Overview

Audit managers are critical, contributors to business performance providing an independent assessment and view of state of the business. As a leader in Governance, Risk Compliance (GRC) and Quality Management solution, MetricStream engages with a large number of audit managers accountable for monitoring risks and ensuring compliance across organizational units. Increasingly, the role is evolving into a horizontal function and companies are trying to implement a common framework for all types of audits - financial, risk, operations, internal, suppliers, and compliance -such that auditing priorities are determined by a enterprise-level risk-based approach and not departmental and tactical imperatives.

With increasing business complexity and the rising number and types of audits that companies need to conduct, audit managers are realizing that point-solutions and spreadsheet-based systems are no more suitable for managing audit programs and they are seeking comprehensive audit management solution designed to help companies manage a wide range of audit-related activities, data and processes. And like most enterprise software projects, the audit management solution also requires its champion to build a business case to justify the capital spend. This paper provides a methodology to compile an ROI (Return on Investment) analysis for an integrated audit management solution examines the main drivers for implementing such a system.

 

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Case for an Audit Management System 
Effective risk management and compliance with industry standards and government regulations drive the need for ongoing auditing in organizations. For example, companies that are regulated by the FDA or are following quality standards such as ISO 9000/14000, regular audits are also essential to reduce the risk of noncompliance. Similarly companies in sectors like banking, financial services and energy rely on a variety of audits to comply with a vast number of national and international regulations as well as to get a clear visibility into risk exposures and mitigation plans.

The main drivers behind implementation of an audit management solution today are:

  • Greater Focus on Risk Management: Recent corporate accounting and financial scandals have led to sweeping changes in legislations, regulations and professional standards in order to bring greater focus on how companies manage their risks - and has dramatically increased audit requirements.
  • Regulatory Compliance and Quality Mandates: Growing oversight from regulators and increasing industry mandates related to quality and other business processes is forcing organizations to step-up the auditing practice across the entire enterprise.
  • Real-time Tracking of Issues and Discrepancies: Most firms are realizing that real-time tracking of audit findings and issues such as nonconformance, process deviations and other discrepancies is imperative for a timely implementation of remedial actions and an integrated audit management solution provides easy access and visibility for monitoring such cases.
  • Manual and Error-prone Audit Process: With increasing business complexity, coupled with the rising number and types of audits, companies are realizing the challenges of point-solutions and spreadsheet-based systems for managing internal audit programs. Traditional methods of audit reporting are frequently erroneous and unreliable leading to poor data accuracy and consistency.

The Shifting Internal Audit Landscape: The survey, by Ernst and Young, reveals that there is an opportunity for Internal Audit to better leverage technology and knowledge collection/sharing tools to improve effectiveness and efficiency significantly 
Source:Ernst & Young

In a survey conducted by Ernst and Young in 2007, nearly 84% of respondents held audits as a primary factor in company's fraud prevention and investigation program
Source:Ernst & Young

Automated Tools and technologies implemented by most Audit departments typically support

  • Work papers (87%)
  • Audit planning (73%)
  • Reporting (71%)
  • Report writing (59%)
  • Tracking findings through remediation (52%)
  • Knowledge sharing (51%)

Source:Ernst & Young

Understanding ROI 
A savvy project will always conduct a detailed ROI analysis of a project as it determines the success or failure of the project. ROI answers the question "What do I get in return for the time and money I'm investing?" It is an accounting method used to evaluate the investment by comparing the magnitude and timing of expected gains to the investment. Some organizations compute ROI based on measure of time it takes to recover the cost of an investment (e.g., the software pays for itself within 2 years) while others calculate it as a percent of return over a specific period of time (e.g., 120% return on investment in 3 years).

Earlier, project management and IT decision makers considered direct quantifiable benefits as the only factor in the ROI analysis. But today, they are taking into account the non-financial benefits of IT investments, to facilitate the achievement of broader corporate goals.

The quantitative or the financial consideration for ROI is a business case that enquires whether or not an investment is justified purely in measurable financial terms. It answers questions like:

  • How much will this project cost?
  • What can the company expect to gain in return?
  • How many man-hours will it save?
  • Where will the process improve?
  • What will be the quantifiable cost reductions?
  • How much cost will it save in upgrades and IT infrastructure?
  • How will it impact the company's bottom line?

