So let s go back in time, revisit and discuss the assumptions and hypothesis of our esteemed predecessors.

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1 To quote William Shakespeare what is past is prologue and I want to use this piece of wisdom to enlighten our dialogue today thanks to the understanding of our past as a profession. I hope to provide you with some context of what happened in the profession, over the past few decades, how and why the definition on internal audit has evolved since 1941, when the IIA was first established. It should give you clues about the drivers and intents of the professions leaders at each key milestone and help you drive the conversation going forward on the topics of assurance, consulting and meeting stakeholders expectations. I have chosen this approach because I had the chance to have been an active volunteer of the IIA since the early 90s and followed closely the work of the first Guidance Task force mandated by the IIA Board of Directors which proposed the new definition and standards approved in 1999: the one definition that brought consulting at he forefront of the internal audit mandate. Then, when I joined the IIA global headquarter as an officer in 2003, I found myself having to still help many of our profession partners whether the General Accountability Office in the United State, INTOSAI (International Organization of Supreme Audit Institutions) or IFAC (the International Federation of Accountants) to harness the subtleties of the concept of consulting from the 1999 definition. Finally, later in 2007, I had the privilege to support the Vision for the Future task force which developed and established the new International Professional Practices Framework. So let s go back in time, revisit and discuss the assumptions and hypothesis of our esteemed predecessors. In 1947 The IIA published a statement of responsibilities, equivalent to what we would call today a definition of internal audit. Internal Audit is an independent appraisal function established within an organization to examine and evaluate its activities as a service to the organization. The objective of internal audit is to assist members of the organization in the effective discharge of their responsibilities. To the end, internal audit furnishes them with analyses, appraisals, recommendations, counsel and information concerning activities reviewed. The audit objective includes promoting effective control at reasonable cost. The members of the organization assisted by internal auditing include those in management and the board of directors. Together with professional standards developed in 1954 and revised in 1978, This definition provided the context for practicing internal auditing for a little over 50 years until the definition was revised in You will notice that the notion of counsel was already present in this early stage of Internal Audit and that Serving Management and the Board in their effective discharge of their responsibilities was what was expected from us. Page 1 of 5

2 Then in 1999 the new definition was released: Internal Auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization s operations. It helps an organization accomplish its objectives by bringing systematic, disciplined approach to evaluate and improve the effectiveness of Risk Management, Control and Governance processes. 3 big new words appeared: Assurance Consulting Adding Value Why the changes and what were the intent of our profession s leaders at the turn of the century? The inclusion of consulting in the definition in 1999 had immediately, after its release, created a lot of controversy and obviously almost 15 years later still is. This controversy is somewhat the result of unintended consequences because the purpose at the time was not to create controversy but actually to bring order in the profession which in the 80 s and 90 s had witnessed the flourishing of all kinds of practices in internal audit that were indeed potentially compromising our essential value of independence and objectivity as noticed in the preamble of the US Generally Accepted Government Audit Standards (GAGAS) Auditors have traditionally provided a range of non-audit services that are consistent with their skills and expertise to entities at which they perform audits, (but) providing such non-audit services may create threats to an auditor s independence. For those who were in the profession at that time you would probably remember (I do) that in the 80s and 90 s many in the profession wanted to change the brand of internal Audit. They wanted Internal Audit to be liked. We are here to help was the new motto. But this new quest had also led to many out of control developments when Internal Auditors had put themselves in dangerous situation, departing further and further from their core roles and mission. This needed to be straightened up. The profession leaders at that time were also recognizing and anticipating the importance for internal audit to provide assurance not just ex post (or after the fact) but also exante that is at the time of design of governance, risk management and internal controls processes. Page 2 of 5

