IndII Activity P243-02: Governance Reform in Internal Audit Function (IG-MPW)

PRESENTATION TO THE PARTNERS OF IG MPW

Why AusAID?

GoA is a leader and a strong proponent of

Good Governance

and

Accountability

in the belief that countries that receive GoA aid and have the two attributes, improve the effectiveness of aid and reduce corruption. These goals are in line with the Paris Declaration.

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The Paris Declaration

In March 2005, representatives of developed and developing countries (including Australia) meeting at the High Level Forum on Aid Effectiveness in Paris “resolve[d] to take far-reaching and monitorable actions to reform the ways we deliver and manage aid”. The result was the Paris Declaration on Aid Effectiveness Selected Summary of Indicators of Progress 1. Partners have operational development strategies 2. Partners have reliable public financial management and

procurement systems 3. Capacity will be strengthened by coordinated support THIS PROGRAM FALLS WITHIN THE GUIDELINES & PRIORITIES

OF GOA

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Why AusAID Supports the IG

The IG understands that changes must be made to improve

the operations in order to meet GoI obligations as IG and to make the unit into Professional Auditors

was the primary mover in proposing the Reform Agenda – he is the Change Agent

is Chairman of the 565+ IGs in GoI & wants to continue a leadership role to set an example

Believes this experience can be a template to replicate at other IG Operations

understands the challenges going forward and has shown ownership

wants to work with AusAID 6

Our Partners

Our Partners

• BPKP

• LKPP

• KPK

• MENPAN (Bureaucratic Reform)

• World Bank

In house partners

• IG MPW Change Management Unit

• MPW Management

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Background

• Early 2009, IG proposed a Reform Agenda (RA) for better value-added services to MPW on budget impact, infrastructure development and activity safeguards.

• Indicative trigger for World Bank’s IDPL 4: Adoption of an Action Plan to strengthen staff capacity and introduce modern RBIA methodology & practices to provide assurance on internal control systems and compliance.

• Initial discussions identified the need for continuing support over stages, grouped by achievements / identified deliverables.

• IndII support commenced in June 2009; • Earlier IndII support helped IG to improve and strengthen its

capacity / technical ability to do internal audit work at MPW. • However, although substantial groundwork for fundamental

auditing using RBIA techniques has been established, there are fundamental “roadblocks” within the IG structure and operations that must be resolved if the gains made to date are to be maintained and further improved.

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Background

Therefore, it was timely to consider other critical areas of improvement, to ensure sustainability of progress

In order to have sustainability:

Processes must have the ability to be repeated

In order to repeat processes

there must be a supporting infrastructure with systems that are imbedded and institutionalized.

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Pillar 3 Enhanced

Anticorruption Environment

Pillar 1 Institutional

Strengthening

Pillar 2 Better

Procurement Practices

Change Management, Training, Education & Quality Assurance

Moving from IACM Level 2 to Level 3

Overview : Current Activity: IndII Activity P243-02: Governance Reform in Internal Audit Function (IG-MPW)

Internal Control System PP 60

IG MPW as The Change Agent (with AusAID / IndII support)

Partners: MPW Management, BPKP

Partners: MPW management, all DGs, BPKP, LKPP & KPK

Partners: MPW Management, all

DGs, KPK

An entirely new program, both in scope and approach

• Although it builds on the prior Activities of IndII support to the IG, we concluded there was a serious danger that gains made may not be sustained longer-term and be capable of being used as building blocks for further improvements unless fundamental roadblocks such as updated relevant management structures and support mechanisms were addressed; therefore the importance of IACM (Pillar 1).

• In addition, GoI is now more focused on eliminating (or at least reducing) corruption; thus Pillar 2, a concentration on improving procurement practices, doing better and more procurement auditing and

• Pillar 3 - creating / monitoring a corruption-free environment.

