ENLARGING INTERNAL AUDIT RESULTS WITH ACTION RESEARCH METHODOLOGY

Abstract

A case study approach is used to illustrate how Action Research methodology can be used by Internal Audit to enlarge the locus of benefits derived from the audit process. Management of a newly privatized Australian railway were affronted by a material spike in the annual cost of compulsory casualty insurance which threatened business plan achievement. Initially rebuffed in their attempts to have the premium reduced, management turned to Internal Audit to analyse why the cost had increased far above inflation and whether there were any avenues for negotiation. Due to the exploratory and multi-disciplined nature of the task Internal Audit used Action Research methodology to coordinate a learning group consisting of Internal Audit and an outside actuary to understand the insurance problem and solve it to the company’s benefit over a three month period. The audit exceeded management’s expectations by achieving a US$1.8 million net present value insurance premium reduction. Furthermore, Action Research allowed Internal Audit to gain novel insights into the escalating insurance premium’s underlying causal factors across engineering, safety and public relations which led to a wide locus of unexpected innovations by operational management at the audit’s conclusion. As the Action Research approach was readily generalisable, management agreed to further trials engaging subject matter experts when necessary to boost the effectiveness of future audits.

Disclosure statement

This write up of this research paper was funded by internal audit consulting firm Kelly & Yang.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1. Net present value of immediate plus future savings discounted at the railway’s 7% bank overdraft cost, as the reduction in bank overdraft was the primary financial benefit of the audit outputs.

Additional information

Notes on contributors

Chris Kelly

Chris Kelly, After 11 years as a tax consultant and auditor with Ernst & Young in the UK and Middle East, Chris joined industry as chief audit executive for several British and Australian companies. While in industry, he developed new audit and risk management methods resulting in fraud discoveries, process efficiencies and improvements to risk management often with material dollar savings for clients. This career-long build-up of experience and intellectual property allowed him to start Kelly & Yang which today serves corporate and government clients.