Quality Progress

September 2002 Table of Contents

Add Value To Quality Audits

Align your reports with internal audits to get the attention of leadership by Greg Hutchins As I wrote this column the congressional hearings on auditing and accounting fraud were playing in the bac!ground on C"S#A$% &ne purpose of the hearings was to allow representati'es to (uestion corporate figures about the lac! of transparency to in'estors and lac! of 'alue to sta!eholders% Thin! (uality of information and (uality of decision ma!ing% This sub)ect has been featured in many page one articles in the *all Street +ournal $ew ,or! Times national business maga-ines and local newspapers% The $AS.A/ has hit fi'e"year lows% The .ow has dropped alarmingly% *orldCom lost almost 0200 billion in mar!et capitali-ation% 1nron lost almost 0200 billion in 'alue% WorldCom's hero Sadly IS& 3000 and (uality auditing were ne'er mentioned as solutions to the problem during the hearings% 4ut internal auditing may finally become recogni-ed as a way to sol'e the corporate go'ernance crisis% As a matter of fact a 56"year"old internal auditor at *orldCom became a national hero for blowing the whistle on her corporation7s acti'ities% 4ottom line8 If we as (uality auditors don7t add real and percei'ed 'alue what we say is going to be dismissed% *e need to understand corporate go'ernance issues and what we can do to pro'ide reliable and accurate information to sta!eholders% 9ost importantly partnering with internal auditors is critical to our careers as (uality professionals% What is value? The Institute of Internal Auditors :IIA; defines <adding 'alue< as follows8 &rgani-ations e=ist to create 'alue or benefit to their owners other sta!eholders customers and clients% This concept pro'ides purpose for their e=istence% >alue is pro'ided through their de'elopment of products and ser'ices and the use of resources to promote those products and ser'ices% In the process of gathering data to understand and assess ris! internal auditors de'elop significant insight into operations and opportunities for impro'ement that can be e=tremely beneficial to their organi-ation% This 'aluable information can be in the form of consultation ad'ice written communications or through other products""all of which should be properly communicated to the appropriate management or operating personnel%2

What do internal auditors do? The IIA defines "internal auditing" as: ... an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a

systematic, disciplined approach to evaluate and improve the effectiveness of ris management, control and governance processes.!
What adds value? Audit 'alue comes from managing ris!s strengthening internal controls measuring operational effecti'eness reducing costs eliminating waste and assuring sta!eholders business re(uirements are satisfied% #eriodic assessments also pro'ide trendline data to determine baseline and benchmar! performance impro'ement% $ew issues arise as a result of internal auditing% #rocesses systems and products are understood better% #re'ention is emphasi-ed% 9ista!es are detected and controlled further up the 'alue chain% 4usiness ob)ecti'es are operationali-ed% ?is!s are managed% &pportunities are found% #riorities are refocused% So let7s loo! at two types of 'alue added audits% Process auditing 9ost (uality and IS& pundits thin! IS& 300082000 audits will in'ol'e process auditing% There is still much confusion and little standardi-ation on how to conduct a process audit but the following are commonsense steps8 2% Identify business ob)ecti'es% 2% @lowchart critical processes% 5% Identify critical process inputs and outputs% A% 1'aluate process procedures records and documentation against IS& 300282000 or similar (uality criteria% B% 1'aluate process metrics against business ob)ecti'es% C% Analy-e metrics to determine process stability and then impro'ement o'er time% Risk auditing &?CA is a common ris! assessment methodology used by internal auditors% Its principal elements are8 Identify business and process ob)ecti'es% Identify operational and other ris!s% .efine business or other controls% Assess and ensure the effecti'eness of the business process to satisfy ob)ecti'es% So, what should we do? /uality auditors should understand and align their reports with internal audit reports% *hyD &ur (uality and IS& 3000 audits usually go no higher than a second le'el manager% #re"1nron 2AE of internal audits went directly to the audit committee of a company7s board of directors% #ost"1nron regulators and others are suggesting all internal audit reports go directly to the audit committee% This is a no"brainer for us% If we want our reports and our decisions to ha'e impact we need to send them to the highest le'el management possible% *e add real 'alue because of our operational and supply base !nowledge% REFERE CES 2% <Glossary < IIA "rofessional "ractices #rame$or 2000% 2% About Internal Auditing IIA *eb site www%theiia%org 2000% !RE! "#$C"% S is a principal with /uality #lus 1ngineering a #ortland &? based process management and 'alue added auditing company% He recently authored and published Supply 9anagement Strategies which can be ordered through Ama-on%com% Hutchins is a member of AS/% If you would li!e to comment on this article please post your remar!s on the /uality #rogress .iscussion 4oard on www%as(net%org or e"mail them to editorFas(%org%