The Leadership & Managerial Habits of Highly Effective Chief Audit Executives - Inspiring Excellence in Leading and Managing the Internal Audit Function

By Hans Beumer

The Leadership & Managerial Habits of Highly Effective Chief Audit Executives - Inspiring Excellence in Leading and Managing the Internal Audit Function

What makes a CAE a highly effective leader and manager of the internal audit function? A leader CAE transforms the internal audit function, develops and motivates audit team members, and influences all stakeholders to support the achievement of disruptive internal auditing goals. A manager CAE strategizes, organises, executes, and controls the value adding activities of the internal audit function.

This book integrates the 7 leadership and 7 managerial habits of highly effective CAEs into one definitive and extensive reference manual. A holistic model captures the essence of effectiveness in internal auditing. It analyses and explains the key effectiveness levers for each of the 7 leadership and 7 managerial habits. These habits present objective-focused and principle-based solutions to overcome effectiveness problems that CAEs may face.

• Language: English
• Publisher: Hans Beumer
• Release date: May 31, 2018
• ISBN: 9783906861319

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The Leadership & Managerial Habits of Highly Effective Chief Audit Executives

- Inspiring Excellence in Leading and Managing the Internal Audit Function

Hans Beumer

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ABOUT THE AUTHOR

drs. Hans Beumer is a recognised thought-leader in the Internal Auditing Profession. He is a professional and experienced Chief Audit Executive, with a Master degree (MSc) in Business Economics, and with the education and training of Dutch CPA, CIA, CISA, CRMA and CFE. As a long-time auditing professional, he now dedicates his time to authoring professional books that inspire excellence in internal auditing. To date he published 7 books on the topic of best practice internal auditing.

During his 28 years’ career, he was CAE for 16 years at the head offices of global operating companies, he worked 6 years in public accounting, and he held other positions such as CFO and department head in corporate finance, accounting and reporting.

Contribution to Sawyer’s Guide for Internal Auditors, 7th Edition

The IIA International Headquarters in Florida, USA, is working on a revision and update of the Sawyer’s Guide for Internal Auditors. Hans is a main contributor to this 7th edition. Because of the strategic relevance of his internal audit books, Hans was contracted to author the first chapter of Sawyer, covering the topic of Strategy for the Internal Audit Function. This 7th edition will be published by the IIA in January 2019.

Contact information: www.hansbeumer.com

COPYRIGHT

HB Publications

Zug, Switzerland

www.hansbeumer.com

Text Copyright © Hans Beumer 2018.

-       The Leading Internal Audit part has been published as a separate book in April 2018 with the title The 7 Leadership Habits of Highly Effective Chief Audit Executives, ISBN 978-3-906861-28-9 and ISBN 978-3-906861-29-6, Copyright © Hans Beumer 2018.

-       The Managing Internal Audit part has been published as a separate book in February 2018 with the title The 7 Managerial Habits of Highly Effective Chief Audit Executives, ISBN 978-3-906861-26-5 and ISBN 978-3-906861-27-2, Copyright © Hans Beumer 2018.

Figures Copyright © Hans Beumer 2018.

Cover Art Copyright © Hans Beumer 2018.

All rights reserved. No part of this book may be reproduced by any mechanical, photographic, or electronic process, or in the form of a phonographic recording, nor may it be stored in a retrieval system, transmitted, or otherwise be copied for public or private use without the express written permission of the publisher, except for the use of brief quotations in a book review.

First edition published in May 2018.

This book is available as:

-Hardcover:      ISBN 978-3-906861-30-2

-EBook:            ISBN 978-3-906861-31-9

Printed and distributed by Lulu Press, Inc.

This book is not intended to provide personalised business advice. It offers the viewpoints and extensive experience of the Author, but the views expressed should not be taken as instructions or commands. The reader is responsible for his or her decisions and actions for the business of internal audit and related topics. The Author and Publisher expressly disclaim any liability, loss, damage, or risk, business, personal or otherwise, that is incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this book.

FOREWORD

Transferring information

and experience

Many management books have been published about the principles of leading and managing. No book is presently available that applies these leadership and management principles to the internal audit function. This book does exactly that. The Leadership & Managerial Habits of Highly Effective Chief Audit Executives addresses the question: "what makes a Chief Audit Executive (CAE) an effective leader and manager of an internal audit function?"

