AI and the Future of Internal Audit

Hello, I'm Richard Chambers, and welcome to another episode in my podcast series, Speaking of Risk and Audit. Today, to commemorate Internal Audit Month, I have with me a very special guest. Anthony Pugliese is the President and CEO of the Institute of Internal Auditors, the global body representing nearly 260,000 members in almost 200 countries around the world. As an executive with over 30 years of experience, Anthony previously served as the CEO of the California Society of CPAs and held several key leadership roles at the AICPA.

He is consistently recognized as one of the most influential figures in accounting and the internal audit world. Welcome to the show, Anthony, and congratulations on your fifth anniversary as the IA's president and CEO. Thank you very much, Richard, and thank you for having me on your podcast. You know, Anthony, the world has changed in more ways than we could imagine in the last five years.

I think the last time you and I did a podcast kind of event together was just before you took the helm at the IA, and the world has really changed a lot. What do you think has changed the most significantly in terms of the internal audit landscape today versus when you became the CEO? If I may, I'll give you two things. I'd be remiss in not saying AI.

It seems to have just affected every profession. Every single profession has been impacted, certainly the learned ones. The AI impact, not just internal auditors understanding how organizations use AI, but also how they use it themselves to improve the work they do. Tools such as what Optro has is huge.

And it's probably the most consistent theme of any conference that I attended. I was in New York and Miami last week doing their conferences, and that was by far the topic du jour. So I think that would be the biggest. You know, 2023 has been all that started with ChatGPT.

But the second one was something our Vision 2035 research brought to light, which was just how pervasive the movement of second line functions to CAEs and third line is becoming. And, you know, a lot of people ask me, you know, Should we be stopping that? And I'm like, well, there's no stopping market-driven forces, not at that level anyway. So we are seeing most notably the enterprise risk management function reporting into internal audit, but also compliance and fraud functions.

And we noted that a third of CAEs around the world, a statistically accurate number, reported having a second line function as a direct report. And we see that trend growing and growing. So those two are pretty notable. And it also has driven a lot of our strategic planning and things that we're doing right now.

But those are pretty big for me and probably for the IAE's global board. I couldn't agree with you more. Certainly, the potential transformation coming from AI, I think, is something we'll all be talking about incessantly going forward. You know, as I often share with you behind the scenes, I think the IA has accelerated the momentum for the profession and really made notable achievements since 2021.

Which of the ones that you have helmed at the IA have you been the most proud of? Josh, well, some of it I'm building on, I think, what you and our predecessors did, Richard, before us. But I think probably the ones that I'm most proud of, of getting more momentum behind it is advocacy would be a big one. And a lot of people think it's, you know, influencing legislation and regulation, and it most certainly is that.

And we've started to see a lot of success in the United States and Canada, but also around the world. It's also the need for us to be present whenever any of these thought leadership groups or corporate governance think tanks start thinking about proper paths to the governance and new AI governance models and anything else in the governance space. We need to be there to represent the profession and even in some cases to undo some things that have happened around the world in the past that we weren't aware of, like a law in Panama that required internal auditors to be CPAs or the equivalent.

So we managed to get that undone and make sure that internal auditors were also CIA was mentioned. But it's the advocacy space, I think. I think that's really been a powerful tool for us. And I think the environment has been a little bit more conducive, even with all the change and all the craziness that I think the world is seeing right now.

That is the perfect time to represent the profession. And we have a very bipartisan approach in the U.S. We find the folks that are representing causes that we want to be represented in or be a part of.

But advocacy is a big one, and also just our moving into that second-line space with a lot of caution and a lot of due process, but making sure we're representing members in that space. And since we released that study in July when we were in Washington over, gosh, a year and a half ago, it's been very important that we make strides to represent and give members the tools they need to be successful when they're supervising second-line functions. So those are two big ones aside from just the general growth that the profession has experienced and how big our federation has become.

You know, you invited me to join an event recently, which I think falls under your advocacy umbrella, where you guys were launching the Audit Committee Center, Global Audit Committee Center. Is that the kind of initiatives that we can look forward to more of? Absolutely. So that's directly under that GRC space.

