Digital transformation, characterized by innovation, rapid technological evolution, and an enhanced stakeholder experience, is imperative for organizations and business units in today’s context. The demand for change has also extended to the internal audit function, presenting two primary challenges: identifying new or updated unmitigated risks and using new technologies to optimize resources.
Regarding the first challenge, the accelerated adoption of new technologies and the evolution of business processes generate new risks that require proper evaluation and mitigation. For the second challenge, digitalization improves the efficiency of audit tasks, resulting in more resources available for the firm to reallocate to higher-value activities.
Experience shows that many digitalization initiatives in internal audit do not meet expectations. The most common issues include inadequate definition of project objectives, poor change management processes, and insufficient human or technical resources to carry out the transformation. Problems usually arise when the transformation project focuses on implementing isolated measures rather than adopting a holistic approach that includes all elements involved in the transformation process.
“The digital transform of the internal audit function requires an integral approach: all elements in the plan should work simultaneously to ensure that the organization adapts and thrives in the digital era”
Internal audit teams should implement an integral and collaborative approach to overcome these challenges. It is essential to involve auditors in developing and using analytical tools, fostering a culture of change and innovation within the organization. Reserving the most specialized projects for teams with more advanced analytical and technical profiles while decentralizing development roles for less complex tasks could significantly contribute to creating effective analytical solutions and the autonomous digitalization of audit tests.
In this section, we propose an integral model for the digital transformation of the internal audit function in financial service firms. The model encompasses five key components: objectives and governance, cultural change, technological architecture, model and automation development, and audit methodological updates. Each component is necessary and contains elements and activities that strengthen and reinforce other components.
The first component, objectives and governance, highlights the need to align the objectives of internal audit’s transformation plan with the organization’s digital strategy. The goals should be clear for all team members, and there should be a link between transformation objectives and performance reviews. In addition, it is important to assign roles and responsibilities and define a governance structure that supervises and guides the transformation process. Finally, early involvement from the Audit Committee and Senior Management is vital to obtaining the firm’s necessary support.
The second component, cultural change, requires creating an environment that fosters openness to change. A culture of innovation necessitates that the internal audit function supports individual initiatives, promotes a trial-and-error climate, and encourages internal and external collaboration. As part of this component, audit leaders should assess existing talent to identify gaps and needs in terms of knowledge and skills required for the transformation process.
The third component, technological architecture, refers to the technological infrastructure required to build, test, and run the new digital tools and models in internal audit. While it is possible to start with a basic configuration, designing a scalable architecture from the outset is beneficial, allowing for expansion as digitalization progresses.
Model and automation development constitutes the fourth component and emphasizes the importance of identifying and selecting the appropriate business cases for developing digital tools. This component ranges from creating simple scripts that replace manual control tests to developing complex models using artificial intelligence to identify and monitor risky transactions, operational errors, or early signs of fraud.
Finally, methodological updates, the fifth component, underscore the need to update traditional auditing methodologies to incorporate data analysis approaches. It is not enough to develop tools; defining how their results will be used and how to communicate the results to business teams is equally important. Continuous Auditing represents the natural evolutionary state that should address these aspects.
In conclusion, the digital transformation of the internal audit function requires an integral approach: all elements in the plan should work simultaneously to ensure that the organization adapts and thrives in the digital era.