This book presents a holistic model that captures both the essence of leadership and managerial effectiveness in internal auditing. It diligently analyses and explains the key effectiveness levers for each of the 7 leadership habits as well as for the 7 managerial habits. These habits present objective-focused and principle-based solutions to overcome effectiveness problems that both leaders and managers of internal audit functions may face. Workshops and additional literature mobilise you to activate and sharpen these habits. With a step-by-step approach, this book leads you to the highest level of effectiveness in both leading and managing an internal audit function. Effective leadership and management is attainable for every CAE. It is not an art mastered by only a few talented people. It is not limited by the professional background of a person. Each and every one of you aspiring to be a highly effective leader in internal audit, can become such a leader. You need to set yourself on the right path to effective leading and managing.

The Institute of Internal Auditors (IIA) recognised a gap in leadership training within the profession and is offering the Qualification in Internal Audit Leadership (QIAL). The QIAL programme consists of three case studies, a presentation, and a panel interview. The programme covers a variety of internal audit leadership and management related topics. QIAL prepares a present or future CAE for the overall leadership responsibility of an internal audit function. The Leadership & Managerial Habits of Highly Effective Chief Audit Executives supports the QIAL programme. This book is an extensive reference manual for present and future internal audit leaders and managers.

Although the title of this book refers to CAEs, the book has a much broader application. CAEs find guidance on achieving the highest level of leadership and managerial effectiveness. Audit managers can apply the leadership and managerial habits to advance their career. Auditors gain insight in the leadership and managerial workings of the internal audit function and are shown the pathway to becoming successful CAEs. Board members and executive management obtain insight in managing their relationship with the CAE. They can use this book for developing recruitment profiles and for the CAE’s coaching and performance evaluations. The purpose of this book is to inspire excellence in leading and managing the internal audit function, bearing in mind that everyone can be an effective leader and manager.

The Leadership & Managerial Habits of Highly Effective Chief Audit Executives provides information for and shares experience with the present and future leaders and managers of internal audit functions. Knowledge is transferred to the reader through a structured analysis of the key leadership and managerial attributes required at the top level of any internal audit function. This is the first and only book that develops a clear strategy for effectively leading and managing an internal audit department. The book includes the practical experiences, examples, and solutions from an experienced CAE. The content draws upon 28 years of business experience, of which 16 years as leader of audit functions of globally operating corporations.

The Leadership & Managerial Habits of Highly Effective Chief Audit Executives combines two published books into a new comprehensive internal audit leadership manual. This bundle integrates both the 7 leadership habits and the 7 managerial habits of highly effective CAEs into one definitive and extensive reference manual – with more than 460 pages – for leaders of internal audit functions.

This book is the seventh in a series of internal audit best practices called Driving Audit Value. The previous six books in the series are: Audit Function Strategy, Audit Engagement Strategy, Audit Risk Management, The Internal Audit Handbook, The 7 Managerial Habits of Highly Effective CAEs, and The 7 Leadership Habits of Highly Effective CAEs. The series helps you to become successful in the business of internal auditing.

Read to advance your life,

drs. Hans Beumer

May 2018

THE MODEL

The leadership & managerial habits of

highly effective Chief Audit Executives

Introduction

THE LEADERSHIP & MANAGERIAL HABITS OF HIGHLY EFFECTIVE CHIEF AUDIT EXECUTIVES addresses two questions:

(1)      What makes a CAE a highly effective leader of an internal audit function?

(2)      What makes a CAE a highly effective manager of an internal audit function?

Therefore, the book is split in two main parts: LEADING INTERNAL AUDIT and MANAGING INTERNAL AUDIT.

CAEs differ, just as the organisations they work for differ. Leadership styles, management styles, characters, personal goals, and experiences vary from CAE to CAE. A CAE may head a department with over 250 staff, or a CAE may be the only one in an internal audit function. An organisation may strongly support an internal audit function or see it as a necessary evil. A board may allocate sufficient resources or squeeze the financial budget to a bare minimum. A CAE may be a long-time audit professional or have a background in another field. A CAE may be an experienced leader, or newly appointed to the role without such practice.

Whatever the background of a CAE, each person aims to be an effective leader and manager. Effective leadership and management in internal audit is attainable for each and every CAE, audit manager, and even auditor. It is not an art mastered by only a few talented people. It is not a skill captured in the genes of a person. It is not dependent on the organisation. It is not limited by the professional background of a CAE.

Each of you aspiring to be a leader in internal audit can become such a leader. The only obstacle to overcome is yourself. You need to set yourself on the right path to effective leadership and management. You need to be diligent in applying the principles and habits described in this book. You determine your own success in becoming an effective leader and manager of an internal audit function.

