Esther R. Sawyer Research Manuscript 2011
Esther R. Sawyer Research Manuscript 2011Internal Auditing “Rotational” Programs:Opportunities for Internal Audit to Add ValueSubmitted by:Rachel L. BondLouisiana State UniversityCenter for Internal AuditingMarch 1, 2011ESSAY TOPICMany organizations have implemented "rotational" programs within the internal audit activity aspart of their management development plan. These programs often offer career opportunitiesin the organization's business units after spending two to three years in internal auditing. Ofteninternal auditors rotate back into internal audit after a short rotational assignment to acquirebusiness knowledge. Some Chief Audit Executives (CAEs) believe rotational programs make itmore difficult for internal auditors to continue a career in the profession of internal auditing.a) Under what circumstances is a rotational program beneficial to the internal audit activity?b) Does a rotational program model impact auditor independence and objectivity?Submitted to: The IIA Research Foundation
Table of ContentsAbout the Author .iiiAcknowledgements .ivExecutive Summary . vObjective.viIntroduction . 1Part I: History of Job Rotation . 2Organizational Behavior . 2Why Do Organizations Use Job Rotation Today? . 4Part II: Evolution of Internal Auditing Rotational Programs . 6Staffing and Sourcing the Internal Audit Function. 6Methods of Knowledge Acquisition. 8The Advantages and Limitations of Rotational Programs .10The Upside: Benefits of Rotational Programs .10The Downside: Challenges of Rotational Programs .11A Collection of Personal Experiences from Rotational Participants .11Part III: Considerations .13Factors to Consider in the Design of Rotational Programs .13Impact on the Internal Auditing Profession .19Part IV: Independence & Objectivity .20Independence and Objectivity Concerns .20Practitioner Insight on Independence and Objectivity .21Concluding Remarks .23Strategically Positioning Internal Audit for Future Changes .23List of Tables and Figures .24Appendix A .25Organization Profiles and Rotational Program Attributes .25Bibliography .33ii
About the AuthorRachel L. Bond was born and raised in Baton Rouge, Louisiana. She is currently a full-timegraudate student pursuing a Master of Science (M.S.) degree in Accounting at Louisiana StateUniversity. Rachel has worked for the Louisiana State University Center for Internal Auditing(LSUCIA) for two years, coordinating the internal audit internship program. She graduated fromLouisiana State University in May 2010 with a Bachelor of Science (B.S.) in Accounting and witha concentration in internal auditing.Rachel completed the Certified Internal Auditor (CIA) exam and will be certified pending thenecessary work experience. She received the Cynthia Cooper Professional IntegrityScholarship in 2009 as a student in the LSUCIA program. While at LSU, Rachel has beeninvolved with the Institute of Internal Auditors by serving as a non-voting student member onThe IIA Academic Relations Committee from 2009-2011. She also served as a student liasionrepresentive on the Institute of Internal Auditors local Baton Rouge Chapter board.Rachel interned with Freddie Mac (Federal Home Loan Mortgage) in McLean, VA in thesummer of 2009 and Deloitte & Touche, LLP, in New York, NY in the summer of 2010. She hasaccepted a full-time offer for 2011 with Deloitte’s Enterprise Risk Services division in New York.iii
AcknowledgementsI would like to thank the following individuals and his or her respective organizations fordonating the time, effort, and insight for this manuscript They each serve as a model ofcommitment and dedication to the future of the internal auditing profession. A specialappreciation goes to Dr. Glenn E. Sumners, the Director of Louisiana State University’s Centerfor Internal Auditing, for providing me the motivation to write this paper.Lyn Beaty, CPA, HalliburtonJohn Carroll, CPA, Merck & Co., Inc.Steve Casazza, CIA, CISA, CFE, NestléRichard F. Chambers, CIA, CGAP, CCSA, CFE, The Institute of Internal AuditorsCynthia Cooper, CFE, CPA, The CooperGroup, LLCP. Keith Dickey, CIA, FedEx ServicesSteve Goepfert, CIA, CPA, United AirlinesDennis Johnson, CIA, CPA, Vanderbilt UniversityTimothy F. Kenny, CPA, Freddie MacRoger McDaniel, Audit ServicesAmber Miller, CIA, AIG Enterprise ServicesDavid Neary, CPA, CISA, Calpine CorporationSusan L. Rudolph, CIA, Pearson plc.Glyn Smith, CIA, CCSA, CPA, The CooperGroup, LLCGlenn Sumners, CIA, CFE, Louisiana State University Center for Internal AuditingJoyce Vassiliou, CIA, CCSA, Coca-Cola HellenicSherron Watkins, CPA, Sherron Watkins and CompanyRod Winters, CIA, CPA, MicrosoftThe variety of unique and diverse perspectives that each person contributed made the project apersonal learning experience, and I am grateful to have such a wonderful opportunity.iv
Executive SummaryChief Audit Executives are faced with the challenge to build and maintain an internal audit staffwith the competencies necessary to fulfill their responsibilities to the organization. This includesthe business and audit knowledge needed to add value by enhancing the risk management,control, and governance processes.The IIA Code of Ethics1 states that internal auditors should be able to ―apply the knowledge,skills, and experience needed in the performance of internal audit services.‖ The increasingcomplexity of business due to technology and globalization makes this task even more critical.One way of improving this ―competency challenge‖ is through the use of rotational programs.This paper will discuss various approaches, including rotation into and out of the internal auditfunction. Additionally, the applicability of rotational programs will be listed including theadvantages and limitations. The critical point is the selection of a program that best satisfiestoday’s staffing challenges.1Source:The IIA’s Code of Ethics Rule 4.1 states “Internal auditors shall engage only in those services for which they have the necessaryknowledge, skills, and experience.” The IIA’s Code of Ethics Rule 4.3 states “Internal auditors shall continually improve their proficiency and theeffectiveness and quality of their services.”v
