Managing the Effectiveness of the Audit Process
Mission and Objectives of the International Audit Department
Stakeholders
The IAD stakeholder power-interest grid
The Audit Process
Objectives, Scope and Approach of the Research
Purpose and Mandate
Resourcing
Competency Development
Sustaining People Excellence
Tools and Technology
Knowledge Management
Operations
Quality
Governance
People
Infrastructure and Operations
Japan Tobacco International (JTI) is an international tobacco business that is operated by Japan Tobacco Inc. Japan Tobacco Inc. is the third largest player in the international tobacco industry with a market capitalization of 32 billion USD and a market share of 11%. JTI was established in the year 1999 when Japan Tobacco Inc. purchased the operations of United States multinational R.J. Reynolds, for 8 billion USD.
The Internal Audit Department (IAD) of the organization is accountable to the board of directors. The department is headed by the Global Internal Audit Vice President. He took his position in the year 2009.
The basic object of this research is to analyze the operational ability and effectiveness of the internal audit department of JTI. The research would analyze three primary areas of the IAD, including governance, people and infrastructure and operations. The nine dimensions of the internal audit operating model were analyzed under this research, this model has been adapted from Anthony’s triangle.
It was analyzed that the issues in the operations were not related to basic flaws. Instead, in-depth analysis was required to analyze the weaknesses of the department. The Anthony’s triangle supported the research very well and was the corner stone of the research.
Managing the Effectiveness of the Audit Process
1. Introduction
Japan Tobacco International (JTI) is an international tobacco business that is operated by Japan Tobacco Inc. Japan Tobacco Inc. is the third largest player in the international tobacco industry with a market capitalization of 32 billion USD and a market share of 11%. JTI was established in the year 1999 when Japan Tobacco Inc. purchased the operations of United States multinational R.J. Reynolds, for 8 billion USD.
The Internal Audit Department (IAD) of the organization is accountable to the board of directors. The department is headed by the Global Internal Audit Vice President. He took his position in the year 2009. The figure below demonstrates the position of IAD within the organization:
The internal audit function currently employs 34 audit professionals who work at seven different locations including Geneva, Hilversum, Weybridge, Manchester, Vienna and Moscow in Europe and in Tokyo as well.
1.1. Mission and Objectives of the International Audit Department
The internal audit department aims at providing the JTI group of companies with independent advisory and objective assurance services. Furthermore, the department also aims at adding value to operations and enhanced the internal control systems. The IAD aims at achieving these aims through the development of systemic approach for effective risk management, control, governance and compliance practices.
1.2. Stakeholders
The department aims at the identification, prioritization and fulfilment of the expectations of the stakeholders. The staff of department is appropriately aware of the political skills and abilities that are required for the effective performance of this task. In order to manage stakeholders appropriately, it is necessary that the department first identify their needs accurately. In order to demonstrate the way in which the organization performs this task it can be helpful to use the ‘stakeholder power-interest grid’, which has been described in the book ‘Operations and Process Management’ by Nigel Slack. This tool enables the organization to map the position of the stakeholders effectively and devise strategies that would enable it to manage these stakeholders appropriately. The figure below represents the stakeholder power-interest grid:
The organization is required to manage various stakeholders differently according to their power and interest in the organization:
High-power / high interest: these stakeholders shall be engaged completely in important processes and shall be satisfied to the fullest.
High power / low interest: these stakeholders shall be satisfied effectively but the organization shall not pressurize them exceedingly.
Low power / high interest: the organization is required to provide these stakeholders with sufficient levels of information.
Low power and interest: these stakeholders shall be monitored through infrequent interim communications.
1.3. The IAD stakeholder power-interest grid
As evident from the above mentioned figure the most important stakeholder of the department is the finance department or the global CFO. This is because the finance department is most significantly impacted by the audit reports. In addition, a major portion of the audit reports is related to finance department.
The members of Board and Excom also have an influential impact on the IAD. This is because these members play an important role in developing the audit planning cycle. These members, however, are included in the reporting process at the final stage.
The local entities are also influenced by the audit reports as these reports provide a true picture of the effectiveness of local management. They, however, incur low influence during the process. Finally the legal and compliance authorities are informed only in case of a fraud or flaw in governance practices.
