Internal auditors can add value to their clients by identifying waste and inefficiency. Practice Advisory 1220 states that acting with due professional care means identifying areas of waste and that internal auditors must be alert to the possibility of fraud, intentional wrongdoing, errors and omissions, inefficiency, waste, ineffectiveness, and conflicts of interest, as well as being alert to those conditions and activities where irregularities are most likely to occur. This also involves internal auditors identifying inadequate controls and recommending improvements to promote conformance with acceptable procedures and practices.

Effective organizations eliminate waste, and internal auditors who identify it will be adding value to their clients in clear and meaningful ways. The focus in organizations should be to spend more time and resources creating value for customers and eliminate, or at least reduce, everything else. A useful methodology is the Eight Areas of Waste, which identify common wasteful practices in organizations and processes.

1. Mistakes/Errors: This involves the time and materials spent doing something that has to be scrapped or fixed due to poor quality. Examples include:

    • Making parts that don’t meet customer requirements or safety regulations
    • Software bugs
    • Incorrect data entry
    • Items shipped to an incorrect address

2. Transportation: This relates to the movement of people, inventory, tools and other items more frequently or over longer distances than necessary. Examples include:

    • Moving parts, products or tools from one location to another
    • Returning overstock inventory to another warehouse
    • Transporting produce across long distances instead of sourcing what is available locally
    • Moving software from one server or database to another

3. Waiting: This source of waste involves customers, associates or parts sitting idle until they are needed or can be serviced. This occurs when the receiver is ready for the next step, but the process is not prepared. Examples include:

    • Customers waiting in person, on the phone, or online
    • System downtime, software ready for quality assurance (QA) review, or for migration from development to production
    • Manufacturing processes waiting for the delivery or arrival of raw materials, semi-finished goods or sub-assemblies
    • Customers forced to wait due to errors, equipment malfunction, or missing items

4. Motion: This involves the unnecessary movement of people or items within a work area. For example:

    • Workers searching for parts, materials, tools or equipment
    • Excessive repetitive motion due to poor workspace layout
    • Excessive data entry or clicks on a system to perform a small task
    • Poorly structured or disorganized workspaces
    • Requiring users to re-enter the same information on company forms

5. Overproduction: This occurs when more is produced than consumed. It also occurs when items are produced too early. This waste type often triggers other types of waste, such as transportation, excess inventory and motion. Examples include:

    • Producing items before the next stage in the process or before the customer is ready to receive and use them
    • Producing items without a committed and ready buyer or user
    • Printing, copying, and filing unnecessary documents
    • Producing reports that are not used
    • Holding more items in inventory in warehouses or consignment locations than will be needed and sold within a reasonable amount of time

6. Over Processing: This relates to doing work that does not add value to the customer and can be resolved through simplification. It is important to remember that sometimes the best course of action is stop doing something rather than trying to do them better. For example:

    • Multiple approvals for a small spending request
    • Requesting unnecessary tests in a healthcare environment
    • Entering the same data in multiple places in a paper or software form

7. Excess Inventory: This involves storing products or materials that are not needed within a reasonable amount of time. This condition is even more significant when the items involved are perishable. Purchasing and production should be just in time (JIT) not just in case (JIC), unless there are valid reasons to justify the practice. Examples of excess inventory include:

    • Producing more product than historical or forecasted demand indicates
    • Excessive promotional materials
    • Storing unused or rarely used machines or tools
    • Having multiple cabinets with duplicate office supplies

8. Underutilized Personnel: This involves the waste of human potential. For example:

    • Employees placed and kept in positions that under-utilize their potential
    • Limited or absent career planning, training and development
    • Ignoring improvement ideas
    • Employees performing tasks that do not add value

Internal auditors can make searching for waste a part of their routine audit activities. While some areas of waste may be obvious, others may be more subtle and harder to find. When waste is identified and corrected, internal auditors will help their organizations become more efficient, effective and economical. It will also get them closer to being recognized as problem-solvers and trusted advisors. Highlighting operating deficiencies and recommending improvements will make operating units function better, and that will transform the internal auditors’ image into an efficiency expert, whose insights are valuable for business success.

Interested in learning more about this and other tools and techniques? Join Dr. Murdock when he teaches Lean Six Sigma Skills for AuditorsInternal Audit School, and High-Impact Skills for Developing and Leading Your Audit Team.

 Loic Djim