The model

Leading and managing: different but complementary

Leadership is a key success factor in effectuating an internal audit function’s strategies and objectives. The principles of successful leadership, however, differ significantly from the principles of successful managing. The theories of leading and managing make a clear distinction between the two:

Leading concentrates on influencing behaviour of people.

Managing concentrates on influencing activities.

Leading can be broken down in 4 core principles: transforming, developing, motivating, and influencing. Transforming is based on a CAE’s vision; a disruptive goal to transform an internal audit function, its services and products, and the value delivered to stakeholders. Developing is a CAE’s leadership activity that changes the capabilities of people, so that the envisioned innovation can be achieved. Motivating is a CAE’s leadership activity that stimulates people to follow the leader towards the innovative future. Influencing is a CAE’s leadership activity that steers and guides people – inside and outside an internal audit function – towards innovative internal auditing goals.

Managing can be broken down in 4 core principles: strategizing, organising, executing, and controlling. Strategizing is a CAE’s managerial activity that determines objectives (outputs) and identifies the actions needed to achieve the objectives. Organising is a CAE’s managerial activity that establishes the structures and allocates the tasks for reaching the desired outputs. Executing is a CAE’s managerial activity that performs the actions that must achieve the objectives. Controlling is a CAE’s managerial activity that monitors the achievement of objectives and corrects the expected variances in the internal audit function’s value delivery.

Figure 1 shows the 4 principles of leading and the 4 principles of managing in a simple model.

Figure 2 shows the connection between the 4 leadership principles and a CAE’s 7 leadership habits, as well as the 4 management principles and a CAE’s 7 managerial habits.

For analysing and discussing the fundamentals of internal auditing, both topics of leading and managing are important, but must be separated. The fundamental truths about leading an internal audit function are covered in the first part of this book. The fundamental truths about managing an internal audit function are covered in the second part.

Linking the leadership model to the managerial model

The strategic planning and actions connect the leadership model to the managerial model.

A CAE as a highly effective leader of an internal audit function transforms, develops, motivates, and influences. The transform principle has three main activities: vision, plan, and action.

A CAE as a highly effective manager of an internal audit function strategizes, organises, executes, and controls. The strategize principle has three main activities: understanding expectations, managing expectations, and aligning auditing services with expectations.

The planning and action activities of the transform principle connect to the strategize principle of the managerial model. At that stage, the leadership role merges with the managerial role.

Figures 1 and 2 show the link between the two models by the arrow pointing from transform to strategize.

Figure 1 – The 4 principles of leading and 4 principles of managing

Figure 2 – The leading and managing principles and habits

The leadership and managerial habits

This book describes and analyses the habits of highly successful (effective) CAEs. Each habit is linked to one of the leading or managing principles.

Leading internal audit

The 1st leadership habit of highly effective CAEs is envisioning a future. This habit is linked to the transform leadership principle.

The 2nd leadership habit of highly effective CAEs is increasing the performance of the internal auditors in pursuit of the transformational goals. The 3rd leadership habit aims at developing talents and growing future leaders in internal auditing. Both habits are linked to the develop leadership principle.

The 4th leadership habit of highly effective CAEs is inspiring engagement in the audit team members. The 5th leadership habit is delegating power. Both habits are linked to the motivate leadership principle.

The 6th leadership habit of highly effective CAEs is making the right people decisions. The 7th leadership habit has the objective to use relationships to influence stakeholders to support the achievement of the transformational auditing goals. Both habits are linked to the influence leadership principle.

Managing internal audit

The 1st managerial habit of highly effective CAEs is fulfilling the expectations of the stakeholders. This habit is linked to the strategize managerial principle.

The 2nd managerial habit of highly effective CAEs is managing the positioning of the internal audit function. The 3rd managerial habit is aligning the audit resources with the organisation, business, and company. Both habits are linked to the organise managerial principle.

The 4th managerial habit of highly effective CAEs is anchoring the annual audit plan. The 5th managerial habit is elevating the internal auditing assurance. Both habits are linked to the execute managerial principle.

The 6th managerial habit of highly effective CAEs is managing the performance of the execution processes. The 7th managerial habit is seizing opportunities and mitigating risks that may impact the managerial processes. Both habits are linked to the control managerial principle.

Figure 3 shows both the 7 leadership habits and the 7 managerial habits, as an expansion of the short titles shown in figure 2.

Figure 3 – The 7 leadership and 7 managerial habits

Achieving effectiveness

This book is not about leading and managing only. It is about effectiveness in leading and managing. What is effectiveness?

