that had a big payoff for your organization? If so, we’d like to hear from you.

Posted on Sep 4, 2012 by Richard Chambers

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  1. Thank you for this article.  From my experience, eventhough my internal audit function would conduct a formal risk assessment annually and use the results to develop the annual work plan, there is a need for a more dynamic risk assessment and planning process.  As you indicated, the risks facing the organisations we serve are changing quickly so this emphasizes the need for us as internal auditors to be more responsive in terms of the methodologies we apply to get our desired results.  The first step would be to develop a strong working relationship with senior management so that the internal audit function is notified of changes and new developments in the organisation as they occur.  I would advise leaving the lines of communication open while maintaining that level of objectivity.  Additionally, as auditors we always have to be alert and pay attention to all the forces in the environment in which we operate that could impact the organisations we serve.  Hope my thoughts are useful.   

  1. At my most effective as a CAE, my approach to annual planning was to avoid identifying specific audit projects. My process engaged senior leadership annually in broad discussions of strategic risks, supplemented by emerging issues identified in monthly executive meetings. Coupled with an an entity-wide computer driven annual risk assessment that engaged operational managers and staff, we quantified the relative risk of each of 9 core functions of the organization. My annual goal was to have a presence in each core function. I allocated staff resources that way based on the risk data we developed. Getting to your "continuous risk assessment" approach, rather than assign specific audit projects for each core function, my practice (which we called "just-in-time auditing") was to have the lead auditor assigned to the core function engage the core function's executive director and direct reports in a risk conversation at the outset, allowing the audit team to focus on the issue(s) currently most important in that core function in the context of the organaization's overall  strategic risk. By focusing on risk and outcomes rather than processes, my staff of four became very energized and engaged, consistently producing 50-60 quick, high impact, high value audits per year (confirmed by customer surveys, formal and informal follow-ups, and requests for our services that exceeded our available committment time). I could not and would not predict or lock my department into completing a set number of audits each year, because that defeated the purpose - I designed the entire process to be dynamic and pro-active, and controlled it through a set of balanced scorecard metrics. The process of continuous risk assessment that you've described, and the process I applied, requires buy-in from those who oversee the IA department, and whose thought processes hopefully aren't constrained by historical approaches to annual planning.

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