Quality norms are the benchmark for most companies. Analysts today go beyond direct cost savings and consider intangible benefits like business scalability, employee competency and enhanced productivity. The main factors considered while enumerating the qualitative benefits of a project are:

  • Will it add scalability to the overall business?
  • How many employees will it affect positively?
  • Does it add value to the business?
  • Will it improve the employee morale and satisfaction?
  • Will it result in employees being more productive?

Calculating ROI of an Audit Management Solution

Base-lining Costs and Benefits of an Audit 
The ROI analysis starts with the identification of the potential benefits due to overall implementation of the project. This helps in developing a consensus regarding revenue boosters, labor efficiency improvements, cost savings and business process change. This involves identifying the measurable variables and quantifying them into actual gains.

But the first step is to estimate total costs and benefits associated with auditing. While gathering the factors, count everything that is directly associated to the project including the infrastructure items. Here, we take a look at the time and cost of a generic audit procedure.

  Auditing Process Information
Number of Audits in a Year 100
  Number of Audit Team Members   10
Time Spent Per Audit 200
  Number of CAPAs per Audit   2
Savings from a Succesfull CAPA $100
  Hourly Cost of an Audit Team Member   $50
Cost of an Audit $10,000
 
  Yearly Cost of Auditing   $1,000,000
 

Using this matrix, you will be able to estimate of costs and benefits of the auditing program. You can calculate the cost of each audit and how much is the organization spending annually on auditing programs based on the total number of audits being conducted.

The benefits resulting from audits are the remediation and corrective/preventive actions that the company can implement for audit findings that add value to the existing business processes in terms of reduced cost. While not all remediation and corrective/preventive actions will lead to direct savings, a percentage of such value adding outcomes can be assumed. If an audit management solution plays a role in successful implementation of such remediation and corrective/preventive action plans, the benefits can be quantified with reference to this amount. If there are other tangible benefits that result from an audit and can be impacted by the system being considered, those can be considered in a same way.

With this frame of reference for current costs and savings, we can analyze how implementing an audit management solution reduces costs and improves savings.

Analyzing Savings from the Audit Management Solution 
The next step is analyzing the impact of the audit management solution on the current auditing process. Identify the key areas, like audit activities and processes that will be impacted by the audit management solution and then quantify the potential savings by percentage or an absolute.

  Savings from Improved Productivity and Efficiency
  Audit Activities and Processes   Time Allocation   Before Automation   After Automation   Savings
Audit Planning 20%   40   16   2400
  Creating audit programs, objectives and scope, organizing audits in a logical structure and hierarchy, managing checklists, evaluation and, pass/fail criteria, scheduling audits, assigning, auditor tasks and audit responsibilities, informing auditors and auditees.                
  Audit Execution   40%   80   56   2400
  Recording qualitative and quantitative findings, observations and recommendations, compiling audit findings, track audit status, consildating supporting information.                
Audit Review 20%   40   24   1600
  Routing audit findings and auditors recommendations to appropriate quality managers for review and subsequent actions. Sending findings to the audited entity seeking responses on specific questions or issues observed. Reviewing response for approval or rejection; initiating internal or supplier corrective/preventive actions for undesirable variations and trends.                
  Follow up Activities   10%   20   10   1000
  Tracking status of recommendation and corrective actions, following up on imeplemenation, verifying effectiveness, managing re-audtis, escalations for delays.                
Analysis and Reporting 10%   20   7   1300
  Creating respots for tracking, analysis and management reviews. Mesuring auditor performance and audit results. Compiling data, formating reports and chart. Developing tredning analysis on a variety of parameters.                
  Total    100%   200   113   8700
  Savings Based on Hourly Cost of an Audit Team Member               $435,000
 

This model allows quantifying the saving from on improved productivity that will be achieved by implementing the system.

As the audit management system streamlines tracking and implementing remediation and corrective/preventive actions, savings from reduced opportunity costs is a key benefit that can be quantified. The illustration here shows how the benefit of faster implementation and fail-proof follow through on audit findings.

  Benefits of an Audit Management System
Audit Activities and Processes Improvement Estimates
  Audit Planning   60%
Audit Execution 30%
  Audit Review   40%
Follow up Activities 50%
  Analysis and Reporting   65%
CAPA Implementation Follow Through 100%
  CAPA Implementation Schedule   50%
  CAPA Implementation Delays   50%
 

 

  Savings from Reduced Opportunity Cost
      Before Automation   After Automation   Savings
Number of CAPAs that Do Not Get Implemented 10%   0%    
  Number of CAPAs that Get Delayed   15%   8%    
Average Delay in Days 30   15    
  Number of CAPAs that can Save Money   10%   10%    
Opprotunity Cost CAPAs Not Implemented $73,000   $0    
  Opprotunity Cost CAPAs Delayed   $9,000   $2,250    
Total Opportunity Cost $82,000   $2,250    
  TOTAL            $435,000
Costs shown are for illustration only
 

Cost of the Audit Management Solution 
With this estimate of savings due to an automated audit management solution, you can now move onto the costs associated with its implementation.

