Example case study: XYZ’s Internal Audit function had historically focused on compliance. Now they are looking to raise the bar.
Summary: Our fictional scenario follows four leaders at fictional XYZ Technology Group considers cosourcing as part of their Internal Audit transformation strategy. Then four different Ernst & Young internal audit professionals share their point of view, whether or not cosourcing is a good idea for XYZ.
The Chief Audit Executive seeks change
The auditor: Melanie had been in her role as Chief Audit Executive (CAE) of XYZ Technology Group (XYZ) for only six weeks, but she was excited by the challenge of transforming XYZ’s Internal Audit function into a world-class leader.
The scenario: XYZ’s recent acquisition of AttaBee Innovations — a company she had been with for more than 20 years — had doubled XYZ’s size, making it one of the largest manufacturers of laser diodes in the world. Its footprint now reached around the world, with plants in 12 international jurisdictions.
XYZ’s approach to its Internal Audit function had historically been focused on compliance. But when they saw how AttaBee’s Internal Audit group managed risk, while offering recommendations that saved the company money and enabled it to perform better, they decided to raise the bar. As AttaBee’s CAE, Melanie was the logical choice to set XYZ’s audit function on a new course.
The CFO worries about costs and people
The CFO: Hans Larsen, XYZ’s Chief Financial Officer, had spent hours the night before poring over AttaBee’s financial statements and general ledger. The numbers looked right, but he still wasn’t confident that AttaBee had the right processes in place to account for goodwill and intangible impairments in certain foreign jurisdictions. He made a note to talk with Melanie about it in his meeting with her later in the day.
Hans turned his attention to the notes he had taken last week when Melanie had laid out her vision for the future of Internal Audit and the expanded role it could play within XYZ — one of business advisor and value provider.
It was definitely going to be a big change, and he wasn’t sure that all the possible ramifications had been covered in Melanie’s impassioned presentation. There were going to be people in the company who weren’t going to like it.
Making the case for cosourcing: Melanie had made the case that she could save XYZ a lot of money through a cosourcing arrangement with minimal disruption to XYZ’s people. But Hans wasn’t convinced. As a corporate leader who had spent time in Internal Audit, he was worried that implementing Melanie’s vision might limit the development potential of the financial staff he had been nurturing.
And then there were the costs. Hans knew that Internal Audit’s budget would likely need to be reduced in the next fiscal year to absorb unexpected expenses associated with the AttaBee merger.
Would cosourcing prove too costly?
Hans sighed. He would agree to support Melanie’s plan — but there would be no money and no third-party support, and she’d have to get it done in the next 18 months.
The CEO says grow, grow, grow
The CEO: Malcolm Woo, XYZ’s CEO, finished reading the morning’s financial journals. The CEO of one of XYZ’s competitors had just made an unfortunate appearance in the media about an unexpected and immediate product recall for reasons of public safety.
As Malcolm watched the stock ticker across the bottom of his computer screen report his competitor’s plummeting share price, he made a mental note to ask his new CAE about the status of AttaBee’s business continuity planning, and the risk management processes her predecessor believed kept XYZ out of the headlines.
Also on his agenda for their meeting later in the day was his latest growth strategy.
AttaBee was Malcolm’s latest acquisition, but it certainly wasn’t going to be his last. His goal was to gain a 60% market share in the industry, making XYZ the largest laser diode manufacturer — outpacing its competition by almost a 2-to-1 ratio.
Malcolm had a target in mind, and he wanted assurances from Melanie about the new processes she was suggesting around mergers and acquisitions (M&A). He was ready to give her the opportunity to play the role of strategic advisor and to put her recommendations to the test. But she needed to know that failure was not an option.
He was beginning to hear murmurs of resistance from the Audit Committee around his expansion plans. He was looking to Melanie to assure committee members that XYZ’s execution of its business strategy relative to its risk appetite had been flawless and that XYZ should continue its course as planned.
If that meant bringing in a third party as an additional measure to improve credibility, he would make it happen.
The Audit Committee Chair demands checks and balances
Sashi Gupta, the Audit Committee Chair of XYZ, was agitated by Malcolm’s seeming lack of concern around the risks of taking on so many acquisitions so quickly. XYZ had just begun implementing its AttaBee post-acquisition integration plan, and already he had a new deal in mind. With so many potential risks around the AttaBee deal still unknown, she viewed a new acquisition at this time as wilfully foolish.
She was determined to make sure that Malcolm and his management team fully understood every aspect of the company’s risk profile — in all jurisdictions — before continuing with its acquisition strategy.
She planned on making it clear to Melanie that an enterprise-wide risk assessment was to be her top priority. She had read Melanie’s vision for transforming XYZ’s Internal Audit function, and she liked it. She was particularly supportive of the idea of third-party involvement.
Audit committee chair sees trouble brewing over the companies new global reach
AttaBee expanded XYZ’s global reach threefold. Sashi knew that the company’s current Internal Audit function had neither the language skills nor the cultural skills to effectively support the company’s new manufacturing facilities.
She shuddered at the thought of the issues that could arise from a simple cultural misunderstanding.
It was time XYZ had a fresh and independent perspective of its Internal Audit function.