The Internal Audit and Activity Based Management

By Forrest, Jonathan S.; Forrest, Edward | The CPA Journal, August 1999 | Go to article overview
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The Internal Audit and Activity Based Management


Forrest, Jonathan S., Forrest, Edward, The CPA Journal


The internal audit department is one of the most underutilized assets in most companies. Usually the audit function is limited to the identification and communication of routine difficulties and is not viewed as a value-added problem solving unit.

Successful corporations have realized that limiting the internal audit department's responsibilities to financial reporting and meeting statutory regulations is an outmoded approach. These organizations have enlarged their focus to include operational audits, consulting, and process improvement initiatives as a means of adding value to the function.

A further extension of the internal audit function that has yet to be fully utilized is activity based management (ABM). This methodology provides the internal auditor with the ability to identify and eliminate activities that do not contribute economic value to a business.

Advantages of ABM

ABM gives the internal audit function the ability to redesign an organization's processes and systems while building in the necessary internal controls. This coupling with ABM assists internal auditors in uncovering financial and operational prob lems before they can do damage.

ABM affords internal auditors the opportunity to be in a better position to detect potential fraud through early detection of out-of-bounds situations from an operational dimension. For example, studies have shown that employees that steal are usually in a position of trust which allows them to seize opportunities or take advantage of control weaknesses.

ABM sheds new light on operational activities and exposes process weaknesses that lack controls. The internal auditor is exposed to how work is currently performed and is able to recommend how work should be performed.

There is an interesting difference between small business owners and major corporate executives. The small business owner has an instinct about what looks right and what doesn't. A well-structured ABM program gives the internal auditor of a large corporation the instincts of a small business owner to see and feel the important operating issues.

Making the Transition

Making the transition is not easy for internal auditors because their primary training centers on financial controls. Organizations that wish to incorporate ABM techniques may find that their staff is not trained for it.

Bringing ABM to the internal audit function requires a change to the internal audit charter and mission statement.

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