Effectiveness is a measure of achieving the desired outcome; the output of activities. Effectiveness is a measure of outcome fulfilment. High effectiveness means that activities achieve their objectives. Low effectiveness (or ineffectiveness) means that activities fall short on their objectives.

This is not to be confused with efficiency. Efficiency is a measure of efforts. High efficiency means that activities are quick and use little resources (low input, high output). Low efficiency (or inefficiency) means that activities are slow and use many resources (high input, low output).

Effectiveness is doing the right things, while efficiency is doing the things right. Doing the right things means doing the things that lead to the achievement of an objective. Doing the things right means doing the things that take the least time and resources to achieve an objective.

How does a CAE achieve effectiveness in leading and managing an internal audit function? The answer to this question is threefold:

(1)      A CAE needs to define objectives for each of the 4 leadership activities (transform, develop, motivate, and influence) and for each of the 4 management activities (strategize, organise, execute, and control).

(2)      A CAE needs to identify the key levers that enhance the achievement of each of these objectives.

(3)      A CAE needs to maximise the utilisation of these levers to reach the objectives.

What is the way to attain high goal-achievement in leading and managing? What must a CAE do to become highly successful (effective) in achieving an internal audit function’s goals? The 7 leadership habits and the 7 managerial habits both explain the way to effectiveness. For each of these habits, key effectiveness levers are analysed and described in the first (leading internal audit) and second (managing internal audit) part of this book.

It is both the consistent and persistent application of these defined effectiveness levers that makes a CAE become successful in leading and managing an internal audit function.

The structure of this book

What makes a CAE a highly effective leader of an internal audit function? What makes a CAE a highly effective manager of an internal audit function?

These two questions are the central theme of this book; hence the book is split in two main parts. The first part about leading an internal audit function has the same structure as the second part about managing an internal audit function. The two parts have ten chapters each. Their content is arranged as follows:

The first chapters reveal the holistic leadership and managerial model respectively. These models visualise the essence of leadership and managerial effectiveness in internal auditing. They draw their strength from their simplicity and clarity.

The second chapters describe and analyse the 4 leadership and 4 managerial principles respectively. They describe general theories and apply these theories to a CAE and an internal audit function.

The third chapters provide insight in the 7 leadership and 7 managerial habits respectively. These chapters also list the key effectiveness levers to each of the habits.

The following seven chapters analyse and describe each of the 7 leadership and 7 managerial habits respectively. The key effectiveness levers are detailed and explained, and examples show the practical application of the levers. When you finish reading the tenth chapter of a part, you will have found all answers to that one question.

This book not only gives you information on the 7 successful leadership and managerial habits, but also influences your future. Each habit chapter ends with a workshop and references to additional literature. These mobilise you to apply the habit and sharpen the habit. This is the way for you to reach the highest level of effectiveness in both leading and managing an internal audit function. That is the goal of this book.

Every CAE, audit manager, and auditor will identify with the key principles and habits for both effective internal auditing leadership and management. It is easy to apply the effectiveness models to every internal audit function, independent of its size and industry. A highly effective CAE applies both the leadership and management principles, through the diligent use of effectiveness levers that enable the habits of leading and managing.

Get the most out of this book

Each habit is analysed and explained in a chapter, creating a thorough understanding of the habit. Each habit chapter completes with a workshop to activate the habit, and with references to additional guidance to sharpen the habit. Understand. Activate. Sharpen.

Understand habits

Each habit chapter provides a detailed analysis and explanation of the habit. These are complemented by examples from practical experiences. Each topic is addressed from a theoretical and practical perspective, providing a hands-on and step-by-step guide, for understanding and improving your audit function leadership and managerial skills.

Activate habits

Each habit chapter completes with key questions or actions to mobilise you. Activate your habits by answering the questions and taking actions if necessary. These workshops are for your use. They set you on the right path to mastering the habits. The workshop activities draw upon the content of the habit chapter. Applying the activities to your own professional environment drives these habits and improves your effectiveness.

You may already apply some of these habits. In this case, the book helps you fine-tune these skills. You might be less skilled in some habits, or they may be new to you. In this case, the book helps you activate these skills. Practicing you need to do yourself, by applying the leadership and managerial concepts to your everyday work environment. Start today. The highly effective CAE does not postpone applying these effectiveness habits. This CAE starts improving today. This CAE starts a continuous improvement.

