On 9 October 1903, an article published in The New York Times titled “Flying Machines Which Do Not Fly” estimated that the development of flying machines would take between one million and 10 million years. However, a few weeks later, on 17 December 1903, the first manned flight was successfully achieved by the Wright brothers.1 But after that, it took commercial airlines 68 years to reach 50 million users. In comparison, it took the popular mobile game Pokémon Go only 19 days to reach the same number of users.2 The growth of Pokémon Go is an example of the era referred to as “Turbulent Times.”3
The Fourth Industrial Revolution (4IR), which began in 2000, is marked by the rapid, exponential pace of change driven by four major digital forces: social, mobile, analytics and cloud (SMAC). These forces, when combined, create the foundation for high-velocity disruptive innovation and the digital transformation of products and services.4, 5, 6
However, despite the chaotic and nonlinear nature of the turbulence that depicts this era, its causes are still manageable using internal audit.7 The internal audit function is instrumental in promoting innovation and cultivating a culture of continuous improvement in organizations. However, to remain relevant and fulfill this role, the internal audit function needs to adjust its activities and value propositions to align with the demands of the 4IR era.
The Intelligent Organization, Digital Business Agility and Flux Mindset
To keep pace with a rapidly changing, turbulent business landscape, organizations strive to develop organizational intelligence. Organizational intelligence encompasses an organization’s ability to adapt, transform and proactively influence its environment.8 To achieve this, intelligent organizations are client-focused, effectively communicate and collaborate, engage in knowledge management, and practice digital business agility.9, 10, 11
Digital business agility encompasses three key competencies:
- Hyperawareness—Allows an organization to stay alert to the flux of changes in its internal and external business environments.
- Informed decision-making—Supports data- and knowledge-driven decision-making in a fully automated or semiautomated structured process.
- Fast execution—Ensures that decisions are promptly and efficiently implemented.12, 13
The internal audit function is instrumental in promoting innovation and cultivating a culture of continuous improvement in organizations.
Adopting these practices supports a shift from a fixed to a flux mindset. A flux mindset is rooted in change and embraces change as an ongoing aspect of the business. Organizations that adopt flux mindsets are comfortable with change, highly responsive to changes, and have the ideal environments and digital cultures for engaging in digital transformation and innovation efforts.14
Digital Transformation, Digital Culture and Innovation
Digital transformation is a strategy for enterprises to implement change in their business models and ecosystems by utilizing digital competencies while simultaneously cultivating a digital culture within the organization. This shift toward a digital culture is critical to the success of digital transformation as it supports the values and behaviors necessary to drive innovation, agility and responsiveness in a rapidly evolving digital landscape.15, 16 Digital transformation is about rewriting the organization’s business story in the new language of digital natives—that is, the Y, Z and Alpha generations.
There are four core values of digital culture:
- Impact—Underscores the need for radical change through innovation
- Speed—Emphasizes the importance of moving quickly and iterating rather than waiting for a complete understanding of the situation before taking action
- Openness—Highlights the importance of hyperawareness and transparency in both internal and external contexts, and open sharing of information and data
- Autonomy—Emphasizes the importance of decentralization and delegation of authority, which allow for discretion and fluent, prompt execution17
Innovation is conceptualized as a process that incorporates the ideation, adoption and execution of new ideas, processes, products and services.18 Scholars have also defined it as a process that starts with the inception of a new idea and then matches a challenge with a solution through its realization to its impact.19
Innovation encompasses two main aspects: innovation speed and innovation quality. Innovation speed refers to the time span to conduct the innovation process from inception to impact. Like the fast execution competency associated with digital business agility, innovation speed is essential to assure the timely implementation of creative ideas for a competitive advantage.20, 21, 22, 23 Innovation speed is the ability to identify, decide on and execute changes quickly enough to cope with a high-paced, exponentially changing business environment.
Innovation quality encompasses various factors that define the value of services or products, such as functionality, effectiveness, reliability, costs and complexity.24 This aspect of innovation can be seen as a dimension of a client-centric intelligent organization that strives to provide its customers with the right and relevant value through its products and services.
