The Effects Of Digital Transformation On Internal Controls

Nilly Essaides

In the digital economy, change is rapid and often unexpected. Technological and business-model innovations are disrupting market dynamics, while economic and geopolitical uncertainty injects a whole new level of volatility into the business environment. As a result, internal control functions face two seemingly mutually exclusive challenges:

  1. They have to adjust to a riskier environment…
  2. … but not hinder their companies’ ability to keep up with the speed of change.

Companies that fail to address both challenges risk the erosion of their competitive advantage.

An intelligent internal controls process

The Hackett Group’s research indicates that finance executives are looking to smart automation to tighten controls while at the same time enhancing their agility. With tools like robotic process automation (RPA) and AI-enabled analytics, they are beginning to automate compliance monitoring and remediation activities. They are also using machine learning solutions to detect suspicious activities, identify emerging control points, and learn from experience on an ongoing basis.

Right now, the function’s automation levels are low. But respondents to The Hackett Group’s recent “Internal Controls in the Age of Disruption Study” (2019) expect a significant increase. For example, they project that the adoption of advanced analytics solutions will more than double over the next 12 to 24 months.

The anticipated rise in the deployment of smart automation tools is mirrored in the current and future impacts of digital transformation. Over the next couple of years, study respondents expect digital technologies to significantly raise companies’ real-time visibility into controls violations and dramatically enhance the reliability of detective activities. The highest impact will be a reduction in the number of required controls and shorter testing time (see image below). By eliminating a lot of manual work, internal controls teams can better target fieldwork and free up staff to focus on higher-value activities.

Building a business case

There is certitude that internal controls must up the automation quotient. However, in conversations with clients, we find that a huge obstacle is a lack of resources, both human and financial. This gap ranked at the top of the list of challenges facing internal controls functions today.

As a result, internal controls leaders are looking to build a strong business case to get management buy-in. Our analysis can help. When we correlated the efficiency of the process with the degree of the function’s automation (based on 40 automation measures), the results were extraordinary. We found that by moving from a state of low technology enablement to high technology enablement, internal controls can slash process costs by 69% and headcount (FTE per US$1 billion in revenue) by 62%. Organizations that are more highly automated can also reduce their external audit fees by nearly 80%.

Clearly, there’s a measurable return on the investment in internal controls automation. The opportunity for improvement is vast. It’s up to internal controls executives to grab it.

For more on the benefits of finance automation, see “Sizing The Prize: The Digital Finance Advantage.”

The Hackett Group is an SAP platinum partner.

Nilly Essaides

About Nilly Essaides

Nilly Essaides is senior research director, Finance & EPM Advisory Practice at The Hackett Group. Nilly is a thought leader and frequent speaker and meeting facilitator at industry events, the author of multiple in-depth guides on financial planning & analysis topics, as well as monthly articles and numerous blogs. She was formerly director and practice lead of Financial Planning & Analysis at the Association for Financial Professionals, and managing director at the NeuGroup, where she co-led the company’s successful peer group business. Nilly also co-authored a book about knowledge management and how to transfer best practices with the American Productivity and Quality Center (APQC).