Sharpen habits

Sharpening your habits requires reading, learning, and practicing. The book covers both 7 leadership and 7 managerial habits of highly effective CAEs. Achieving proficiency in these habits may require you to read additional literature and practice what you have learned. Though I cannot help you with practicing, I can point you to additional reading materials. Each habit chapter ends with suggested literature to sharpen the habit. This additional reading increases your learning and positively influences your practice, thereby sharpening your habit.

Understand. Activate. Sharpen. Understand the principles of both 7 leadership and 7 managerial habits. Activate your leadership and managerial habits. Sharpen your leadership and managerial habits by reading additional literature. Then learn and practice. Practicing sharpens your habits, improves your skill, and develops you as a highly effective leader and manager. Realise your leadership and managerial potential!

On a general note

In this book I am frequently stating that the CAE should do this or that. Often it is indeed the CAE, as leader of the internal audit function, who needs to perform a certain task or achieve a certain goal. In small size audit functions, the CAE will indeed be the one performing the tasks as I describe them. That will not be the case in medium or large size internal audit functions. These CAEs will delegate power and authority to their audit managers. For consistency, however, I use the term CAE in most cases. Similarly, I am often referring to the auditor as employee of the CAE. Whenever I use auditor, it could also mean audit manager, or any other level or position within the hierarchy of the CAE’s organisation. I also use audit team member as a neutral indication of the employee. For allowing some variation in the text, I regularly switch between these naming conventions, though they all mean the same: a person working in the CAE’s internal audit function.

LEADING INTERNAL AUDIT

EFFECTIVE INTERNAL AUDIT LEADERSHIP MODEL

Linking the 7 leadership habits to

4 leadership principles

Figure 4 – Effective Internal Audit Leadership Model

THE 7 LEADERSHIP HABITS

1. Envision transformational goals, rally support from key stakeholders

2. Build high-performing individuals and teams, enable continuous learning

3. Develop future leaders for internal audit function, organisation, profession

4. Energize enthusiasm with shared passions, beliefs, values, and culture

5. Give power and authority to motivate, commit, and develop people

6. Hire and fire right people, resolve ethical dilemmas and wrong decisions

7. Forge facilitating alliances on rapport, trust, and help stakeholders advance

THE 4 LEADERSHIP PRINCIPLES

Fundamental truths about successful

internal audit leadership

General leadership principles

Leadership theory

Much has been written about leadership practices and theories. When you break these theories into their fundamental elements, a couple of principles stand out.

Leading is an activity revolving around people. The purpose of leadership is to influence – change – the behaviour of people to achieve an innovative goal. People and change are at the centre stage.

Because leadership is concentrating on people, it is not considered to be the same as managing. Managing is an activity revolving around a conversion process. The conversion process turns inputs into outputs. Managing is focusing on the productive use of resources. Conversion and productivity are at the centre stage.

Leadership can be broken down in several core activities around the change process. These are transforming, developing, motivating, and influencing.

Transforming is the leadership activity that envisions innovation. A leader challenges status quo and has the imagination and creativity to picture a future that is radically different from the present conditions of the organisation.

Developing is the leadership activity that changes the capabilities of people, so that the envisioned innovation can be achieved. Developing is the building of teams and advancing of talents.

Motivating is the leadership activity that stimulates people to follow the leader towards the innovative future. Motivating is inspiring passion and belief in people and shaping the culture to enable the achievement of the radical change.

Influencing is the leadership activity that steers and guides people – inside and outside the organisation – towards the innovative goals. Influencing is establishing relationships and making decisions that drive people to do the right things in the right circumstances.

A leader is not a know-it-all. In the world nowadays, this is not even possible anymore. While in the past the most knowledgeable person often became the leader of a team, this is not the case anymore. Knowledge can be purchased. Technical expertise can be purchased. In the present world, one becomes a leader when one can envision a future, motivate, develop, and influence people. The leader is the one who can access the right people resources and influence them in such a way that the vison, goals, and objectives can be achieved. For that you must be a visionary, a motivator, a developer, and an influencer.

Leader and followers

Traditionally a leader is in command through directives and enforces execution without being involved in the daily and detailed work. Such a leader has all the wisdom needed and selectively shares this with subordinates to enable his own success. Leadership is often defined as directing in the dictionaries; like a general on a military battlefield, giving orders to soldiers who blindly follow the commands.

