The balanced scorecard is a system used to make sure business operations are aligned with the organization’s mission, vision, and strategy. Since it uses several measures to determine success, it helps those involved to balance what is achieved with how it is achieved. As a monitoring tool, it standardizes measurements, so all involved can use a common language to measure progress towards the achievement of organizational goals.
While financial measures will continue to capture the attention of business leaders, my previous post, How Internal Auditors Can Leverage the Balanced Scorecard, outlines the important role that metrics related to employees, customers, suppliers, processes and innovation play in the success of modern organizations. As much as this tool can be applied to the organizations we audit, it is also applicable to our own internal audit departments.
Internal audit departments have been using balanced scorecards for many years to help them maintain a quality assurance and improvement program covering every aspect of the internal audit activity (Standard 1300) and to make sure that audit activities are consistent with the organization’s goals (Standard 2010). Internal auditors may want to consider the following types of measures (with suggested metrics in parenthesis) in their balanced scorecards:
1. Business Process: These focus on how the process of auditing is performing in relation to the audit plan. Some of the metrics in this category include:
- Time from audit announcement to final report published (days), from end of fieldwork to draft report publication (days) and from draft report to final report publication (days).
- Time variance from plan (hours) and (%)
- Variance from audit plan budget (hours), ($) and (%) for all audits, high-risk audits, and variance from schedule (days).
- Technology licensing cost ($)
- Cost related to the use of external resources ($)
- Project-related work, which is often referred to as chargeable hours, (number) and as a percentage for each auditor and entire staff time (%)
- Corrective action items completed, or delinquencies (number) and days behind the originally agreed-upon completion date (#) by severity of finding
2. Financial: This category of metrics includes cost savings and cost avoidance as well as incurred costs. Some specific measures could include:
- Average cost per audit ($)
- Cost reduction to client ($)
- Actual ($) and average ($) cost per internal audit project
- Travel expenses per audit ($) and variance from budget (%)
- Technology licensing and maintenance costs ($)
- Cost related to the use of external resources ($)
- External auditor cost reduction from reliance on Internal Audit ($)
3. Customer: Meeting the client’s needs and providing reasonable assurance about the system of internal controls is paramount for most internal audit departments. Customer satisfaction is central to the internal audit department’s mission and focus. The metrics used to measure the achievement of these objectives can include:
- Post audit survey satisfaction results (score) and qualitative feedback (comments)
- Special projects conducted (number)
- Repeat findings (number)
- Management requests for audit services (number)
4. Learning/Growth: This category focuses on developing the staff and includes training hours provided and received internally and externally, dollars budgeted and spent attending training seminars, conferences, webinars, and obtaining certifications. Some of the specific department goals can include:
- Training hours per auditor (number) with a goal of (X) per year
- Training cost per auditor ($)
- Internal auditors with a professional certification (number) and percentage of entire staff (%)
- Articles written for professional publications, internal publications, blogs (number)
- Presentations made at conferences (number)
Many internal audit departments begin the year discussing the audit plan for the year, the metrics that will be used to track the completion of the plan, and the specific goals associated with each of them. During the year, internal auditors track their individual and team performance and report the results with varying frequencies. Some metrics are reported weekly, others monthly, and some quarterly within individual teams and up through the chain of command in the department.
Deviations are reviewed individually, within the teams and in staff meetings across the entire department. Issues limiting the ability to reach stated goals are examined and resolved. This entire process is enhanced using visual tools such as charts, graphs and dashboards, which provide easier reference and analysis than text-heavy means. An important element making status reviews more effective is to limit blame and focus instead on identifying the root cause of issues while finding tangible solutions. This promotes transparency, early notification of emerging issues and a culture of constant improvement.
Internal audit managers track their teams’ progress towards the completion of the annual plan, and reports are submitted to the audit committee of the board quarterly. This report usually focuses on audits and consulting engagements completed, in progress and upcoming, variance from audit plan, corrective action items outstanding, cost variance analysis and the cost related to the use of external resources. This way performance to plan is calculated, reported and re-prioritized as conditions within the organization mandate.
Impact on Departmental Performance
Balanced scorecards provide clarity, consistency, timeliness and direction to internal audit staff and makes evaluations and progress reports more objective than they would be otherwise. Internal audit departments should select and track the metrics that provide a balanced overview of the unit’s performance and finetune the process over time. By identifying relevant metrics and making sure they are aligned with the organizations’ needs and priorities, balanced scorecards can be a valuable contributor to the internal audit department’s ongoing success.