CEB: Internal Auditors Should Focus on Strategic Risks
During the recent recession, audit departments focused more on compliance and financial risks, providing assurance in those areas, overlooking strategic risks to their companies. The Corporate Executive Board Company (CEB), a for-profit, publicly-traded firm founded in 1979, conducted a study to determine the causes for steep declines in firms’ market capitalization (decline in the value of the business).
Their findings indicated that strategic risks comprised 68% of the risk events responsible for destroying greater than 50% of the market capitalization of firms’. Operational risks (eg, product failure, customer satisfaction) comprised 13% of the risk events. Financial risks and compliance risks contributed only 18% towards the failure of a company.
Ironically, the CEB found that most audit departments spent 80% or more of their time in providing assurance in compliance and financial risk areas, leading the CEB to conclude that many audit departments have so far largely ignored high risks to their organization.
The CEB recommended that in order to ensure their success, firms must ask their internal auditors to focus more on strategic risks (eg, the availability of capital, social trends, competition, etc) facing the company. It was important to make strategic decisions during this period of struggling economic recovery.
In fact, a company’s future success would be determined by the execution of strategic decisions made now. Evaluating strategic as well as vital operational risks is becoming an increasingly crucial aspect of the role of audit departments. High quality audit groups are striving towards providing such risk-based auditing.