Its distinct overall organizational access and perspective, combined with its independence, objectivity and impartiality, allows the audit function to serve as an accurate sensor for gaps in knowledge and competencies.
Innovation extends beyond generating creative, novel and useful ideas. It encompasses their successful execution, which leads to impact. Creative ideas alone are not enough; it is through their implementation that their value is realized.25, 26 Therefore, effective innovation leadership does not necessarily require individuals with creative competencies, but rather individuals with the ability to get things done.27
The Role of Internal Audit in Driving Innovation
The International Professional Practices Framework (IPPF) 2017 defines internal auditing as a systematic process aimed at improving an organization’s value through assurance, advisory and insightful activities, while considering the future impact.28 The audit function is further defined to be independent, objective, unbiased and devoid of any conflicting interest. The internal auditor must remain impartial and maintain objectivity during the provision of consulting services and must not assume management duties.29
The internal audit function is well-suited to serve as a key player in promoting and enhancing organizational innovation and providing the necessary means to cope with a fast-paced, changing business environment.
Its distinct overall organizational access and perspective, combined with its independence, objectivity and impartiality, allows the audit function to serve as an accurate sensor for gaps in knowledge and competencies. In addition, it can perform a change audit to determine areas of new business that are yet to be explored.30
Socrates famously stated, “All I know is that I know nothing.”31 The role of internal audit is paramount in assisting organizations to understand their areas of ignorance. Internal audit serves as a medium for the expression of unheard internal and external opinions and ideas. This enables internal auditors to facilitate and foster collaborative behaviors such as communication, and balance member contributions to enhance teamwork and knowledge sharing. That, in turn, promotes creativity and innovation.32, 33
Moreover, the internal audit function can monitor and motivate informed decision-making, enabling organizations to make sound decisions that are efficient and effective. In situations in which organizational shortcomings hinder innovation, internal auditors can serve as mediators and facilitators to remove bottlenecks, promote decentralization and delegation of authority, get things done, and improve innovation speed. In addition, the internal auditor is well-positioned to examine the quality and method of execution, consider the voice of the customer and gauge the impact on the customer experience.
To effectively fulfill this role, the internal audit function must transition from its traditional focus on retrospective analysis and control examination to a more consultative, predictive and forward-looking approach.
Furthermore, the internal auditor can offer unbiased, forward-looking insights without being constrained by first-line factors such as biases due to prior investments, knowledge limitations or operational incapacity. This enables internal auditors to shed light on complex challenges that arise from the implementation of cutting-edge technologies or the digital transformation of processes and products.
Practical Implications
To transform internal audit, there are several practical approaches.
This transformation necessitates a change in auditing skills and competencies, encompassing the mastery of audit proficiency with a greater emphasis on professional knowledge, hands-on experience and real-time auditing skills.
In addition, the internal audit function should adopt an Agile approach, allowing for greater flexibility and responsiveness. It is recommended that the Agile approach be integrated into the audit work plan process to enable internal auditors to remain alert to changes and to prioritize critical and high-risk issues. In addition, incorporating the Agile approach into audit project management promotes audit programs that are more focused and effective, while increasing efficiency and facilitating rapid execution.34, 35, 36, 37, 38
Moreover, internal auditors can adopt content validity approaches, such as an expert panel inter-rater agreement for reconciliation, to overcome hindrances to innovation caused by professional disagreements among decision makers within the organization.39
Conclusion
Internal audit has an important role in promoting and fostering organizational innovation and a flux mindset. To effectively fulfill this role, the internal audit function must transition from its traditional focus on retrospective analysis and control examination to a more consultative, predictive and forward-looking approach, facilitated by professional and academic research, benchmarking, advanced data analytics and business process analysis methodology.40
The internal audit function must align with the new demands of the 4IR era and transform its activities and value propositions accordingly. By adopting an intelligent approach and digital business agility, the internal audit can retain its significance and relevance and act as a driver for innovation.