1.4. The Audit Process
According to Slack et al. — 2009, ‘All processes have inputs of transforming and transformed resources that they use to create product and services.’ The audit process is not excluded from this definition. This the IAD has inputs that are transformed through audit process, which include annual strategic plan, fraud risk assessment, financial reports. Furthermore, certain inputs in the process, including auditors, data analysis software, SAP, which help the department in the transformation process. The audit process, both offsite and onsite, which enable the department to transform inputs into outputs is demonstrated by the following figure:
1.5. Objectives, Scope and Approach of the Research
The basic object of this research is to analyze the operational ability and effectiveness of the internal audit department of JTI. The research would analyze three primary areas of the IAD, including governance, people and infrastructure and operations. The following figure demonstrates the nine dimensions of the internal audit operating model, this model has been adapted from Anthony’s triangle.
Anthony’s triangle can help the IAD to divide the operations in the above mentioned three levels. According to the theory proposed by Robert Anthony (1965), the base of the triangle is the operational level, which is associated with day-to-day or routine operations. Above the operational level is the tactical level, this level is associated with medium term decisions. These decisions are generally associated with the effective implementation of the overall strategy. The apex of triangle demonstrates the strategic level, which is associated with long-term strategic decisions. This level sets out the direction for the department and formulates the overall strategy.
The approach used in the research begins with the analysis of the current leading practices of the internal audit department. It then identifies the current strengths of these practices and highlights the challenges that the department confronts. On the basis of this analysis, the research proposes recommendations for the improvement of operational ability of the internal audit department.
The above mentioned model is based on the maturity model, demonstrated by the following figure. The leading practices, strengths and challenges are identified on the basis of secondary data, whereas, recommendations are made on the basis of thorough data analysis. The recommendations are given in relation to the three major operation dimensions of the internal audit department, namely governance, people and infrastructure and operations.
2. Analysis
2.1. Purpose and Mandate
Leading Practices
The strategies of the department are developed in a manner that aligns effectively with the overall strategies of the organization.
The department holds quarterly structured with the board members and the executive management. These meetings are held to monitor and update the expectations from the departments.
Risk assessment operations are conducted in a systematic and routine manner. Furthermore, the department plays an active role in managing overall organizational risks as well as the factors that might enhance this risk.
Current Strengths
Routine interaction with the board members and executive management.
Effective and active assessment and management of risks.
IAD is regarded as an important and independent function of the organization and is respected as an advisory unit.
Current Challenges
The staff does not clearly understand the expectations of the board members from IDA.
The mission of the department is not appropriately shared and understood throughout the organization.
The risk assessment activities of the department are not aligned in a focused and systematic manner.
There is no formal enterprise risk management model that can be deployed as an input in the risk assessment and management process of IDA.
2.2. Resourcing
Leading Practices
This function utilizes a formal people model to demonstrate the level of skills of the employees and then aligns these skills with stakeholder expectations.
The function employ resources in a proactive manner, which is in alignment with the people’s model of the function.
This function involves retooling, rotating and effective planning in relation to important resources. All these tasks are performed both internally and externally.
Current Strengths
There has been an increase in the resources of IAD along with the growth of JTI and changes in regulatory requirements.
The members of the internal audit team are observed to have strong technical, strategic and administrative skills.
The function consists of appropriate and well defined job descriptions. This, as a result, facilitate the employees in performing their tasks appropriately.
Current Challenges
The geographic spread of the functions can prove out be a challenge for the department.
No formal skills analysis have been performed on the team. The team, as a result, cannot identify the training and development that are to be addressed for effective performance.
There are a limited number of auditors with in the IAD who have IT forensic skills including IT governance and application controls.
2.3. Competency Development
Leading Practices
The learning maps of the personnel are monitored appropriately and are updated as per the needs of the individual, function and organization.
Defined models exist for the competency development of the personnel. These are reviewed and confirmed by concerned authorities.
Appropriate software and training programs exist so that the personnel can be developed as per their learning maps.
Current Strengths
The auditors feel that they are provided with appropriate training, which, in return, help them to attain specialized skills.
Most of the staff of the department holds professional education and those who do not are encouraged to get professional education.
