It is officially planning season! A time for reflection, decision making and patience. Soon to be followed by negotiation, questioning and explaining. And more explaining. Followed by thinking you were good, only to be asked the same questions two months later, right?!
I kid. Planning and budgeting can be a frustrating process, but it is absolutely critical to the proper running of any Internal Audit department. Without an Audit Plan, you are violating the Standards. Without a budget, you have no yardstick. Without a time tracking system, you have no way to measure results.
If you’re worried that your department may be lacking in this area, relax! Today, I’m offering you a simple guide to follow, and pointing you toward a tool that can do the heavy lifting.
Nuts and Bolts
I have been through the audit budgeting and planning process many times over the years, and have seen this in practice from different perspectives.
When I worked in public accounting, my first boss was very passionate about tracking charge hours and holding us accountable. He really invested the time to explain how the firm made money by balancing productivity and efficiency, and how each of us played a part in our collective success or failure. I used the same concepts and methods to lead an Internal Audit department later in my career.
When I was first promoted to a Chief Audit Executive role, I developed a spreadsheet with my Excel-genius husband. A later evolution of this spreadsheet is available to subscribers, which I call the Audit Plan Template. This is my absolute favorite document available through The Audit Library. It is worth the cost of subscription alone for anyone who needs a quick and easy solution for planning, budgeting and time-tracking. I have versions available for audit departments of one to five staff members; I also created credit union friendly versions. I don’t recommend using Excel alone for teams of more than five. The process can get cumbersome and large groups are better off finding a technology solution. But most of us are small groups, and if an Excel workbook can accomplish your objectives, why not use it?
The Audit Plan Template also creates department metrics in real time. Here is a post I wrote about the meaning and purpose of audit metrics, which explores these concepts in much more detail. If you are just here to learn about budgeting, I also created the Audit Budget Prep Template for my subscribers. Full disclosure, the budget template is just a tab from the Audit Plan Template on its own. Sometimes people can get overwhelmed by large spreadsheets, so I decided to offer a short simple version in addition to the monster than can do it all. However deep you want to get, I have something to help!
Now let’s move onto the actual process.
Step 1: Calculate Available Audit Hours
The first step in any of this is figuring out how much time you have at your disposal. This is the really easy part.
You know how many team members you have. If your staff member works full time, that’s 2,080 hours per year to work with (1 x 52 x 40). If you have a new hire starting in July, you have 1,040 hours to allocate (1 x 52 x 40) x (6/12).
Not exactly rocket science. The difficult stuff comes later!
Also Step 1: Get Feedback
IPPF Standard 2010 –Planning details the requirements discussed in this post, and includes the following statement:
The chief audit executive must identify and consider the expectations of senior management, the board, and other stakeholders for internal audit and other conclusions.
So, the Standards say you need to ask for input from certain stakeholders in the course of planning, and consider their expectations and perspectives. This can be accomplished through a survey process. I created a simple Control Log and a Planning Survey Template for subscribers. Just determine which leader owns which process and function, send them a survey, and control the responses. Give your participants a reasonable deadline, and follow up with second and third requests as needed.
While these responses are rolling in, you can move on the next step. A quick note here. While the Standards describe the process of asking for and considering feedback from management,they do not say you have to accept their perspectives or adopt their ideas. Leaders outside of audit have a huge incentive to downplay risks to you! Consider what they have to say, which is both a requirement and common courtesy, but take it all with a grain of salt.
Step 2: Budget for the Little Things
This may seem counter-intuitive, but before you start allocating hours to big projects, you should consider all the little things you need to budget for. You know how much PTO your staff have, the holidays recognized by your company, how much CPE you expect of everyone, etc. What about jury duty, industry events, and fielding random questions from managers, board members or even customers? If you don’t budget for these needs, you are not being realistic!
You also need to budget for some administrative time. Be honest; no one is productive every minute of every day! Your staff need to read emails, fill out paperwork, take coffee breaks and chat with people at the water cooler. Also consider audit needs such as working in IDEA or ACL, attending staff meetings, sitting with the external auditors or regulatory examiners when the time comes, helping out with hotline and fraud investigations. All of these things take time, and you need to budget for them.
At this point, you may be surprised how few project hours you actually have left to work with! But having an understanding of your resources and the inherent limitations of your department is absolutely critical. You need to know your limits to reach your potential.
Step 3: Allocate Remaining Hours to Priority Projects
Now it is time to allocate the hours you have at your disposal to projects.
