Q 692. Explain the concept of 'Audit by Design'. How does integrating its principles enhance business excellence efforts? Is it advisable to adapt to this approach in a rapidly changing regulatory environment?

 

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The Concept of 'Audit by Design'

'Audit by Design' is a proactive strategy integrating audit concepts and practices into business systems at the outset rather than treating them as a stand-alone, periodic activity. This entails that control measures, risk management, and compliance are essential to business operations.

 

Enhancing Business Excellence with 'Audit by Design'

Businesses can promote continual improvement, improve compliance and risk management, increase operational efficiency,  and build a culture of transparency and accountability, resulting in business excellence. Here’s how it works:

 

1. Continuous Monitoring and Improvement: When audit principles are integrated with business operations, real-time oversight is possible, enabling faster identification and resolution of issues. For example, an E-commerce, D2C or retail company integrates automated compliance checks and real-time data analytics into its inventory management system, immediately notifying management in case of inconsistencies or compliance issues, allowing for prompt corrective actions.
    
2. Risk Management: Businesses can effectively identify, evaluate, and manage risks by integrating audit procedures into routine activities. For example, a financial institution integrates risk assessment tools into its workflow, and each loan application is automatically evaluated against predefined risk criteria using real-time scoring and audit trails, lowering the chance of defaults and financial losses (NPAs).
    
3. Transparency and Accountability: By employing clear & specific documentation and frequent reviews, audit processes integrated into routine business operations guarantee that all stakeholders understand their roles and how the organisation performs compared to the established benchmarks.
    
4. Operational Efficiency: Business goals can be efficiently and effectively achieved when audit procedures are integrated with regular business activities. This enables minimal business disruption compared to the traditional approach to periodic audits. For example, A logistics company implements real-time tracking of shipments and automated compliance checks in its supply chain management system, reducing the need for periodic, manual audits. This ensures timely delivery of goods while maintaining high compliance standards.

 

The Audit by Design strategy ensures that all regulatory obligations are consistently fulfilled across the organisation, reducing the likelihood of non-compliance and associated penalties.

 

Adaptability in a Rapidly Changing Regulatory Environment

The ‘Audit by Design’ approach is highly recommended in a regulatory environment that is evolving quickly. Here’s how it works:

 

1. Agility and Responsiveness: Embedded audit principles allow quicker adaptation and modification of audit processes without overhauling the entire audit framework.
    
2. Reduced Compliance Costs: Continuous monitoring reduces the need for corrective actions and the associated costs often arising from non-compliance issues.
    
3. Enhanced Risk Mitigation: “Well begun is half done”—Aristotle's proverb demonstrates the validity of the ‘Audit by Design’ concept, which proactively identifies and notifies businesses of risks, enabling preparedness for regulatory changes and prompt actions during mitigation efforts.
    
4. Competitive Advantage: A corporation can gain a competitive edge by consistently complying with regulatory requirements and managing risks effectively, ensuring reliability and stability, which is desirable to investors, clients, and other stakeholders.
    

Conclusion

The principles of Audit by Design can be effectively integrated into business processes to improve business excellence by encouraging ongoing attempts at improvement, efficient risk management, and consistent regulatory compliance. This strategy is crucial for preserving competitive advantage in a fast-changing market, cutting costs related to compliance, and maintaining agility.

 

 

The term  'Audit by Design' is self-explanatory which means that design of the product or service should be done in such a way that provides the real time quantitative measure of process controlling parameters and efficiency measuring parameters as well.

 

How does integrating its principles enhance business excellence efforts?

 

Answer- If 'Audit by Design 'concept is added right from the product or service design it gives the real time analysis of what is happening in process, and triggers the continuous improvement team to work on the solution to enhance the 'Process Effectiveness'

 

 Is it advisable to adapt to this approach in a rapidly changing regulatory environment?

 

Answer- It should be advisable in the rapidly changing regulatory environments as well because if this would have been religiously followed  we can have increased 'Customer satisfaction' and enriched return of investments

An awesome question. Let us understand this by understanding the meaning of the phrase "Audit by design". 

 

In simple terms, it implies that you audit the performance of the product or service as a integral part of building that product or offering that service. Hence, rather than calling for an audit as an ad-hoc process; it is built into the DNA of the product or process build/ offering; thereby giving the individual, or the team, or the organization a continuous way to understand the improvement opportunities. 

 

Having understood this term let us try to understand how this is a game changer? 

When we continuously seek to improve the current condition, and move towards the target condition or redefine the newer challenging target conditions; that is what we call continuous improvement and achievements. 

 

" Without continuous improvement, words like achievement and success have no meaning.