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Internal Audit Capability Model (IA-CM) for the Public Sector

Overview Presentation Libby MacRae Bob McDonald

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Agenda

The IA-CM

– Its structure and underlying concepts

– Principles in its application

– Using the IA-CM

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What is the IA-CM?

• A universal model with comparability – principles, processes and practices

• To be used globally to improve internal auditing

• Framework for assessing capabilities against standards and practices

• Communication vehicle for defining and advocating the importance of internal auditing

• Roadmap and toolkit for orderly improvement

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Underlying Principles

IA Activity’s Obligations

• Be an integral component of effective governance in the public sector

• Assist organizations achieve their objectives and account for their results

Organization’s Obligations

• Determine optimum level of IA capability to support required governance structures

• Achieve and maintain the desired capability

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Underlying Principles

Selecting Optimum Capability

• Three variables

– Environment

– Organization

– IA Activity

• Different capability required

• Auditing must be cost-effective

• No “one size fits all”

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IA-CM Levels

LEVEL 5

Optimizing

LEVEL 4

Managed

LEVEL 3

Integrated

LEVEL 2

Infrastructure

LEVEL 1

Initial

No sustainable, repeatable

capabilities – dependent upon

individual efforts

Sustainable and repeatable IA practices and procedures

IA management and professional practices uniformly applied

IA learning from inside and outside the organization for continuous improvement

IA integrates information from across the organization to improve governance and risk management

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Level 1- Initial

• Ad hoc or unstructured

• Isolated single audits, document reviews, transaction verification

• Outputs dependent on incumbent skills

• No professional practices or standards applied

• Funding approved by management as needed

• Absence of Infrastructure

• Auditors likely belong to a larger organizational unit

• Institutional capability not developed

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Level 2- Infrastructure

• Repeatable processes or capability established

• Reporting relationships, management, administrative infrastructure, professional practices established

• Audit planning based principally on management priorities

• Continued reliance essentially on skills and competencies of incumbents

• Partial conformance with IIA Standards

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Level 3 - Integrated

• Defined IA policies, procedures, documented and integrated into organization structure

• IA management and professional practices well established, uniformly applied

• IA beginning to align with business and its risks • IA providing advice on performance and

management of risks • Focus on team building and IA capacity and

independence and objectivity • Generally conforms to IIA Standards

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IA-CM 1-page Matrix Services and Role

of IA

People Management Professional

Practices

Performance

Management and

Accountability

Organizational

Relationships

and Culture

Governance

Structures

Level 5 –

Optimizing

IA Recognized as

Key Agent of

Change

Leadership

Involvement with

Professional Bodies

Workforce Projection

Continuous

Improvement in

Professional

Practices

Strategic IA

Planning

Public Reporting of

IA Effectiveness

Effective and

Ongoing

Relationships

Independence,

Power, and

Authority of the IA

Activity

Level 4 –

Managed

Overall Assurance

on Governance,

Risk Management,

and Control

IA Contributes to

Management

Development

IA Activity Supports

Professional Bodies

Workforce Planning

Audit Strategy

Leverages

Organization’s

Management of

Risk

Integration of

Qualitative and

Quantitative

Performance

Measures

CAE Advises and

Influences Top-

level

Management

Independent

Oversight of the

IA Activity

CAE Reports to

Top-level

Authority

Level 3 –

Integrated

Advisory Services

Performance/

Value-for-Money

Audits

Team Building and

Competency

Professionally

Qualified Staff

Workforce

Coordination

Quality

Management

Framework

Risk-based Audit

Plans

Performance

Measures

Cost Information

IA Management

Reports

Coordination with

Other Review

Groups

Integral

Component of

Management

Team

Management

Oversight of the

IA Activity

Funding

Mechanisms

Level 2 –

Infrastructure

Compliance

Auditing

Individual

Professional

Development

Skilled People

Identified and

Recruited

Professional

Practices and

Processes

Framework

Audit Plan Based

on Management/

Stakeholder

Priorities

IA Operating

Budget

IA Business Plan

Managing within

the IA Activity

Full Access to the

Organization’s

Information,

Assets, and

People

Reporting

Relationships

Established

Level 1 –

Initial

Ad hoc and unstructured; isolated single audits or reviews of documents and transactions for accuracy and compliance; outputs

dependent upon the skills of specific individuals holding the position; no specific professional practices established other than those

provided by professional associations; funding approved by management, as needed; absence of infrastructure; auditors likely part of a

larger organizational unit; no established capabilities; therefore, no specific key process areas