ObjectiveThe purpose of this essay is to explore the origins and growth of rotational programs, andevaluate the potential effect on the organization, the participating individuals, and the internalaudit activity. The body of this essay explores under which circumstances rotational programsare beneficial to the organization. There are several factors that CAEs and the organizationshould consider in planning the design and implementation of an effective rotational program.This paper also evaluates the potential impact of rotational programs on internal auditorindependence and objectivity. The content of this paper is based on research applicable to amultitude of industries, staffing levels, and classifications. The framework is based on numerousinterviews with Fortune 500 company executives, employees, and individuals with specificinternal audit knowledge and experience regarding rotational programs.vi
IntroductionThe 21st century brought many changes to the business environment, providing the internalauditing profession with many challenges and profound growth opportunities. Several of thechanges impacting business organizations and the internal auditing profession includetechnological advances, an increase in the availability of information, the evolving role of theinternet, the fast-paced nature of communication, a complex regulatory environment, andglobalization. Organizations have also undergone significant changes in their governance, risk,controls, and compliance processes to manage the globalized and sophisticated businessenvironment. This rapidly changing and dynamic business environment has enhanced theevolution of the internal auditing profession and their role in adding-value to businessorganizations over the past few decades.Staffing has always been a challenge for organizations, and their internal audit departments.The International Standards for the Professional Practice of Internal Auditing (Standards)2 ofinternal auditing delineate the responsibilities of the Chief Audit Executive (CAE) with referenceto staffing and career development. Maintaining compliance through adherence to thesestandards has become a multifaceted goal for CAEs. One of the major challenges for CAEs is tofind, maintain, and continuously enhance the skill sets of the internal audit staff.A frequent topic in internal audit circles is the ―war for talent,‖ also referred as the ―talent gap.‖ Inthe past decade, the internal auditing profession demand has outgrown the availability ofqualified talent. There is often a gap between the skill sets desired and the skill sets available inthe market. In response, CAEs have looked to rotational programs into and out of internal auditto acquire the necessary knowledge and to enhance career development. In developing acomprehensive and well-designed rotational program, many organizations are using the internalaudit activity as breeding grounds for management development and future leadership. Forexample, companies may follow the ―GE Model,‖ where talented employees rotate into theinternal audit activity for two to three years and then rotate back out into the businessorganization into a management position. Rotation also includes internal auditors rotating outinto business areas, gaining experience, and then returning to internal audit.According to The IIA’s Global Internal Audit Survey, the extent of value-added by the internalaudit function is derived from its ability to deliver change and improvement to meet theorganization’s needs. The IIA’s CBOK study on ―Core Competencies for Today’s InternalAuditor‖ provides that the internal audit activity must stay updated with the profession, whileensuring staff have the adequate knowledge, skills, and experience to provide businessorganizations with recommendations for change.3 In the past few years, the economic globalrecession has pushed internal audit practitioners to cope with budget and resource constraints,essentially learning to do more with less. The IIA’s report, ―A Glimpse Ahead: CAEs LookBeyond the Recession,‖ 4 roundtable participants have indicated that rotational programs and―guest auditors‖ are two useful strategies for coping with the downturn of the economy, bringingexperienced staff with a wide variety of skill sets to the internal audit table.Source: The International Standards for the Professional Practice of Internal Auditing (Standards)Source: The IIA’s Global Internal Audit Survey: A Component of the CBOK Study, Core Competencies for Today’s Internal Auditor, Report II.4 Source: A Glimpse Ahead: CAEs Look Beyond the Recession (April 2010)231
Part I: History of Job RotationPerhaps an overview of generic rotation would be beneficial before drilling down to the use of rotationalprograms within the internal audit activity.Organizational BehaviorThe industrial revolution promoted the division of labor and job specialization to maximize productionefficiency. This scientific management approach (job engineering) emphasized standardization,specialization, and job simplification to improve production. Frederick W. Taylor was the chiefproponent of scientific management. This approach was successful with routine jobs and specific tasksand still has application today in certain industries. However, internal auditing requires broad-basedcognitive and behavioral skills to address unstructured assignments. Accordingly, this led to the interestin job design incorporating job rotation, job enlargement, and job enrichment. Figure 1-1 illustrates theevolution of job design over the years, starting with low levels of standardization and specialization forgeneral craft jobs. As scientific management approaches originated, the degree of specializationincreased. However, most recently job rotation and sociotechnical systems have provided mediumlevels of job specialization.Figure 1-1: Evolution of Job Design5In organizational behavior, job rotation is classified as a subset of job design and is related tomotivation theory. The motivation theory formula is:Performance ability X motivationEmployee motivation can be enhanced through job enlargement, job enrichment, and job rotation.Increased motivation will increase employee satisfaction and related performance. These three canalso enhance ability as greater knowledge and decision-making skills are acquired. The synergisticimpact of job rotation is to elevate ability and motivation to drive performance. See Figure 1-2 for thehierarchy of organizational behavior and job rotation.5Source: Reproduced modified version of graphic based on (Kreitner).2
