Auditing & Risk Management A Happy Couple or a Shotgun Marriage? Presented by Bruce Turner CGAP, FIIA (Aust), CISA, CFE, FFin, FPNA, MAICD, AFAIM Chief Internal Auditor Australian Taxation Office 15 October 2010

Overview We’ll explore the pre-nuptials … how strong is the connection between internal audit and risk management … does it provide the foundation for a happy couple?

Overview Internal Audit Governance Roles Integrating Internal Audit with Enterprise Risk Management

Internal audit Fundamentals of professional auditing practices Definition Key elements Professional standards

Definition of internal auditing “Internal audit is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.”

Key elements Governance Risk management Control

Auditing standards 1000 – Purpose, Authority, and Responsibility 1100 – Independence and Objectivity 1200 – Proficiency and Due Professional Care 1300 – Quality Assurance and Improvement Program 2000 – Managing the Internal Audit Activity 2100 – Nature of Work 2200 – Engagement Planning 2300 – Performing the Engagement 2400 – Communicating Results 2500 – Monitoring Progress 2600 – Resolution of Management’s Acceptance of Risks

Auditing standards - planning (2010) “The chief audit executive must establish risk-based plans to determine the priorities of the internal audit activity, consistent with the organisation’s goals.”

Auditing standards – risk management (2120) “The internal audit activity must evaluate the effectiveness and contribute to the improvement of risk management processes.”

“Risk management remains at the heart of internal audit “Risk management remains at the heart of internal audit. It defines the focus as well as the effort of the internal audit staff. Getting it right through a comprehensive risk assessment will drive better results, achieve greater efficiencies, and cover the important things that either add or preserve value in an organisation.” * Financial Executive November 2008 - Better Internal Audit Leads to Better Controls - by Robert B Hirth Jr – from Protiviti NewsAlert January 2009

Risk elements in audit process Planning Forward work program Each audit engagement Fieldwork Scope and work program Reporting Each audit reported Basis of prioritising recommendations Consolidated high-level reporting Follow-up of recommendations

Example - audit planning development process

Example – ATO audit themes Core tax administrative activities Change Program Financial stewardship Strategic reviews Assurance activities

Example – ATO audit themes cont’d Managing contracts Managing overheads Fraud control Non-financial management information Security and privacy

Looks like a marriage …

Governance The inter-relationships between the risk management players Risk management advisor Auditors The effect of changing risk profiles

Management Owns the risks Manages the risks Risk management advisor Develops the framework Produces risk reporting Internal auditors Use risk based planning Evaluate controls

Business Objectives Governance Heightens likelihood of achieving objectives Risk Management Charts & oversights the business Internal Controls

The changing risk profile

Change is inevitable Risk management activity must be dynamic Vital to embed risk management in organisational processes Both risk management framework and processes The organisation and its environment will change Auditors to be agile and flexible to accommodate changes

Thinking about risks Yesterday Tomorrow Managing known risks Exploring emerging risks Avoiding unknown risks Capitalise emerging opportunities Register of known risks Radar of emerging risks Established risk tools Optimised approaches to risk Individual risk responses Collaborative risk mitigation * Based on thought leadership in a PwC Publication – Extending Enterprise Risk Management to address emerging risks (2009)

Examples - emerging risk areas Increased competitive pressures Continued recessionary pressures Cost reduction pressures Talent risks Commodity prices

Examples - emerging risk areas (cont’d) Strategic change management Third party solvency Political trends Compliance Lack of investment in product innovation * Sourced from Audit Director Roundtable Publication – Top Ten Emerging Risks – Likelihood, Impact and Velocity (October 2009)

Examples - local government risk areas Developer contributions Water supply Culture centre development Asset maintenance Integrated planning Climate change Attract / retain staff Long-term finances Information management Fraud and corruption

Examples - state government risk areas Shared services provision Information technology Security State plan delivery Specific reforms Attract / retain staff OH&S Major projects Reactive work Fiduciary controls