This is no longer the case in most companies. Employee expectations have evolved in the 21st century, from living for a salary, to providing a meaningful contribution to society and feeling purposeful in their job. The role of a leader has evolved too. Nowadays a leader identifies and develops talent and creates a positive and ethical environment allowing people to apply their skills in the achievement of meaningful goals. This is about creating an effective work environment. A leader does this by defining and reinforcing key values, by advocating appropriate behaviour based on these values, and by feeling responsible and accountable for helping subordinates succeed with their tasks. A leader is not distant and far above or far in front of a team anymore. He is in the middle of a team, forming the core of a team. He is in the middle of the action, providing support and direction.

Another comparison of leaders and followers is on the religious or political battlefield. People who believe in the preaching and teachings of religious leaders are called followers. The term followers is often used when there is no specific structure to the organisation that follows the leader. Martin Luther King had followers. Mahatma Gandhi had followers. Nowadays on Facebook, Twitter, or Instagram, social media savvy politicians have followers. Former president Barack Obama has 100 million followers on Twitter. Pope Francis has almost 4 million followers on Instagram. President Donald Trump has more than 20 million followers on Facebook.

Throughout this book I am trying to avoid the term followers, as it reflects an unstructured group of people who follow a leader. Only when it makes a clear point, when it can be used generically, will I use it. Present day leaders form clearly structured partnerships with the people and teams in and outside their organisation. The leader of a company, the CEO, does not have followers; he has management teams and employees. The leader of the internal audit function does not have followers; he has audit managers, auditors, and audit team members.

Leadership traits

All literature on leadership theories and practices define a limited number of core behavioural traits of highly effective leaders. These traits can be summarised with the following terminology: ambition to transform; energy to lead followers; initiative to make changes; desire to lead; honesty and integrity in relationships with people; self-confidence that the envisioned future is attainable; intelligence to show the way; knowledge relevant to the job, organisation, and external environment; creativity that produces the vision; decisiveness to do the right thing; courage to make changes; social skills to listen to, care for, develop, and motivate people; enthusiastic, inspirational, and passionate about the transformation; and lead by example.

Leadership styles

Notwithstanding the traits that are common for effective leaders, leadership styles differ. The main leadership styles are:

Charismatic: using charm and attention to influence followers – think of the Dalai Lama and Buddhism;

Autocratic: using fear and directions to influence followers – think of Vladimir Putin and Russia;

Transformational: using passion and ideals to influence followers – think of Steve Jobs and Apple;

Transactional: using rewards and punishment to influence followers – think of Bill Gates and Microsoft; and

Bureaucratic: using policies and procedures to influence followers – think of Ban Ki-moon and the United Nations organisation.

Other common styles are called laissez-faire, democratic, facilitative, situational, or participative.

There is no best way of leading, as leadership styles depend on the type of problems to overcome. This is the reason for some leaders being successful in one organisation, but unsuccessful in another. For example, Ban Ki-moon, with a bureaucratic style, would not be successful in driving the success in innovation at Apple. The Dalai Lama, with a charismatic style, would not be successful in leading Russia. The organisational particularities determine what kind of leader is needed to bring the organisation to success. Do you have examples in your own organisation? Can you determine why a certain CEO was – or was not – successful in changing the organisation? This is one of the most critical aspects for boards in their search of a new CEO: ensuring that the CEO-candidate has the leadership style that can change the organisation. A mismatch between style and organisation will almost always lead to failure, and replacement of the CEO.

Leadership challenges

In a battle between a leader and his followers, the followers always win – the leader always loses. This is based on the principle that the leader needs the followers to implement the change. The leader is dependent on the cooperation of the followers; he cannot do it alone. When the organisation resists or refuses to implement the change the leader envisions, it is the leader’s challenge to overcome this resistance. The methods to overcome this resistance are rooted in the leader’s style. Apply a ‘wrong’ style – a style that is not effective – and the followers will not give up their resistance. Enduring resistance always leads to failure of the leader. He will either give up and resign or be fired for not being effective in initiating the change process. In the short-term the organisation will continue to exist, but the leader will be replaced. Having said that, long-term ineffective leadership results in the downfall of the organisation. It will inevitably go out of business. Think of Blackberry; once the most used business phone, now reduced to a small player on the mobile phone market. Think of Enron; once a pioneer in innovative energy trading products brought down by corrupt leadership. Think of Compaq; once the biggest seller of PCs, long since out of business.

When you link the leadership style to the type of organisation, leadership is using the appropriate style to overcome the organisation’s resistance to change. Different types and levels of resistance require different leadership styles. Leadership challenges relate to the level of resistance in an organisation, caused by its maturity, size, structure, condition, dynamic, and employees. Let me address them one by one.