© 2009, The IIA Research Foundation – All Rights Reserved

Key Process Area (KPA)

Purpose

Essential

Activities

Outputs

Outcomes

Institutionalizing Practice

Examples

Key Process Area

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People Management Level 2 – Infrastructure

Skilled People Identified and Recruited

Purpose – To identify and attract people with the necessary competencies and relevant skills to carry out the work of the IA activity. Appropriately qualified and recruited internal auditors are more likely to provide credibility to the internal audit results.

Essential Activities • Identify and define the specific audit tasks to be conducted • Identify the knowledge, skills (technical and behavioral), and other

competencies required to conduct audit tasks • Develop job descriptions for positions • Determine proper pay classification for positions • Conduct valid, credible recruitment process to select appropriate candidates

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People Management Level 2 – Infrastructure

Skilled People Identified and Recruited

Outputs • Internal audit positions are filled with appropriately qualified persons

Outcomes • Audit work is conducted with due professional care • There are credible audit observations, conclusions, and recommendations

Institutionalizing Practice Examples • Visible commitment and support through senior management action to ensure that a

competent and qualified CAE is in place, and the necessary resources are provided to appropriately staff the IA activity

• Staffing and recruitment policy • Job descriptions • Classification system, including levels specific to internal auditing

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Institutionalizing a Key Process Area

Commitment To Perform Activities

Ability to Perform

Activities

Activities Verified

Activities Performed

Activities Measured

Key Process Area

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Using the IA-CM as an Assessment Tool

• Understand the purpose and structure of the IA-CM • Identify the KPAs that appear to be institutionalized by

the IA activity • Obtain and review documentation re: IA activity,

organization, and environment • Interview managers/stakeholders • Confirm the actual KPAs institutionalized • Determine the capability level • Communicate and confirm the opportunities for

improvement • Develop and implement the improvement plan

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Principles in its Application

• Apply professional judgment

• Environmental and organizational factors

• A practice cannot be improved if it cannot be repeated

• Capability gets built in steps/stages

• KPAs at one level set the foundation for KPAs at the next level

• A KPA is achieved when it is institutionalized into the culture of the IA activity

• All KPAs, up to and including the KPAs at a given level, must be institutionalized to achieve that level

• Not all all elements need be at the same level

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Important Considerations

• All levels in the IG participate

• Organizational management and stakeholder support

• Processes are institutionalized and sustainable

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Procurement Standards in Indonesia

IndII Activity P243-02: Governance Reform in Internal Audit Function (IG-MPW)

9/6/2012 IndII Activity P243-02: Governance Reform

in Internal Audit Function (IG-MPW)

Presented by Rob Thompson

Identify the Need

Develop the Specification

Define the Contractual Terms

Research the Market

Identify Pre-Qualification and Select Bidders

Invite Quotes/ Tenders

Analyse Quotes/ Tenders

Clarify/ PTN VFM

Contract Award

Review of Performance

Payment

Approval to Proceed

Monitor Performance

Develop Contract Strategy

Manage Relationship

Set Evaluation Criteria

The Procurement Process

Key Areas of Procurement Activity

• Good Sourcing Principles and Practices

• Price and Cost Analysis

• Inventory Management

• Legal Protection

Procurement Competencies being prepared

Approach • Analysis of current competencies, procedures, practices and policies

• Work with MPW management and selected DG’s to enhance procurement competency

• Develop and support the ULP in developing good procurement practice

• Applying Risk Assessment & Management techniques to all procurement

• Introduction of best practice procurement training

• Presenting and mentoring the introduction of new procurement tools and techniques