First of all, you are not going to be able to get everything done. Accept it! The reality is that everything in life is about priorities. We would all love to sleep for 9 hours, exercise for 3 hours in the morning, work a 15-hour day, study a new language for 4 hours and spend 2 hours playing with our kids. Unfortunately, a day is only 24 hours long! Having children means you’ll get less sleep and go out on the town less often. Taking up a new hobby often means you give up an old hobby. It’s just math!
It’s very common to get frustrated at this point, but some difficult decisions need to be made by a qualified professional. Here are some factors that can move a project up your priorities list:
- The process/department was not subject to audit procedures during the last plan year
- Management has rated the process/department high risk
- You have become aware of management issues, or other problems, in the process/department
- Regulatory examiners or external auditors flagged a department/process during a recent audit or examination
- You want to provide a learning opportunity for a staff member or take advantage of a skill set on your team
You should also consider throwing in a completely random project. Something that doesn’t appear particularly risky, but which you know nothing about. Who knows what you might find!
If you run the numbers over and over, and you just can’t get done what your company needs with your current resources, it’s the time to consider outsourcing. Highly technical or procedural projects, or engagements required by regulation rather than a risk-assessment, are perfect candidates. You still need to budget a little time for helping the auditors out, attending exit meetings, reading bids, etc.
Step 4: Approvals, Approvals, Approvals
At this point, consider your budget a draft. IPPF Standard 2020 – Communication and Approval states:
The chief audit executive must communicate the internal audit activity’s plans and resource requirements … to senior management and the board for review and approval.
This part is a little tricky, and you need a strong understanding of your corporate governance and org chart to get proper approvals in order. The last time I went through this process, I obtained approval from the CEO as a representative of senior management and the Audit Committee, which had board representation. This met the standard in my professional judgment, but it’s not black and white and certainly not one size fits all.
Whatever your approval mechanism is, make sure you get it in writing. Your CEO will not remember the finer details, nor will your Audit Committee, and you shouldn’t expect them to. Do your best to remember the tone of conversations and how/why decisions were made, and keep emails just in case you need something to reference later. Most importantly, document audit plan approval as an agenda item in your Audit Committee minutes.
In other words, get the receipts!
Step 5: Happy New Year! Now Start Tracking Your Time
Whether your fiscal year starts on January 1st or some less-exciting date, once the calendar rolls over it is time to start tracking. The Audit Plan Template has one tab for each staff member to record their hours. This information automatically computes YTD productivity and realization on projects. See, I told you that template was worth the cost of membership! Here are some best practices in time tracking that I recommend:
- Round time to the nearest half-hour
- Document any special circumstances using the comment function
- If administrative time in a business day exceeds one hour, document the reason
- Don’t eat time or re-allocate project overages to other line items! This is fraud!
- Record time daily
Once you have this process in place, you can start using the information created from the data to make decisions. When projects go over budget, you need to figure out why. When one staff member is less productive than the others by a significant amount, you need to sit them down and discuss what is going on. When projects wrap up early, you need to figure out what additional projects to work on in their place. Sometimes these answers are obvious, and sometimes you need to do a little digging. No matter what, staying in tune with the budget, the plan and charge hours can help you make these important daily decisions.
The goal is not to meet the budget. News alert: your budget will be wrong. You will forget to budget for a project, misjudge the hours needed to accomplish something, or allocate hours to a project that turns out to be a dud. You don’t know, at the beginning of the year before anything happens, how it will all turn out. The point of budgeting is not to be perfect. The objective is to create a plan and have a baseline to work from when you need to make adjustments. There are good reasons why we miss targets or exceed expectations! I can’t say it enough; you need information at your disposal to make good decisions and be a real leader.
Step 6: Repeat and Report!
Keep tracking that time, keep making good decisions based on evidence and analysis, adjust the department workload as needed, and report what you do regularly. The Audit Plan Template is formatted to print the summary tab neatly. You can take this with you to one on one meetings with the CEO, or throw it into your Audit Committee materials packet as a PDF. Always be ready to discuss the plan progress, in whatever detail your bosses need. Show them why they hired you, and why they should keep your around.
At the end of the year, your completed Audit Plan is ground zero for the new Audit Plan. The projects you wanted to work on, which had to be cut for time, may now become your new priorities. Anything your external auditors or regulators flagged should be considered as you balance the needs and goals of the new plan year. This is also a time to consider whether you want to request any new staff or outsource additional work. Once you have data at your fingertips, use it to explain what you can and can’t do to your bosses. A professional will argue their points with data, facts and figures, rather than feelings.
Now I want to hear from you! Have you used the Audit Plan Template or the Audit Budget Prep Template? What benefit did the documents provide, and what difficulties did you have? If you use a technology solution, what program is it and would you recommend it to your peers? Thanks so much for reading!