                                   - Benjamin Franklin"

 

 

It is hence quite natural for this to link to the business excellence or control & verify phases of the Lean Six Sigma methodology. Having said this, there are many organizations that deliver software and fail to use Lean Six Sigma methodologies. It will hence be advisable to use this as an approach irrespective; and hence I highly recommend all organizations to deploy Lean Six Sigma approach or accept audit by design as a standalone way of developing/offering a product or a service to the customers or set of customers.

 

Now, let us see what happens in a regulated environment?

An environment with requirement to audit trail documents or series of actions taken as a part of the service or process as natural, and driven by an external regulatory body, is a regulated environment. Hence, it becomes natural for such organizations to be top of their game when it comes to document keeping and managing a central repository of data in multiple spheres of work. Therefore, having "Audit by design" mindset built into the culture of the firm will prove extremely beneficial.

 

 

 

Audit by design is a pre facto approach of audit considerations taken at the start of any process or system in order to ensure accuracy check at the very beginning to avoid bottleneck, error or escalations 
towards the end of the process.

Would like to share an example to explain how the disciplinary actions and its principles helps us maintain the compliance in the process and achieving seamless execution of the process -
An ABC co. have transitioned all its processes spread over in PAN India and it integrated its operational activities under one hub in XYZ location. Until the transition all the entities were following different set of norms set per their respective firm; however in order to bring uniformity of the execution of activity and define the roles to be performed by the employees(here ABC Co.) and operating co(here stakeholders)'Target Operating Model - TOM' was introduced by the Compliance team; they ensured the below:
1. Integration of audit controls applicable as per SOX compliance as per each accounting unit such as
 Order to cash, accounts payable etc.
2. Timing of the activity(when it needs to be executed) including the dates as per the accounting closure
3. Documentation of standard operating procedures along with the changes as and when required 
4. Due to timely tracking of the activities; this also ensured quality management so that irreversible errors are timely mitigated to the stakeholders

 

Hence by keeping this practice intact and continuously improving over it; it was observed the error in post facto audit findings were lowered considerably which also proves that in the changing environment where the audit recruitments keeps rapidly changing such approaches are important not only to avoid red flag in compliance rating but also maintain and increase goodwill and creditability of company.

Audit by design is proactive approach to embed auditing approach within organizational operational & strategic approach. Where audit is a post facto audit by design ensure prevention of potential risk or failure.

 

• Early identification of risk help organization better plan and less turn around
• It also helps in gain efficiency as it helps prevent defects or error at large number
• Compliance at design helps in embedding auditing approach, hence always complies with the regulatory requirement and less chance of violation, penalties, and reputational errors
• It also helps identify the areas of improvement and timely implantation of the solution to the same

 

It is advisable to adopt in the rapidly changing volatile world. Organization will be able make adjustment with any changes in controls as & when needed. It can ensure ongoing compliance. Early identification of risk help organization to timely react on any risk mitigation.

 

Embedding Audit at the design phase will help the organization remain complaint all the time and ensue long term success.

Audit By Design - It’s a practice or mechanisum deployed in or across organisational process/ es, which enables the system to give real time comparison of the various performing KPI's, thus , minimizing or negating the requirement of periodic reviews to ascertain the flaws or defects in a system. All the artefacts pertaining to each and every step in the process gets recorded and traces are left at the right junctions to be picked for auditing in real time.

In other words, Audit by Design phenomenon, helps processes to be self-sufficient 'structurally' , to give real time movement of various business KPI's, which enables the system to make relevant corrective measures, if required. 

 

Example - In a typical Call Centre/BPO set up, Audit By Design phenomenon is practiced religiously, wherein real time data is fetched and tracked around various KPI's like - Call Volume, Average Handling Time, Active & Inactive Operators, Minimum waiting time amongst calls etc. These KPI's are constantly monitored to make necessary and real time interventions, if the process goes beyond the Controllable Limits

 

Business Excellence and Audit By Design, in every means and ways, should go hand in hand. Business Excellence core aim is to drive improvements and enhancing customer satisfaction to create value. This aim gets strengthening by following phenomenon of Audit by design as each and every step is being tracked and relevant traces are left to picked up in real time.

 

With constant and frequent changes being made witnessed in the regulatory environments, what's essential is, to keep adapting new elements in the process design, while constantly relying on the basic principles of the phenomenon.

After reviewing all the answers, Akkul's answer has been selected as the best answer.

 

Guess all respondents have hinted towards it, I will put it forward in very simple terms -

1. Audit is a non value adding activity, however, Audit by Design ensures that we do not spend additional time on this NVA

2. Audit by Design shifts the focus to prevention rather than correction.