And it was us trying to really find an effective way of talking to our key stakeholder groups and audit committees, audit committee chairs, and making sure we were really good about being sure tools that we provided were not always pushing internal audit, but actually be practical and usable. And then suddenly position internal audit as one of the solutions an audit committee can turn to. But most certainly, and we have a lot of work to do to get that up to speed, including the development of content that will go into that center.

But the Audit Committee Center is a prime example of an initiative, strategic initiative under that GRC umbrella. Yeah, I think that's a long overview, and congratulations to you and the whole team for getting that launched. You know, Anthony, as we both know, it's May, which means that we're celebrating Internal Audit Month. And by the way, I was really, really encouraged when we dropped awareness from that because I feel like the profession has been around 100 years.

If people aren't aware of us, then we haven't been very effective. So now it's about celebrating and creating awareness about what we do, not about who we are. And so, you know, our profession often does what I call the heavy lifting in the shadows, you know, sort of it's it's a little risky because sometimes out of sight, out of mind. So people don't realize what internal auditors do because we're out there doing our work every day and it's not on the headlines.

Maybe occasionally it is if it's government. But how is the IA encouraging organizations this year to highlight the work of internal auditors and recognize the value that they bring? Well, probably the most visible campaign we have, we call it Faces of Internal Audit to celebrate Internal Audit Month. And we hope it's something that will go viral.

Certainly in the last few days, I've noticed all weekend long on LinkedIn that people have loved it. But it's a toolkit. You go in and there's a link on one of the posts I made or just go to the IIA homepage. And you can download a series of templates, insert your photo on it, pick the one you like.

And it's meant to draw just attention to the fact that we're here and all the things that we do. There's a series of different templates showing different facets of the profession. So we hope that will be one of the more viral things that we do. And again, seeing great pickup around the world.

So it's only in the first few days of the month. I'm excited about that. But also we're using Internal Audit Month back on the advocacy thing I mentioned earlier is using that as an avenue to get to our local officials in the United States particularly and to some degree in Canada. But in the U.

S., we've been matching all of our chapters with their elected leaders. And again, same in Canada. There's just a lot more volume in the United States.

And then having our members meet with their electeds to further, you know, bring awareness, for lack of a better word, of all the different things we do other than just internal controls over financial reporting, fraud, and compliance. But making them aware of the full gamut and of our standards and of our topical requirements and all the other things that guide our profession. So those are two big ones. And again, Internal Audit Month is a great way to bring people closer to their elected official.

And again, it's like advocacy is never done. It'll be an ongoing issue. We can do people elected to Congress. You have to make sure you're making us aware of them.

But that's two of the things we're doing. So fingers crossed on the success. I think advocacy has already started to see a good bit of success early in the month. I see what you're talking about in terms of the visibility that you guys are driving through social media and getting the profession involved in helping to promote itself, really, during Internal Audit Month.

But, you know, Anthony, the IIA has had a longstanding and fruitful partnership with the team at Optro, formerly Audit Board. And thank you again for sort of delivering the IA's official congratulations on our name change at the GAM conference a couple of months ago. From your perspective at the IA, why, and you kind of touched on this earlier, why are technology solutions so important for the profession in the 2020s and going forward? You know, especially tools that span the entire gamut of, you know, everything our profession needs to know when they're working in a particular area.

But, you know, AI tools particularly have been difficult for members to find and deploy effectively. We love the fact that Optro has so many solutions in your platform that actually do that for our members and internal auditors around the world. But continuing to position tools in front of them is critical. We are not seeing yet the uptake we would like.

I guess in a perfect world, we would see every internal auditor using AI right now, which there's a learning curve for our profession and everybody else. But really right now we're seeing about 25% of the profession saying that they're using AI tools. And that's based on our last research that we did with our. Our North American Pulse surveys.

And it's encouraging to see the adoption. I just want it to be faster. And I think when members get closer to it and have the hands-on experience, they'll realize the power that's in front of them. So we love having partners like Optro because you have the tools our members need.

And that's not something I see the IIA wanting to do, you know, developing AI tools per se. The commercial market will always do better at keeping pace with that. But we're seeing more and more members use it, but having tools like the one you represent is just invaluable to us. Yeah, it's a great segue into a conversation about AI.