(1)      The higher the maturity of an organisation, the higher the leadership challenge. The more mature an organisation, the more structured, defined, and settled the processes and procedures, the more established the working methods of the people are. Mature organisations have many policies, procedures, standards of operation, and so forth. This organisational governance standardises the ways to work. The more standardised, the more the employees are used to doing their work in one particular way. The more they are used to this, the higher their resistance to change – the more they hang on to status quo. An organisation with a low maturity will be much more open to change. Start-up companies are the typical example. These organisations understand that they need to change – develop – to become successful. Change is continuous in such organisations – status quo would mean their immediate death.

(2)      The bigger the size of an organisation, the higher the leadership challenge. Compare the size of an organisation to the size of a ship. It is much harder to change the course of an oil tanker with a length of 450 meters (1’500 feet), than a Bertram 17 meters (57 feet) deep-sea fishing boat. The bigger the size of an organisation – in terms of number of employees, management structure and layers, geographical spread, number of products, and so forth – the longer it takes to implement change. The bigger the size, the more people need to be influenced, the more changes are needed in all aspects of the organisation. Think of General Electric. On the contrary, in a small organisation – with just one product, a handful of employees, in one location – it will be relatively easy and quick to execute change. Think of the many successful companies that make up the German ‘Mittelstand’.

(3)      The more decentralised the structure of an organisation, the higher the leadership challenge. High decentralisation disperses all change efforts over many aspects of the organisation. Decentralised units often have a high degree of autonomy and independence. Think of Nestlé and Johnson & Johnson. The more centralised the structure of an organisation, the lower the leadership challenge. High centralisation concentrates all execution efforts in one place. This means that change efforts at the core of an organisation will quickly influence the other parts of the organisation. Think of Apple and Ikea.

(4)      The more stable the financial condition and profitability of an organisation, the higher the leadership challenge. In a stable financial condition there is no sense of urgency. Without a sense of urgency for change, the organisation will resist change. After all, profits and finances are good, so why change a winning team? Think of the financial services industry before the banking crisis in 2008. When an organisation is in crisis, the sense of urgency will be high, and employees will be looking for change. A change that leads them out of the crisis into stability. Think of the banking industry after 2008. The Titanic is also a good example. Thought unsinkable, there was no sense of urgency when the ship approached icebergs. This dramatically changed after the collision. Then, priority for survival topped everything else. It is the same with organisations. When the business and finances are good, it is difficult to convince of a need for change, even when icebergs – disruptive technologies – may be on the horizon. Once sales and profits start declining it may be too late to reverse the trend. Think of Hewlett Packard, Nokia, Kodak, BlackBerry, Bang & Olufsen, and even Microsoft.

(5)      The lower the dynamics in an organisation or its external environment, the higher the leadership challenge. Organisations that experience low dynamics are stable for many years. Stability in their environment leads to stability in their organisation. When there is no external driving force for change, internal resistance to change will be high. Think of the telecom companies when these were monopolised state-owned organisations, or the large state-owned enterprises in China. The higher the dynamics in the external environment, the lower the resistance to change. The organisation and its members understand that they need to adapt to external forces for the survival of the organisation. Think of social media companies (e.g. Facebook, Instagram, Twitter), and the dynamics of regulation, privacy concerns, data protection, and the impacts of fake news, data abuse, and so forth. In these organisations the leadership challenge does not relate to implementing change itself; it relates to responding – reactively and proactively – to the external dynamics and executing the right changes.

(6)      The more diverse the employees, the higher the leadership challenge. In this respect, diversity relates to cultures, capabilities, motivation, and social organisation. The higher the homogeneity (single culture), the easier to influence employees. The higher the heterogeneity (multiple cultures), the more efforts are needed to convince employees of change. The more employees are aligned in groups with common goals, the easier to execute change. The more individual the employees, or teams having diverging goals, the more effort to execute change.

In the above examples I focused on resistance to change as the main challenge for a leader. Overcoming this resistance is, of course, not the only challenge. Identifying the right innovative goals to transform the organisation, proactively responding to the dynamics in the organisation’s environment and in the organisation itself, developing the next generation of leaders, making the right decisions, establishing and maintaining a network of relationships, handling uncertainty, and motivating people are some of the other main challenges.

Leadership style is ingrained in the character, and thus behaviour, of a leader. The highly effective leader is self-aware of his leadership’s blind spots, biases, and weaknesses. This leader achieves high effectiveness by

(1)      seeking and obtaining support of others to compensate for his weaknesses, and

(2)      adjusting his leadership style to the nature of the problems at hand.

