Liz Sandwith, chief professional practice advisor at the Chartered Institute of Internal Auditors, explores the benefits of data analytics within internal audit
In the era of Big Data, there’s no doubt that there are rich gains to be made in utilising vast datasets that can produce insights that will improve business performance.
Using big data and creating the metrics to understand it can involve a significant financial investment. Financial directors need to understand the costs versus benefits and ensure that the process represents good value for money.
Big data is now starting to form part of the internal (and external) audit process, supporting the identification, management and reporting of risk, as well as the effectiveness of internal controls.
What issues do FDs need to consider?
Internal audit can use Big Data to help highlight red flags like significant control weaknesses, potential fraud risks, as well as pick up emerging trends.
This enables organisations to respond to threats or capitalise on opportunities faster, and make decisions based on better-informed insight.
Many finance functions use data analytics mainly for finance-related audits, such as general ledger, purchase-to-pay and payroll. However, those with more risk mature capabilities are also using data analytics to automate a wider range of processes.
Big data can even be used to collate information from across the whole organisation and/or multiple audits to give objective feedback on complex areas such as organisational culture.
On a practical level, the benefits of utilising data analytics include:
- Improved efficiency – freeing up internal audit time to focus on areas of particular strategic need, for example, by avoiding the need for repeated manual analysis
- Increased effectiveness – analytics allows for whole population testing instead of random sampling, as well as enabling continuous auditing so that the business can achieve greater audit coverage, pick up on emerging trends and be more agile
- Enhanced assurance – analytics can reduce the margin for human error in the analysis of vast datasets, and allow for greater precision in assessing operational performance
- A greater focus on strategic risks – by moving away from the more routine tasks which can be automated
- Significant cost and resource savings – over the longer term.
Whilst all these benefits will resonate with financial leaders, it is perhaps the potential resource efficiency savings that are most likely to make FDs prick up their ears.
However, it can take some time to realise fully these benefits. Auditors will need to be up-skilled and data analytics will need to be embedded into the internal audit function.
Organisations will need to carefully consider the application of data analytics from the outset. Boards and senior management will need to work with their heads of internal audit to determine how the use of data analytics will assist them and which specific areas of the audit population analytics can be used in. Finance will be a key part of this discussion.
For FDs, the real need-to-know is how will data analytics impact the bottom line and what benefits will it bring for future performance and shareholder value?
It’s clear that data analytics is playing an increasingly key role in enabling organisations to identify threats and opportunities – internally, in their specific markets and in the macro-economy.
Larger organisations may be leading the way, but smaller businesses can equally benefit. Identifying ‘quick wins’ can ensure the right balance of resource investment and outcomes. Deployed in the right way, Big Data can be an essential tool in the fight against risk.
Liz Sandwith is chief professional practice advisor at the Chartered Institute of Internal Auditors (CIIA).