Endnotes
1 National Air and Space Museum, “1903 Wright Flyer,” USA, https://airandspace.si.edu/collection-objects/1903-wright-flyer/nasm_A19610048000
2 Desjardins, J.; “How Long Does It Take to Hit 50 Million Users?” Visual Capitalist, 8 June 2018, https://www.visualcapitalist.com/how-long-does-it-take-to-hit-50-million-users/
3 Drucker, P.; Managing in Turbulent Times, Harper and Rowe, USA, 1980
4 Schwab, K.; The Fourth Industrial Revolution, Currency Press, Australia, 2017
5 Schwertner, K.; “Digital Transformation of Business,” Trakia Journal of Sciences, vol. 15, iss. 1, Bulgaria, 2017, https://www.studocu.com/en-gb/document/university-of-greenwich/human-resource-management/digital-transformation-of-business/48207449
6 Xu, M., J. David et al.; “The Fourth Industrial Revolution: Opportunities and Challenges,” International Journal of Financial Research, vol. 9, iss. 2, April 2018, https://ideas.repec.org/a/jfr/ijfr11/v9y2018i2p90-95.html
7 Op cit Drucker
8 Schwaninger, M.; “Managing Complexity—The Path Toward Intelligent Organizations,” Systemic Practice and Action Research, vol. 13, 1 April 2000, https://www.alexandria.unisg.ch/entities/publication/33e58473-fbc8-492f-877e-293214cec735/details
9 Pinchot, G.; E. Pinchot; The End of Bureaucracy and the Rise of the Intelligent Organization, Berrett-Koehler Publishers, Inc., USA, 1994
10 Wade, M.; A. Tarling; “The Digital Business Agility Imperative: How Companies Can Fight Digital Disruption,” International Institute for Management Development, Switzerland, 2016
11 Wade, M.; A. Noronha et al.; “Orchestrating Digital Business Transformation: Working in Concert to Achieve Digital Excellence,” Global Center for Digital Business Transformation, Switzerland, 2017
12 Op cit Wade, 2016
13 Op cit Wade, 2017
14 Rinne, A.; “A Futurist’s Guide to Preparing Your Company for Constant Change,” Harvard Business Review, 22 September 2021, https://hbr.org/2021/09/a-futurists-guide-to-preparing-your-company-for-constant-change
15 Whalen, M.; A Digital Transformation Maturity Model and Your Digital Roadmap, IDC, 2014 http://www.agendaconference.com/wp-content/uploads/2014/12/Whalen_IDC.pdf
16 Westerman, G.; D. Soule; A. Eswaran; “Building Digital-Ready Culture in Traditional Organizations,” MIT Sloan Management Review, vol. 60, iss. 4, 21 May 2019, https://sloanreview.mit.edu/article/building-digital-ready-culture-in-traditional-organizations/
17 Ibid.
18 Thompson, V.; “Bureaucracy and Innovation,” Administrative Science Quarterly, 1965, https://doi.org/10.2307/2391646
19 Budden, P.; F. Murray; An MIT Framework for Innovation Ecosystem Policy: Developing Policies to Support Vibrant Innovation Ecosystems (iEcosystems), MIT Lab for Innovation Science and Policy, USA, October 2018, https://innovation.mit.edu/assets/Framework-Ecosystem-Policy_Oct18.pdf
20 Kessler, E.; A. Chakrabarti; “Innovation Speed: A Conceptual Model of Context, Antecedents, and Outcomes,” The Academy of Management Review, vol. 21, iss. 4, October 1996, https://www.jstor.org/stable/259167?origin=crossref
21 Kessler, E.; P. Bierly; “Is Faster Really Better? An Empirical Test of the Implications of Innovation Speed,” IEEE Transactions on Engineering Management, vol. 49, iss. 1, February 2002, https://ieeexplore.ieee.org/document/985742
22 Allocca, M.; E. Kessler; “Innovation Speed in Small and Medium‐Sized Enterprises,” Creativity and Innovation Management, vol. 15, iss. 3, January 2003, https://www.researchgate.net/publication/35230802_Innovation_Speed_in_Small_and_Medium-Sized_Enterprises
23 Carbonell, P.; A. Rodriguez; “The Impact of Market Characteristics and Innovation Speed on Perceptions of Positional Advantage and New Product Performance,” International Journal of Research in Marketing, vol. 23, iss. 1, March 2006, https://www.sciencedirect.com/science/article/abs/pii/S0167811606000024
24 Haner, U.; “Innovation Quality—A Conceptual Framework,” International Journal of Production Economics, vol. 80, iss. 1, November 2002, https://doi.org/10.1016/S0925-5273(02)00240-2
25 Levitt, T.; “Creativity Is Not Enough,” Harvard Business Review, vol. 80, iss. 8, August 2002, https://hbr.org/2002/08/creativity-is-not-enough
26 Erez, M.; R. Nouri; “Creativity: The Influence of Cultural, Social, and Work Contexts, Management and Organization Review, vol. 6, iss. 3, November 2010, https://doi.org/10.1111/j.1740-8784.2010.00191.x
27 Op cit Levitt
28 Institute of Internal Auditors, The International Professional Practices Framework (IPPF), USA, 2017, https://www.theiia.org/en/standards/international-professional-practices-framework/