• Providing practical guidance to MPW & DG’s to ensure a consistent application of best practice techniques

Key Messages • Early involvement (by both parties) in the

procurements to resolve potential risk areas in time

• Shared understanding of what is procurement • Integrate lessons learnt from past experience in

future training and procurement practices • Best practice contract management • Cost not price • Performance not conformance • Consistency in actions.

Best Practice Procurement WILL

achieve compliance,

Compliance alone does not ensure a best value for money

procurement.

9/6/2012 IndII Activity P243-02: Governance Reform

in Internal Audit Function (IG-MPW)

Change Management Support Program (CMSP)

Dr Steve Harris

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Role in Change Management

• Private and Public Sectors – Reform efforts gone under many banners

• TQM, PRR, Reengineering, restructuring, cultural change, turnaround

• Core focus: “making fundamental changes in doing business” – Results variable

• Some reforms successful & few utter failures & most fall somewhere in between

• Lessons learned are significant

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CMSP at core of reform

• CMSP + CM Strategy (D5)

– Inform & guide key strategic/operational decisions the MoW/IndII Team make

– Address and overcome Roadblocks

– Linked closely to long-term approach outlined in the 'roadmap’

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Lessons Learned • The most general lesson is change is a series

of steps/stages over considerable time (5-10 years)

– Tenacity to skip stages and creates an illusion of speed and never produces satisfying results

• Critical mistakes during stages have a devastating impact on the reform program

– Declaring early victory

• Negative impact, momentum lost

• Erodes/negates progress made

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Lessons Learned (con’t)

• Transformation thus is a process not an event

– Series of building blocks

– 5-10 year time frame

– Resist skipping stages

• Standard approach to CM

– Targeted areas are: • Org's Strategy

• People, pay, processes

• Move staff

• Realign functions

• Rewards and incentives

• Remove inefficiencies

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Lessons Learned (con’t)

Sustainable and effective leadership is often the missing Ingredient in reform implementation

Leadership • MPW leaders as 'Guiding Coalition’ • IndII Team as 'Change Agents' • Selected employees as CAs • Establish CM mechanism Effective persuasion campaign • Early activation/weeks or months • IndII Team instrumental here/design and implement • goals: ensure employees listen to tough messages • Understand institutional and national psychology Campaign goals: ensure employees listen to tough messages; question old

assumptions; embrace new ways IndII Team mentor and nurture/training (technical&CM)

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Key IG MPW - IndII Team Phased Steps (Source: JP Kotter)

• Sense of urgency/identify crises & opportunties

• Forming a powerful coalition to lead change

• Create Vision to direct reform

• Communicate Vision/use every vehicle available

• Empowering others to act on vision (get rid of obstacles (encourage risk taking/change systems or structures that undermine the vision

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Key IG MPW - IndII Team Phased Steps (Source: JP Kotter)

• Planning for and creating short term wins (plan and create performance improvements)

• Consolidate improvements and produce even more change (hire promote and develop employees who can implement vision)

• Institutionalise (highlight link between new behaviours and Departmental success/ensure succession

• M&E/Impact Focus

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Case Study: MAIL/Afghanistan • Institutional mandate for reform mandatory (link to strategic level

leadership in national public sector reform program)

• Capacity development

– Based on long term commitment

– competency based incentives

– mentoring by national specialists

• Inst'l reforms not too ambitious

– No 'whole inst't approach

– select small operational priorities

– Use them as cascading models to demonstrate CM principles

• Monitor and evaluate management ‘energy’ in the Department

• Vertical/Horizontal communications is critical

• Establish mechanism for wide ranging stakeholder collaboration and coordination

• Guaranteed funding critical 45