Leaders draw upon integrity and trust to influence their followers. Leaders recognise that they cannot do it alone, are dependent on others, and therefore need the buy-in and commitment of others to attain an innovative goal. Getting the buy-in and commitment requires successfully influencing of people and organisations.

This subchapter on leadership principles addresses the general leadership theories and practices. How can these principles be applied to the internal audit function? How can the CAE apply these principles to his audit organisation? What are the specific leadership challenges for the CAE? These topics, and more, are covered in the next subchapter.

Leadership applied to the internal audit function

Leadership is showing presence and being visible

Effective leadership must result in the leader CAE being visible to the audit team members. Leading from a room at the corporate office, physically invisible to the audit team members, is not leading. Leading by email is not leading. Leading by phone is not leading. The learning and development of audit team members is highest in the physical presence of the CAE. The first priority in promoting learning, development, and bonding is physical presence. Phone calls can support this as second priority, and emails as third priority. Emails are a cold and impersonal means of communication. Hearing the CAE’s voice on the phone is personal. Physical presence expresses to the internal auditor: you are important to me and the engagement you are performing has value for the internal audit function and the key stakeholders.

The CAE’s first responsibility is supporting the audit team members in doing successful audit assurance engagements. This means showing presence at the audit closing meetings, for the important engagements at minimum. I know a CAE who does not like to travel and never visits the audit closing meetings. At best he shows his presence in a conference call, attending the closing meeting remotely. This CAE expects the audit team members to travel but does not apply the same expectation to himself. Physical presence at closing meetings adds significant value to the audit teams; its creates bonds, it facilitates relationship building, not only with the auditors, but also with local management. The physical absence creates the image of indifference, not caring for the project in which the auditors and audit clients are engaged. Of course, a leader cannot be at multiple places at the same time, and often needs to set priorities. However, always setting the priorities such that the CAE never attends audit closing meetings shows weak leadership.

Leadership is responsibility and accountability

A leader CAE can steer the internal audit team members to success, but also to failure and disaster. The determining factor whether it is success or disaster depends on the leader, not the auditors. Conversely, when the internal audit function is a disaster, the audit team members are not to blame. This responsibility – and accountability – lies with the leader CAE. This is why, rightfully, an organisation changes the CAE when the audit function’s performance is slumping. The leader got the organisation into the mess, making it unlikely that the leader can move the organisation out of the mess. Change of CAE is then the best way forward. The new CAE needs to change the behaviour of the audit team members to create change. After all, change is what gets the audit function out of the slump. A leader gives the credit for success to other people but takes the responsibility for failure himself.

I was hired as CAE for a company with an audit department in shambles. During my first week, I learned that we had four audit reports on the shelves (between one to six months old), awaiting issuance. These reports had between 80 and 120 pages, did not have a clear message, and were based on incomplete audit testing. Management had not yet seen the draft reports, and no risk mitigation recommendations were agreed with the process owners. It was clear that this internal audit function lacked leadership. My predecessor had been fired six months before I joined the company. The auditors had been without leadership since. The internal audit function was a disaster, and the previous CAE had been held responsible and accountable.

Leadership is having a clear purpose

Motivating internal audit staff starts with the CAE being motivated. High motivation shows in the way the CAE talks about the goals, in the way the CAE prepares action plans to achieve the goals, in the body language of the CAE, in the attitudes of the CAE, in everything the CAE does. Low motivation shows the same way. The audit team members are very sensitive to the CAE’s behaviour. They are constantly observing what the CAE is saying and doing. A disconnection between saying and doing – not walking the talk – is picked up by others immediately. The motivation – high or low – of the leader is contagious. Employees will immediately copy the corresponding behaviour and attitudes.

It may seem strange to find the topic of having a purpose in life in this business book about internal auditing leadership. How does having a purpose in life help a CAE to be a successful and effective leader? Let me explain. A leader first needs to be clear about his own purpose. Only then can a leader set goals that are in line with his purpose. Only then can a CAE expect people to follow his transformational goals. Think about this. Are you willing to follow a CAE who does not have, or is not able to articulate, a purpose of his own life? What else can be the basis for innovative and transformational goals? Would you follow someone who does not give a clear meaning to life? The topic of having a purpose in life has two components: personal and professional. The personal component relates to the meaning of life for the leader CAE. The professional component relates to the meaning the leader CAE gives to the internal audit function. Best case these are aligned. Worse case these are disconnected. It will be obvious to all audit team members when these are disconnected. The CAE will not walk the talk. His actions will not be consistent with his words.

Leadership is sharing emotions

Highly effective