3 So, it looks like the motives behind the 1999 definition revision were wise and visionary as it indeed provided Internal Audit with a solid framework to undertake work very common today such as: Promoting ERM Educating the audited entity or the Audit Committee on matters within the technical expertise of the auditors; Providing information to the audited entity, such as best practices and benchmarking studies. Reviewing process in development and providing recommendations on process and control design And many more So the intent of the leaders at that time was to put order and to clarify the boundaries and scope around those counsel activities which had flourished and to provide standards that would help to execute those activities in a manner that would not impair independence and objectivity by: 1. Limiting the pool of topics where Internal Audit counseling is appropriate: Governance, Risks and Controls 2. Limiting the nature of Internal Audit Counseling activities (risk assessment, new processes and control design pre-assessment, training, facilitation) 3. Developing specific standards and practice advisories to ensure quality, objectivity and independence Managing the unintended consequences However, the semantic used and the nature of the IIA standards (principles vs. detailed rules) may have left room to more interpretations than answers, worse, it may have led to misconception. SHOW SLIDE 1 For whatever reason, consulting does not lead to positive thoughts (as alluded to by the cartoon on the slide) and certainly do not associate well with independence and objectivity. In extreme cases, ideas associated with consulting are Consultants will do what management wants and tell them what they want to hear Beautiful presentation, big words, big concepts but not real substance The use of the word consulting, despite the definition in the IIA standards glossary and the related guidance, is charged with a lot of negative intangibles which have been hard to overcome. Page 3 of 5

4 In addition several ideas have emerged which were not part of the original intent Idea 1: Internal audit must conduct consulting services No - but if they do they must define those in their internal audit charter Idea 2 - Only consulting services add value No - But if you deliver those services they must contribute to the betterment of governance risk and control processes of the Company, hence adding value. Before I conclude those opening remarks, let me fast forward and provide you with some examples of how this perceived issue around consulting services and the mix of assurance and consulting activities has been able to settle over the past 15 years: 1. In General Since 1999, many not to say most internal audit groups following the IIA standards have taken the time to properly define in their charter their services - as requested by the standards (assurance and consulting) and are keeping those activities within the intended scope (actual expertise of internal audit, no management responsibility, focus on bettering controls etc ). In general, the balance between those 2 types of activities is very much determined by the stakeholders needs and influenced by the governance model of the industry the organization is in (public sector, private sector, non-for profit, and the features of the environment in which the organization operates (regulated/non regulated, maturity level etc ). Let me show you a few examples: Teacher Retirement Association SHOW SLIDE 2 United Nations, SHOW SLIDE 3 Texas Health & Human Services Nordstrom SHOW SLIDE 4 & 5 2. On a macro level, Dialogue and explanation have occurred between standards setters to overcome misinterpretations. I personally worked with the US General Accountability Office, which originally decided not to reference the IIA Standards anymore because of the introduction of Consulting concept which they understood as non audit services which, as consequences would compromise Internal Audit independence. Our multiple discussions helped to understand and agree that what the IIA called consulting activities were indeed: Page 4 of 5

5 1. Audit services ; 2. Regulated by standards to ensure independence would be preserved 3. Particularly suited in the government sector to tackle what they called performance auditing In its 2011 edition, the US Generally Accepted Auditing Standards continue to reference the IIA standards and recognize their validity Audits provide an independent, objective, nonpartisan assessment of the stewardship, performance, or cost of government policies, programs, or operations, depending upon the type and scope of the audit. In addition, the GAO helped further, in this latest edition of its standards (2011), providing additional guidance for auditors to ensure that they would remain independent in all cases: A conceptual framework for independence was added to provide a means for auditors to assess their independence for activities that are not expressly prohibited in the standards. This more principles-based approach to analyzing independence provides the framework for auditors to assess the unique facts and circumstances that arise during their work. Let me give you one last example recent guidance, closer to us here, from the Basel Committee on Banking Supervision a Consultative Document on the Internal Audit Function in Banks dated December 2011, which shows that the concept of consulting has been somewhat endorsed. The document Acknowledge the IIA definition with the following precision: Providing consulting services to senior management on the assessment or development of internal controls is often a cost-effective way of ensuring that management makes informed decisions. This role as a trusted advisor to senior management, while valuable, should be performed in a way that does not compromise the independence and objectivity of the internal audit function. This requires that internal auditors should not assume management responsibility when providing consulting services or design and/or implement internal controls. I could go on and on, but the most important part of our meeting needs take place now and I am looking forward to hearing your debates, input, and questioning. I would be happy to contribute further insights if warranted but for now on, let the discussion begin. Page 5 of 5

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