Examples - enterprise risk categories . External Environment Policy Advice & Design Security & Privacy Law Interpretation Innovation & Change Tax Product Compliance Knowledge Major Tax Integrity Threats Technology Transfers Compliance People Product & Payment Processing Governance Tax Revenue Finance Marketing & Communications Client Experience Legal Support Facilities Client Engagement Regulatory Compliance Government Engagement Business Continuity International Engagement Reputation Management Supplier Engagement

Internal auditing policy agenda Internal audit is fundamental to good governance Public entities need strong effective audit committees Appropriate reporting lines for head of internal audit Clear accountability for risk management and control Internal audit operates at consistently high standard

Ticks along like a marriage …

Integrating internal audit and enterprise risk management Optimising the benefits of the risk management investment A long engagement Audit themes Case studies

A long engagement - case study - loan portfolio audit

Routine auditing Broad coverage of personal loans Average loan $30,000 Thorough audit completed Appropriate sampling techniques well-constructed working papers well-written report

Different loan product offering Foreign exchange loans introduced that year Average loan $750,000 Not part of ‘routine’ audit program No audit coverage of new product lines

Adding value Changing risk profile not assessed Audit value diminished Narrow focus on ‘routine’ loan portfolio Changing risk profile not assessed Audit value diminished The audit and risk marriage is already over 25 years strong

Case study – on time running

Public information Objectives of entity articulated Clean Safe Reliable Key measure of reliability – on time running KPI result updated daily on website

End-to-end controls Well articulated policy and KPI commitment Counting rules clear and transparent High-level sign-offs for release to website and Minister Assertions on the collation of data and calculation of results Strong website security

Data origination Grassroots collection of data Near enough is good enough approach Integrity of data severely tarnished Reputational damage Strong Auditor-General criticism

Case study – security risks

Emerging security risks (2008) More electronic records breached than 4 prior years Corporations fell victim to the largest cyber-crimes ever Motivated hackers know where and what to target 90% of records breaches involved organised crime Could avoid 9 out of 10 breaches with security basics Mistakes and oversights hindered security efforts * Australian Institute of Management, Management Today, July 2009, pp. 7-8, 37

“In recent times, a number of events have occurred overseas resulting in the loss or disclosure of sensitive information. One particularly high public profile incident resulted in the resignation of the Chief Executive of Her Majesty’s Revenue and Customs (HMRC) in the UK.” * ATO, Information Security Practices Review, PricewaterhouseCoopers, April 2008, p. 2

Example – ATO reporting on audit themes Consolidated high-level audit report on security Logical access provisions Managing client records Site visits – remote locations (physical security) Satellite audit – security classifications

Risk management elements Sound governance structures A clear corporate stance Effective education and awareness programs A well-defined security classification framework Effective security monitoring incident response mechanisms Robust plans for IT incidents. * ATO, Information Security Practices Review, PricewaterhouseCoopers, April 2008, covering letter, p. 2

Influences service standards Community perceptions strong 80% think the ATO is doing a good job* Business perceptions strong 89% think the ATO is doing a good job* Professional survey positive 79% are ‘satisfied’ or ‘very satisfied’ with the professionalism of ATO employees*

Comes together like a marriage …

Conclusion The pre-nuptials are sound: In turn internal audit: Internal audit and risk management have a strong inseparable connection Risk management provides the foundation for effective auditing In turn internal audit: Supports the risk management process Validates the effectiveness of internal controls that mitigate the risks

My vote … a happy couple!

Questions? © COMMONWEALTH OF AUSTRALIA 2010 This presentation was current in July 2010

About the ATO Australian Government’s main revenue collection agency Administers main aspects of Australia’s super system Celebrates its centenary in 2010 Net revenue collection of 270.8 billion* Operating budget of $3.1 billion** Average staffing level 21,720** 75 locations across all states and territories** 25 business and service lines* * end June 2008 ** end June 2009

Audit staff Around 40 full-time equivalent staff We employ specialist external staff for technical audits Four teams across 3 sites in ACT, NSW and Victoria Audit capability meets global benchmarks Qualifications, certifications, experience Multi-disciplinary team Completes 60 to 70 audits per year

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