29 Ibid.
30 Op cit Rinne
31 Plato, The Apology of Socrates, 399 BC
32 Hoegl, M.; H. Gemuenden; “Teamwork Quality and the Success of Innovative Projects: A Theoretical Concept and Empirical Evidence,” Organization Science, vol. 12, iss. 4, August 2001, https://pubsonline.informs.org/doi/10.1287/orsc.12.4.435.10635
33 Koriat, N.; R. Gelbard; “Knowledge Sharing Motivation Among IT Personnel: Integrated Model and Implications of Employment Contracts,” International Journal of Information Management, vol. 34, iss. 5, October 2014, https://www.sciencedirect.com/science/article/abs/pii/S0268401214000474?via%3Dihub
34 Serrador, P.; J. Pinto; “Does Agile Work?— A Quantitative Analysis of Agile Project Success,” International Journal of Project Management, vol. 33, iss. 5, July 2015, https://www.sciencedirect.com/science/article/abs/pii/S0263786315000071
35 Kisielnicki, J.; A. Misiak; “Effectiveness of Agile Compared to Waterfall Implementation Methods in IT Projects: Analysis Based on Business Intelligence Projects,” Foundations of Management, vol. 9, iss. 1, 27 October 2017, https://doi.org/10.1515/fman-2017-0021
36 Ambler, S.; “2018 IT Project Success Rates Survey Results,” Disciplined Agile Consortium, 2018, http://ambysoft.com/downloads/surveys/Success2018.pptx
37 Khoza, L.; C. Marnewick; “Waterfall and Agile Information System Project Success Rates—A South African Perspective,” South African Computer Journal, vol. 32, iss. 1, July 2020, https://www.researchgate.net/publication/343138568_Waterfall_and_Agile_information_system_project_success_rates_-_A_South_African_perspective
38 Koriat, N; “Agile Audit—Buzzword or Future?” The Internal Auditor Journal, 16 September 2022, https://mba.biu.ac.il/en/node/971
39 Rubio, D.; M. Berg-Weger et al.; “Objectifying Content Validity: Conducting a Content Validity Study in Social Work Research,” Social Work Research, vol. 27, iss. 2, June 2003, https://academic.oup.com/swr/article-abstract/27/2/94/1659075
40 Deloitte, Internal Audit 3.0: The Future of Internal Audit Is Now, United Kingdom, 2018, https://www2.deloitte.com/content/dam/Deloitte/us/Documents/audit/us-internal-audit-3.0-the-future-of-internal-audit-is-now.pdf
NOAM KORIAT | PH.D., CISA
Is the director of information systems audit at Discount Bank. Previously, he was global chief information officer of the Israeli Ministry of Tourism. Koriat also serves as an adjunct professor at the Graduate School of Business Administration at Bar Ilan University (Ramat Gan, Israel), where he teaches digital transformation and innovation, knowledge management, and information systems practicum courses. Koriat can be contacted on LinkedIn at https://www.linkedin.com/in/noamkor/.