Lean in Internal Audit – a different perspective

Lean in Internal Audit – a different perspective

As organisations face increased international competition and disruption, the Internal Audit function is stepping up to highlight inefficiencies in processes and controls and to improve customer outcomes.

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Every organisation can benefit from finding where processes can be trimmed down, customer service can be sped up or where costs can be saved. Traditionally, analysing an organisation for this purpose has been outside the domain of the Internal Audit (IA) function. Rather, IA has focused on providing assurance that the right risks have been identified and appropriate controls are in place for a company’s strategy to succeed. However, as sectors face increasing disruption, globalisation and immense competition, embedding process analysis into the IA function can bring an extensive value-add to organisations.

To achieve this level of value, Ross Tilly, Partner, Internal Audit at KPMG Australia engages the ‘Lean’ methodology in IA activities.

“KPMG uses the Lean methodology to look to improve the efficiency and productivity of organisations and to help them deliver customer value,” Tilly says.

What is Lean?

Lean dissects a company’s procedures and assesses the steps that are efficient and add to customer value, and identifies the steps that do not. It essentially looks for three kinds of ‘waste’, which are generally variability and unpredictability issues. For example, this could be having overtime requirements one week and idle capacity another week; or overburden, where one person who can do a certain task is always flat out and working long hours. There could also be misaligned skills, unnecessary physical transportation of documents around an office, or having customers stuck in queues – none of which add value.

Tilly says the Lean approach can often find up to 50 percent of processes include an element of ‘waste’. Having these inefficiencies made visible can challenge the common statement that arises – ‘we have always done it that way’.

“It is about streamlining processes and being able to allocate resources more efficiently,” Tilly says.

How can Lean enhance Internal Audit?

Lean methodologies can enhance IA activities across every aspect of an organisation. For example, if a business has a number of errors in its timesheets that lead to problems with its billing process, a Lean IA could help solve the issue.

In this instance, traditional IA questions would be: how was the original timesheet approved, was the control for identifying timesheet errors effective, and does the accounting follow the transaction trail? It would draw conclusions on whether the controls surrounding timesheet approval were operating effectively.

However, by applying the Lean approach, the questions would seek to find out what the error on the timesheet was, how it occurred, and how the number of errors can be reduced in future. It would help to identify the root cause of inefficiencies, report the findings to management, and provide a control assessment summary.

“We can suggest a series of easy, low-cost wins that they could implement, and also prioritise a whole series of much more strategic wins,” Tilly says.
Carmel Mortell, Partner in Charge, Internal Audit at KPMG Australia provides another example of how putting a Lean lens on an internal audit can find hidden cost and time inefficiencies.

“If I took a simple process of approving a home loan – from a control perspective, IA want to know if the bank have identified the home loan applicant, their assets and income, and have determined that the property really exists and it has value,” Mortell says. “However, if you look at it from a Lean lens, you would also look to identify the process for collection of this information. Were five separate emails sent to the customer to collect the data (salary, property details, etc.) followed by additional effort by staff to gather all the information in the one spot? A Lean IA review would seek to identify control weaknesses as well as opportunities to streamline this process.”

This example demonstrates another benefit of a Lean lens in IA – increasing customer satisfaction by simplifying and speeding up communications, or time to market. It can help organisations satisfy customer expectations in a timely manner.

Some other benefits of a Lean IA

In addition to efficiencies, costs and customer satisfaction, there are some other possible benefits of Lean in IA. One is that staff could gain time and be able to apply their focus to more valuable activities. It could help to identify where skills or training is lacking and could be enhanced. Another is identifying any compliance issues, as Lean can help reveal actions that are putting the organisation at risk of misconduct. Also, ‘pain points’ for staff or customers that are holding up processes could be made transparent, with solutions suggested.

Will Lean change the future of Internal Audit?

As stakeholders continue to expect more from IA functions with little or no increase in IA budgets, the prevalence of value-add approaches such as Lean, are a must, says Mortell.

“While some boards and management currently don’t consider efficiency reviews the domain of IA, that perception will change.”

KPMG has trained a large portion of the IA team in Lean fundamentals and engages its Lean management consulting team to assist in running IA workshops and coaching its IA practitioners in Lean.

More on Internal Audit

The Internal Audit function can be in-house, outsourced or a combination of both. Find out more in our article – Outsource vs. insource in Internal Audit – what’s the right approach?

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