Current Challenges
The current competency model of the department covers the managerial level only and does not propose any future learning path for the department.
The department pays inappropriate attention on the development of soft skills.
Any formal learning map and training program has not been developed for the department.
2.4. Sustaining People Excellence
Leading Practices
The department has developed a reward program that operates throughout the year.
Department actively tracks and integrates career mapping and succession planning.
Formal performance appraisals are conducted by the department at semi-annual basis.
The employees are provided with robust mentoring and career counselling.
Effective professional opportunities, which are related to the career maps and competencies of the individual employees, are provided to the personnel.
Current Strengths
Individual goal setting and career mapping processes take place in a strutted manner at annual basis.
The department indulges in active succession planning process and the employees are rewarded effectively.
The staff turnover is reasonable and the staff regards the department as an appropriate place to enhance their skills and gain knowledge about JTI.
Current Challenges
No formal rotation program exists in the department.
The actual structure of the internal audit department does not provide sufficient development opportunities as the current opportunities can be enhanced significantly.
2.5. Methodology
Leading Practice
Documented and structured methodologies are developed and currently operate within the department to supervise all the advisory and support services of the department. These services include, reporting, risk assessment and risk management etc.
The internal audit, audit planning and risk assessment processes are appropriately aligned with each other. In addition to that, the audit plans are monitored routinely and the key risks, in relation to the entire organization, are updated appropriately.
Current Strengths
The reporting format provides the management with concise and factual information and hence this format is appreciated by the management.
In addition to that, the IT staff of the internal audit deploys a recognized framework, which is referred to as Cobit – Control Objectives for Related Technology, for the governance of operations.
Current Challenges
Any formal top down risk assessment plan, which takes the objectives of the organization, business risks and value chain into account, is not developed by IAD.
Even though a rolling audit plan exists in the department but it does not address the adhoc assignments in an appropriate manner.
The rating system and articulation of the department can be enhanced effectively.
In addition to that, apart from the quantitative aspects, the department can also include certain qualitative aspects in the reports.
2.6. Tools and Technology
Leading Practice
The function deploys most effective and advanced tools and technologies. This, as a result, enables the function to perform its task in an efficient manner. In addition to that, various responsibilities can be integrated appropriately. Furthermore, the deployment of effective technology enhances and facilitates the exchange of knowledge throughout the department.
Current Strengths
The data and analysis software, which is referred to as IDEA, has been currently installed in the department for the purpose of data mining, data collection and data analysis. In addition to that, the staff of the department is also provided with effective training so that they may deploy this tool effectively.
The team is currently satisfied with the reporting and working form. In addition, the use of intranet also facilitates the functioning of the department.
The audit software, which is referred to as TeamMate and has been implemented globally, is deployed by the organization for the purpose of audit delivery.
Current Challenges
The current functionalities of TeamMate are used to their fullest.
In addition to that data analytics function of the department is not performed appropriately. The past and present data is not used effectively for the assessment of risks.
2.7. Knowledge Management
Leading Practice
The currently culture of the department strongly encourages the attainment and sharing of relevant knowledge.
The process of knowledge sharing is enhanced through the deployment of technological tools. In addition to that, the department provides the personnel with a number of internal and external sources of knowledge.
The department has developed user friendly interfaces that filter the knowledge and provide the users with relevant knowledge only.
Current Strengths
The department has an access to external sources of information.
The department deploys a common platform, which is referred to as SharePoint, to share knowledge.
During the preparation of an assignment or a report, the department has a complete access to knowledge.
Current Challenges
The team members of the department have attended a very knowledge management and training sessions.
The department does not share knowledge in relation to the current trends of the industry in a proactive manner.
2.8. Operations
Leading Practice
Formal and structured resourcing and audit planning are conducted in a manner that is in alignment with the overall plans of the organization.
The performance metrics are aligned with the mandates that are established by the members of the board.
The performance of the employees is assessed and monitored in careful manner on annual basis.
Current Strengths
The budget of the department represents around 0.09% of the net sales of the organization.
The members of the team are satisfied with the manner in which the department conducts its operations and the position that it holds in the organization.
Current Challenges
The methods that are deployed to track the performance of the department can be enhanced.
The travel and entertainment expenses cover around one fourth of the total annual budget of the department.
