When companies consider the topic of Return on Investment (ROI), they tend to associate it with such revenue-generating processes as sales, marketing, or product development. Non-revenue functions, however, such as internal audit can also pay off. Internal audit can and should be measured to prove its usefulness to the stakeholders and leadership.
Enough said, let us look at how ROI can be measured in internal audit.
What the ROI in Internal Audit is?
ROI is normally determined as:
ROI = (Net Benefit/ Cost of Investment) x 100.
Net benefit, however, constitutes qualitative and quantitative returns in the case of internal audit, i.e.:
- Risk mitigation
- Operational efficiencies
- Regulatory compliance
- Fraud prevention
- Process improvements
These are not necessarily associated with direct financial values, though they are part of organizational values and upholding the reduction of risks.
Measure Cost of Internal Audit.
Begin by determining the complete expense of your internal audit role. This includes:
salary and benefits of audit employees.
- Technical audit support/consultants.
- This is the cost which will be used in the denominator of your ROI.
- Determine and Name and Measure Benefits.
The following are some of the steps that you can take in measuring the value internal audit brings:
Cost Savings and Recovery
Estimate savings because of improved controls or savings of frauds or overpayment, that were found out. As an example, in a scenario where an audit has revealed a payment, that is, a credit, made twice to a vendor, that is a tangible return.
Risk Reduction
Mitigated or avoided risks, that are a result of audit interventions, should be monetarily valued. One of these real benefits is the presence of a regulatory fine due to an active audit.
Process Improvements
More efficient response by audit recommendations like reduction of time of invoice processing or manual errors could be transformed into a cost reduction in terms of labor or time.
Compliance and Assurance
This is more difficult to measure, yet compliance saves legal costs, bad publicity and time. Identifying the counts of compliance problems which have been resolved or reduced in the procedure of carrying out audits is helpful in the discussions of ROI.
Monitor Key Performance Indicators (KPI).
The performance measures that need to be incorporated in internal audit ROI are:
- Audit findings closed.
- Risky audit proportion that has been completed.
- Recommendations on audit taken.
- Stakeholder satisfaction scores.
These KPIs assist in showing effectiveness, although the associated direct financial impact is more difficult to identify.
Apply Balanced Scorecard Approach.
It is not all value that is financial and thus adopt a balanced score card strategy as includes a mix of financial, operations and strategic impact. This gives the general view of ROI:
- Financial: Recoveries, cost savings.
- Operational: Efficiency, process improvements.
- Strategic: Governance, alignment, business.
Convey Value in an effective way.
Finally, the audit role must also be able to present ROI in terms that are understandable by the executives and board in terms of business. Show the effect with examples, case and real-life examples.
Conclusion
ROI of internal audit cannot be easily measured like sales of marketing, but this does not imply that it is impossible. The value of internal audit is quite easy to demonstrate by realizing a tangible saving, minimization of risk, and achievement of organizational goals. Appropriately introduced ROI measurement does not simply make the presence of the function valuable, but it also makes it even more important as one of the major contributors to the organizational success.
Also Read: Internal Audit in Manufacturing: Enhancing Quality and Control