Figure 1-2: Organizational BehaviorOrganizationalBehaviorMotivationTheoryJob DesignJob EnrichmentJobEnlargementJob RotationGoal SettingSociotechnicalSystemsJob rotation overlaps with job enrichment and job enlargement and these three will be discussed brieflyto establish a foundation. Job design includes both the structural and interpersonal aspects of a job.Job design is fitting people to the job as opposed to fitting the jobs to the people.Job EnlargementIn essence, job enlargement is the reversal of the division of labor approach and enlarges the jobdescription to include a wider variety of tasks. Job enlargement consists of horizontal integration ofseveral tasks but does not specifically change the nature of the tasks. Enlargement creates variety andthus higher levels of satisfaction, motivation, and performance.Job EnrichmentJob enrichment consists of vertical integration of tasks that require higher level brain functions. Jobenrichment is also referred to as ―vertical loading‖ of a job, where employees are given moreresponsibility. For example, an individual may increase his or her responsibility from planning a projectto executing a project. This approach results in vertical integration and employee empowerment. Jobsrequiring higher mental capacities may provide greater satisfaction and resulting increasedperformance.Job enrichment is based on Frederick Herzberg’s two factor theory. The motivator-hygiene two factortheory states that the job environment (hygiene) can prevent dissatisfaction while the challenges of thejob (motivators) can create satisfaction. Job satisfaction results from an increase in motivator factors,such as, achievement, recognition, challenging work, responsibility and advancement. Alternatively,employees do not have job dissatisfaction if hygiene factors are present, including good companypolicies and administration, technical supervision, salary, and working conditions.6 Interestingly, thisresearch was based on a survey of accountants and engineers. Job enrichment probably receives6Source:Ibid3
more exposure than the other elements of job design since it focuses on satisfaction, motivation, andperformance.Job RotationJob rotation involves shifting employees from one position to another position with the goal ofsustaining or enhancing satisfaction, motivation, and performance. Job rotation adds new challengesand has elements of both job enlargement and job enrichment since it may include both horizontal andvertical integration. Job rotation models have been used throughout history to rotate executives andemployees, and a variety of models are found in the workplace today.Sociotechnical SystemsSociotechnical systems include job optimization through the best combination of people andtechnology. The influence of competition, suppliers, customers, and regulation in the environment placesignificant pressure on organizations to comply with rules and structure in certain forms. As theeconomy fluctuates and society changes, organizations must continually innovate their products andadapt to new processes for survival. There are several other guiding principles that organizationsshould consider when designing a sociotechnical system, such as: Job design allows for high quality of work-life balanceDesigning subsystems around self-contained and recognizable work unitsSupport systems must align with organizational goalsGoal SettingGoal setting aligns the goals of the individual with the organization. Goal congruence increases thelevel of involvement and performance. The balance scorecard is an approach used by businessorganizations, including their departments and divisions, to measure performance and achievement ofstrategic goals. Performance evaluation tools are useful for organizations when aligned with theorganization’s mission. Employees set individual performance goals at the beginning of the period, andare evaluated on the achievement of these objectives at the end of the period to determine ifcompensation increases or promotional opportunities are necessary.4
Why Do Organizations Use Job Rotation Today?Throughout this evolution of organization structure and job design, job rotation is beneficial tothe enterprise in several ways. Whether job rotation is an advantage or disadvantage to anorganization depends on factors such as industry type, size of organization, the duration of therotation, and the experience or skill level of the individual being rotated. Table 1-1 includes a listof identified pros and cons that have been noted as direct or indirect impacts of job rotation.Table 1-1: Pros and Cons of Generic Job RotationProsIncrease job satisfactionPromote career developmentPromote leadership developmentLower attrition ratesIncrease individual performanceProvides job enrichmentProvides job enlargementMaintain good customer relationsIncrease worker f
Mar 01, 2011 · 5 Source: Reproduced modified version of graphic based on (Kreitner). 3 Figure 1-2: Organizational Behavior Job rotation overlaps with job enrichment and job enlargement and these three will be discussed briefly to establish a foundation. Job design include
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