2.9. Quality
Leading Practice
The quality metrics are designed in a manner that is in alignment with the mandates, which have been designed by the members of the board and management.
Performance of the employees is monitored in an appropriate manner and corrective actions are taken immediately, if and when required.
The department has developed a formal quality assurance program which is implemented on all the key activities of the department.
The department indulges in continuous improvement programs so that the performance and activities of the department can be enhanced effectively.
The department conducts an independent quality review of the operations so as to ensure that they comply with the IIA standards.
Current Strengths
The manual defines the quality assurance assessments at the assignment level.
The audit report is validated and reviewed by the management before the final product is published and used.
Current Challenges
The department does not implement the quality control and assurance procedures in a systematic manner.
The internal audit department is required to perform its activities in a proactive manner. This is because the department plays an important role in the management and assessments of the key risks that are confronted by any organization. In order to enhance the effectiveness and operation capability of the IAD department of JTI, this section makes the following recommendations. All these recommendations are based on the above mentioned discussion and aim at strengthening the current weaknesses of the IAD.
3.1. Governance
Under this head, the following changes shall be made to enhance the operations of IAD:
Enhancement of the Role of IAD and its Relations with the Key Stakeholders: It has been suggested by Rodney Turner (2009), a key factor for the success of a project is the attainment of agreement of stakeholders on the success criteria. The expectations that the key stakeholders have, in relation to IAD, shall be represented in an evident and appropriate manner. In addition to that, the department shall also update its mandate and shall try to align it with the expectations of the key stakeholders. In addition to that, the department shall play a more proactive role as an advisory and direct channels shall be established between the global CFO and the IAD for effective management of operations.
Alignment of the Activities of IAD with the Overall Strategy of the Organization: It shall be ensured by the organization that its audit planning and risk assessment activities are in alignment with the objectives of the organization. In addition to that, the department shall prioritize its activities according to the needs and priorities of the organizational strategy.
3.2. People
Under this head, the following changes shall be made to enhance the operations of IAD:
Development of Appropriate Training and Rotating Programs: The department shall go for the development of more robust and effective performance assessment and career mapping programs. In addition to that, formal and structured schedules, in relation to the rotation of the employees in different functions of the business, shall be clearly stated in the manual the employees shall be encouraged to attend training programs so that the organization can benefit from the enhancement of the skills and productivity of the employees.
3.3. Infrastructure and Operations
Under this head, the following changes shall be made to enhance the operations of IAD:
Enhancement of Audit Planning and Audit Delivery Processes: The audit delivery function of the department shall be differentiated on the basis of the risk profile of various assignments that the department undertakes. In addition to that, the rolling plan of the department shall also be enhanced and it should take various risks and assignments, including the adhoc assignments, in account while performing the audit planning function.
Consistent Application of a Comprehensive Methodology: The department shall enhance its Assignment Management Manual. This manual shall take into account all the phases of the audit life cycle. In addition to that, various quality assurance measures that are associated with these phases shall also be included. Apart from that, in order to ensure that all the members of the department perform in an effective manner, the department shall implement this manual in a consistent manner.
Enhancement of the Monitoring and Reporting of the Performance of the Department: The department shall develop a structured and formal schedule for the effective assessment of the performance of the department. In addition to that, the performance of the department shall be reported in a routine manner and compared with the set benchmarks. Apart from that, the department shall act in a proactive manner so that the key opportunities can be identified and exploited in an effective manner.
Works cited
Anupindi, Ravi. 2006. Managing Business Process Flows. Upper Saddle River, NJ: Pearson/Prentice Hall.
Leseure, Michel. 2010. Key Concepts in Operations Management. Los Angeles: SAGE.
Mahadevan, B. 2009. Operations Management. New Delhi: Published by Dorling Kindersley (India), licensees of Pearson Education in South Asia.
Slack, Nigel. 2009. Operations and Process Management. Harlow, England: Prentice Hall/Financial Times.
Slack, Nigel. 2012. Operations and Process Management. Harlow: Pearson.
Turner, Rodney, Roxanne Zolin, and Kaye Remington. 2009. ‘Monitoring The Performance Of Complex Projects From Multiple Perspectives Over Multiple Time Frames’, 4-23.
