Steven Covey, author of The Seven Habits of Highly Effective People, and many others quite rightly recommend that when you start any kind of new project, you should begin with the end in mind. What does that involve?
Deciding where you want to be in the future (that is, what your “end state” will be);
Defining your key goals and objectives in getting there (to guide your various efforts along the way); and
Building and then implementing your plan to get there (the means to reach your desire end state).
This planning cycle works for all individuals, in both their professional and personal lives. It is even more important for organizations, where an understanding across the whole enterprise is vital in obtaining broad support across a workforce faced with numerous, and many times conflicting, priorities.
For internal auditors this planning cycle takes on a special meaning as well. Successful auditing requires an understanding of what the organization is trying to achieve and factoring that understanding into the company’s auditing efforts. And as an important activity itself, internal audit needs to define what the audit team is trying to achieve; without doing that, the auditing team may end up going down a wrong road during its project. For the organization to understand what the audit team is trying to achieve, the audit team itself must understand and communicate what it wants to accomplish.
The bottom line is that the auditors should be: (1) encouraging and verifying that organizations have robust systems to measure and report performance; (2) be leveraging the information from such systems in planning their audit efforts, and finally (3) walk the line themselves, by defining their long-term goals, the means to get there, and reporting their progress to the audit committee.
Where Performance Management Fits In
As part of tracking the audit’s progress, periodic measurement and reporting is vital, and serves as a bridge between today’s work and tomorrow’s. Put another way, an audit team must define its road map, get agreement with all the stakeholders that the path is correct (including the auditing project’s goals, the plan, and proposed end-state), and then monitor and report progress in getting there.
A robust performance measurement and reporting program facilitates the ongoing monitoring of progress, the regular (and sometimes painful) debate of issues and interim results along the way, and the corrective actions and adjustments necessary to remain headed where you need to go.
All of the above concepts apply at the various levels of the organization, from the enterprise as a whole down to subsidiaries and significant business units. As the internal auditing team evaluates various aspects of the organization, each audit should consider in its evaluation whether performance measurement and reporting is contributing to the setting of direction and the execution of plans.
The Art Of Measurement
A well-known maxim is, “What gets measured gets done.” All enterprise processes, including an audit, can benefit from measurement. Ideally, measurement will help an organization:
show how these results support organizational objectives;
determine what works and what doesn’t;
justify capital allocation;
motivate and provide tangible feedback to employees; and
enhance the ability to communicate with stakeholders.
A critical element of performance measurement is establishing key performance indicators and metrics. In thinking about metrics, they need to be “SMART”—that is, Specific, Measurable, Actionable, Relevant, and Timely. Another important consideration is not to overload the process with too many metrics but to focus on those most relevant to assuring the organization is creating shareholder value. (One excellent reference guide is the Open Compliance and Ethics Group’s metrics and measurements guidance.)
For auditing and compliance efforts, performance measurement and reporting allows auditing and compliance professionals to work with their clients (and fellow employees) and other stakeholders to define the goals, the roadmap, and the end-state the organization is working toward. What ideal system of operation does the company want to have? What should be tested to see whether the company is achieving that goal? What should be improved? How can you measure performance to gauge how well that improvement is happening? Debating ahead of time what measures will be considered for the formal performance reporting will help ensure that everyone is on the same page and that surprises can be anticipated.
RELATED READING
Below are some titles Dan Swanson recommends for anyone interested in further research on performance measurement.
The “Measurement & Metrics Guide” from the Open Compliance and Ethics Group is designed primarily for chief compliance and chief ethics officers and will also help the directors, executives, and others governance practitioners. www.oceg.org
Vital Signs: Using Quality, Time, and Cost Performance Measurements to Chart Your Company’s Future, by Steven Hronec (New York: AMACOM, 1993) is an easy-to-read primer on developing balanced metrics.
The Balanced Scorecard: Translating Strategy into Action, by Robert Kaplan and David Norton (Boston: Harvard Business School Press, 1996) is a groundbreaking description of the balanced scorecard approach, integrating nonfinancial measures with financial measures.
The Power of Six Sigma, by Subir Chowdhury (Chicago: Dearborn Trade, 2001) is a quick read on the Six Sigma philosophy of quality assurance. This fictionalized description, only 117 pages long, provides a basic grasp of the Six Sigma concepts.
In addition, we always say we need to improve communications (the number-one cause of failure, by far, in most everything we do). Defining your performance measurement and reporting program is a vehicle to have discussions on what’s important, what your priorities are, and where you want to go. Knowing that makes an auditing project enormously easier. Performance measurement and reporting on organizational and auditing efforts offers a strategic opportunity for the compliance and the internal audit departments to influence the entire organization’s governance efforts. Consider taking it on!
As mentioned, internal audit should weigh incorporating an evaluation of performance measurement and reporting into each audit performed. Auditing the organization-wide performance measurement and reporting program is also strongly recommended. An audit will provide for an independent and objective review of the efforts of the organization to define its goals and objectives, take action on them, and monitor progress, including corrective actions as things happen (and they will happen). Evaluating the program involves defining the system to be audited; assessing the measures being used, the processes in place, and the operating effectiveness; and determining whether improvement to the system will have an effect on the organization’s results.
Improving the organization’s operational performance is always a critical priority, and implementing (or enhancing) a formal performance measurement and reporting program will help greatly. It ensures that the organization stays on track with its overall objectives, and failing to audit that control creates a significant gap in the overall audit coverage.
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