  Cost of Deploying MetricStream Audit Management Solution
  Software License Cost   $100,000
Implementation Services Cost $50,000
  Annual Support and Maintenance   $20,000
Total Cost: Year 1 $170,000
  Total Cost: Year 2 Onwards   $20,000
 

 

ROI of the Audit Management Solution 
The initial investment, when correlated with the overall annual savings, gives an accurate picture of the ROI of the solution. You can calculate the future benefits of the investment using Net Present Value (NPV) estimated at an appropriate discount rate. The table shows the NPV of the saving the project will deliver in 3 years.

ROI can also be estimated as the percentage of investment that is returned in a specific period like ROI in 1 year and ROI in 3 years.

 Return on Investment
      Year 1   Year 2   Year 3
Overall Savings with MetricStream $514,750   $514,750   $514,750
  Cost of MetricStream   $170,000   $20,000   $20,000
Cummulative Cost $170,000   $190,000   $210,000
  Net Savings   $344,750   $494,750   $494,750
Discount Rate for NPV 10%        
  Project Savings 3 Year NPV   $1,094,006        
ROI in 1 Year 303%        
  ROI in 3 Year   521%        
 

Another measure of ROI is payback - the period of time at the end of which the original investment in the project is redeemed to the company with savings and associated benefits or the time at which cumulative savings will exceed cumulative costs. Assuming the investment has to be made upfront at the beginning of the project, the benefits start accruing after the project is fully implemented and the benefits are uniformly spread over each month, the payback period is the break-even point at which the cumulative savings cross the cumulative costs.

 Payback Calculation
  Month   Cumulative Savings   Cumulative Cost   Payback
0 $0   $170,000   -$170,000
  1   $0   $170,000   -$170,000
2 $42,896   $170,000   -$127,104
  3   $85,792   $170,000   -$84,208
4 $128,688   $170,000   -$41,313
  5   $171,583   $170,000   $1,583
6 $214,479   $170,000   $44,479
  7   $257,375   $170,000   $87,375
  8   $300,271   $170,000   $130,271
9 $343,167   $170,000   $173,167
  10   $386,063   $170,000   $216,063
11 $428,958   $170,000   $258,958
  12   $471,854   $170,000   $301,854
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Audit Management ROI
 

Non-Quantifiable Estimates
Taking the analysis further, audit managers need answer more difficult questions that discuss immeasurable yet increasingly important productivity related benefits. For example, "how do you measure indirect savings?" or, "What's the worth of an employee's time or increased productivity that directly boosts the company's output?" Examples of indirect savings include "the time saved by audit manager will utilized for more value-added tasks" or "the compliance audit will take 1 week rather than 3 weeks."

Even though there are no comprehensive tools to gauge these benefits, yet the extensive advantages of non-quantifiable factors cannot be ignored. This process requires a look at the larger picture of an audit management system - from department level improvements to company-wide benefits. This will help the audit managers to define what to evaluate and how to measure it. Some suggestions include:

  • How will the audit management solution ensure regulatory compliance and success in external audits?
  • How will increase in auditing frequency benefit business?
  • What are the benefits of a shorter audit cycle time?
  • How valuable is the quick and easy accessibility to enterprise wide audit data?
  • How much will improvements in auditing improve risk management and corporate governance?
  • Can we really afford to not implement an audit management solution and continue with the current systems?

The auditing process is inherently complex as it involves multiple internal and external stakeholders. Existing audit systems have evolved from the bottom up, and organizations lack a single system of record preventing top down visibility and control. MetricStream solutions are helping companies with a federated way of handling quality, operational and compliance audits through a single system.

Conclusion 
Today's increasingly intense competitive environment coupled with constant demand for accountability has put intense pressure on the companies to increase spending efficiency across the entire enterprise. Building a ROI-based business case puts audit managers on a strong ground to justify budgets for implementing an audit management solution. An exhaustive ROI analysis provides a transparent view of the profitability of the project - giving the requisite insight to negotiate and make right investment decisions.

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