You know, Anthony, I think there's a fear out there on the part of some, not everybody, but by any means is there's a fear of AI and the fact that potentially could replace internal auditors. What's your response when you hear someone say or sort of refer to AI as a threat to the profession. You know, it reminds me of when I entered the profession, either I entered on the external audit side, but I remember at the time, boy, this will age in me really quickly, is it was the beginning of the use of spreadsheets and it was Lotus 1-2-3 in place at the time.

I remember being so upset with my college because they didn't teach me how to use Lotus 1-2-3 enough. But there were a lot of partners at the firm I started with that were saying, you know, this could be the end of the profession. You know, this is really, I mean, now we've got tools that just add it all up and check it. And, you know, there's no ticking and tying per se anymore.

So it makes me think about that now. But what it ended up being, right, of course, is Lotus and Excel ended up being fantastic tools that are still great today. But I think of AI as the same thing. It's an incredible tool.

It will eliminate a lot of the work we have to do now, just like a spreadsheet did. obviously far more powerful, to say the least. But it will eliminate some of the, you know, I'll use the word we all use, kind of that grunt work behind the scenes of trying to audit, you know, specific audit populations, samples, et cetera, even moving to 100% sampling most of the time. But it allows us to use our judgment in a way we never have before.

Being able to take the results of what we've learned and parlay it into useful information for management, audit committee, board of directors, that's where I see it changing us. I don't think it'll reduce our numbers. I think it'll just reposition the value that we can provide. And all of that on an upscale, the value will simply go up as we have better tools, particularly this one.

The only thing we need to do as a profession, of course, the big lift is to keep up with it and to make sure we're using it and learning along the way. For me, the best way to learn it is just to use it. I mean, I can read about it and see the theory and read about it and read about it. But until I'm in it, it's very difficult.

but our job is to keep them moving toward that but I don't think it'll replace us I really don't it will change what we do I think that's. Absolutely on target. And it's sort of the same thing I share when people ask me, do I think it somehow is going to undermine the profession? You know, Anthony, I know you get in front of classrooms a lot.

You were recently in Africa, and I saw on social media where you were talking to students there, and I know you do in the U.S. As well, and in front of young professionals in general. What is the most important skill or skills, if you want to elaborate, that you believe that young or incoming internal auditors need to master to ensure that they're relevant in the decade ahead?

Yeah, there's two. I'll lead with probably the most imperative, which is some level of technology fluency. I always liken it in many ways to like, you know, for folks that come from an accounting degree and you've been trained in that and you see a new accounting standard come out, you're never like, oh my gosh, I have no idea what to do with this. Even if it's in a topic you've never been really well versed in, but you have the background to take it and understand it and then hopefully utilize it if you're in that field.

Technology is somewhat the same in the sense that, you know, when you're not afraid of it, but apprehensive about it, don't want to use it, don't want to jump into it. There's a mindset that has to be created around wanting to use technology. So technology fluency and the ability and, you know, to uptake with it pretty quickly and to utilize it is big. But I would say what's becoming more and more important are those, I like to say human intelligence skills, because soft skills almost gives it a bad name because people get a little bit bored with that.

But human intelligence skills are really the ones where our skills are being tasked a little bit more. So the ability to communicate effectively, build teams effectively, to use judgment more effectively. All those are things that some people are born with, some people are not born with. They learn it along the way.

But more and more, the ability to be that person that can, in plain English, explain concepts that are complex and hard to follow or understand, that's going to be a key skill. And I'm seeing that more and more, certainly with AI. Audit committees don't want to hear the definitions of what some of these AI technologies are. They want to understand it and how it impacts the company.

And that ability is, you know, it's not in everybody. And it has to be learned pretty quickly for our profession if you're not already entering with it. So human intelligence probably, and then technology fluency for me, to me. Great advice.

Great advice. I'm very excited when I meet young professionals because they bring a level of energy that our profession needs, and I'm very optimistic about the future, and I know you are too. Well, Anthony, listen, it's been great to catch up. Thank you again for continuing to lead the IIA and the profession with such vision.

Excited about the prospects for the future. And by the way, I'm very excited to be a part of the conference this year in Singapore. And I look forward to seeing you and everybody else there. Likewise.

Long trip, but exciting. Yeah, absolutely. Thanks again, Anthony. Thanks for having me.

Thank you.