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Internal auditing conjures up ideas of endless paperwork, countless interviews and a slightly ominous team lurking about to conduct an independent, objective appraisal of how a company works.
Internal auditing is hard work, and it’s essential in evaluating and improving a company’s governance processes, risk management, and controls. As with most other functions, Internal Auditing Services (IAS) is undergoing a digital transformation, and Process Mining technology is driving this change.
Process Mining has objectivity at its center, relying on event logs and digital footprints across ERP, CRM and a multitude of other IT systems. Internal auditing aims to have objectivity at its core, relying on a systematic division of labor that ensures those auditing a given process, or department are not also the ones responsible for managing it. Albeit worthy goals, internal auditing often encounters process flaws, human error and an inability to capture white space between departments, processes, and self-reporting. Here’s how Process Mining is slowly but surely flipping internal auditing on its head and bringing this vital function into the digital age.
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Current State of Internal Auditing 2018
PwC’s 2018 State of the Internal Audit Profession Study reveals an industry that is slow to adopt new technology but perceives technology adoption as valuable to Internal Audit’s (IA) role in an organization. This signals a significant potential for process mining and other related technology such as artificial intelligence, blockchain, augmented reality, and IoT within the field of IA.
- “56% of IA leaders believe technology adoption impacts IA’s value to the organization.”
- “14% of respondents are categorized as “Evolvers” who are advanced in technology adoption.”
According to Alvin Bledsoe of Audit Committee Chair, SunCoke Energy, “the real pitfall for Internal Audit is if they don’t stay current on new technologies then they won’t have a seat at the table and be perceived to be adding value; they need to stay current (not be experts) to stay relevant.”
How Process Mining Improves Internal Auditing
One such way to stay relevant is to integrate process mining into the internal audit function. Here’s why and how innovative companies are adopting Process Mining software to improve speed, efficiency, and effectiveness of internal auditing services.
From sample data to big data Internal auditors have traditionally worked with sample data — a small, but representative data set determined based on the importance of statistical representation and the cost of such data collection. Time vs. Money vs. sufficient Statistical Power compete, each undercut by traditional sampling methods, while internal auditors remain under increasing pressure to turn analytics into insight. Randomized sample data across different departments used to be sufficient for internal auditing needs, but proper insight requires Big Data — number crunching and process analysis powered by technology.
Process Mining is able to take the full breadth of data across multiple systems and map out every minute inch of a process within a given system. This approach allows internal audit services to add real value through in-depth analytics without sacrificing statistical power. The data set is no longer an internal auditor's best guess at what’s happening, but a literal picture of what’s happening with all applicable data to back up a given analysis.
Clears out unknown compliance issues at scale
Regulatory compliances may be set by governing laws or internally defined policies. Regardless of the motivation behind such compliances, they are the goals an organization aspires to achieve and must make every effort to do such. From complying with wage and hour laws to the appropriate execution of approving purchase orders, compliance issues can exist in “blind spots,” well beyond the capacity of self-reporting or sample data.
Processes to be audited with Process Mining may include purchase-to-pay, order-to-cash, production, and logistics. All areas in which a CFO needs complete transparency to understand how these processes are working and to what extent they follow compliance guidelines. One such example comes from a company who unwilling had a backlog of unapproved purchase orders in their system. There was a process flaw which allowed these purchase orders to move forward to payment without proper approval. Process Mining software can identify every single unapproved purchase-to-pay order and bring a company to compliance, at scale, without sacrificing time or statistical integrity.
Benchmark process execution to establish goals upfront
Once Process Mining is established as part of the internal audit function, auditors are better able to set the right focus for an audit upfront. Because Process Mining allows for replicable analysis of the same process over time, auditors can benchmark process execution and more quickly assess risk and compliance issues.
Fresh data, better insights
Another huge advantage Process Mining offers to internal audits over traditional methods is fresh data, the closest you’ll get to real-time data in terms of an audit. Process Mining can capture detailed data up to the minute of execution that makes an internal audit extremely relevant. Audits carry the stigma of being outdated by the time change management is put into place. This, unfortunately, is a stigma well earned as internal audits often work with stale data and analyses that are unable to be replicated at scale. Process Mining eliminates this problem by introducing fresh data into the workflow of an internal auditor and allows for fast, up-to-date replication when needed.
Avoid self-reporting flaws / compare with self-reporting flaws
Self-reporting and in-depth interviews are an essential part of understanding how a company works. Auditors rely on workshops, one-to-one with employees and a general sifting through off files and information provided by stakeholders. While this part of an internal audit process may be long from complete elimination, Process Mining can accompany this self-reporting function to better assess risk management and uncover what employees may not know.
Confessing a known compliance issue takes setting aside of one’s ego, but without knowledge of such compliance issues employees, ego aside, are not able to self-report what they don’t know. Process Mining allows auditors to avoid, or at a minimum compare, self-reporting flaws with data reality.
Visualize critical processes
A final and quite critical part of internal auditing that Process Mining supports is process visualization. We’ve written previously on the distinction between process mapping and process discovery, and why the latter is a more effective way to define the ‘as-is’ process. This step of visualization allows an internal audit team to achieve transparency into how processes work in real life and gain deeper insight into how processes are interconnected.
The Next Phase of Internal Auditing
As PwC’s research indicates and as we’ve seen first hand from our customers, Process Mining is changing the face of internal auditing.
Even with only 14% of internal auditors declaring themselves “Evolvers” a further 46% consider themselves “Followers” and are “taking notice and following the Evolvers’ technology adoption — but at a slower pace.” Only 37% consider themselves merely “Observers” with “basic or no technology use.” Internal auditors may be limited by company culture, budgets or a fear of change, but with an evolving industry and emerging technology change is imminent.
To learn more about how Minit can support your internal audit team become Evolvers, get in touch with our team.