Becoming a Business Partner

Toward a more dynamic internal audit department.
BY ANITA DENNIS

As reengineering, streamlining and downsizing rage across the corporate landscape, the job of the internal audit department frequently becomes harder. With fewer people in place inside and outside the department, ensuring the accuracy of financial information turns into an even greter challenge.

At Praxair Inc., a $4 billion industrial gases supplier, the internal audit group has found a way to alter its processes and practices to keep pace with changes in the business world. Director of Audits Robert Brewer has devised a new approach for his organization that gives it a more vital role in a rapidly expanding corporation.



DAILY CONTACT
Praxair supplies gases such as oxygen, nitrogen, helium and hydrogen-as well as carbon dioxide, in which it is the world leader. The gases are used by a variety of businesses, including the chemical, steel, electronic and food and beverage industries. For example, "when you open up a bag of potato chips," Brewer says, "it is the nitrogen inside that kept your potato chips from going rancid. When you drink a soda, it's probably our carbon dioxide in there. People have a lot of daily contact with our company even though we're not a household name.

"We are truly a global company," he says. "We get about 50% of our sales outside the United States." Brewer has a staff of 41 located in Danbury, Connecticut, Tonawonda, New York, and Rio de Janeiro, Brazil.

The company has experienced tremendous success since its spinoff from Union Carbide in 1992. When the spinoff occurred, Praxair's sales were about $2.5 billion. Today, they are roughly $4 billion. The company's international scope also widened when it spun off, expanding from 17 countries to 44. "Our challenge has been keeping up with growth. We have to make sure the controls are in place and that they ensure the integrity and the reliability of the financial statements and records in all different parts of the world."



A DIFFERENT CULTURE
Along with the spinoff came a new culture and the introduction of a reengineering process to better position the company. "And with that reengineering came staff reduction," Brewer says. "Everyone now is pressed to do more with less." As a result, the internal audit department as well had to undergo reengineering. "We have decreased the number of internal auditors," Brewer explains, "but we still have to cover a much larger area. And we still have to make sure the controls stay in place."

To meet these challenges, his department had to alter the way it does-and views-business. "We changed our philosophy," Brewer says. "We are a more proactive audit group. In the past, we were more reactive." That meant shifting the "ownership of controls"-or the rest of the company's perception about ultimate responsibility that controls are in place and functioning so that financial data are accurate. "Some people viewed internal audit as the owner of controls. However, we shifted ownership to the business people in the individual businesses." ( See box below. )



UNDERSTANDING THE USER
Part of the process has been to consider the ultimate user of the group's work. "We're very much customer (user) focused," Brewer says. The department counts hundreds of customers, ranging from executive management and the audit committee of the board of directors to staff members in various functions with whom the internal auditors work in different locations. (Brewer reports directly to the vice-president-controller and to the audit committee. He meets privately with the audit committee to ensure the department's objectivity and to keep committee members informed about any important issues.)

To promote understanding between company leaders and the internal audit group, the organization increased interaction with executive management. "We sit down about every four months with our chairman, president and chief financial officer to go over our results and what we intend to do over the next four months." The meeting affords the opportunity to update the executives on the department's accomplishments and problems and to learn about their expectations of the group. "Engaging management more in the process has been one very proactive measure. Implementation of such measures has created an atmosphere of change within our group."

Brewer also uses his meetings with the executive staff to try to understand his business better. "When I meet with executive management, I always ask about the primary business emphasis. We need to have audit programs that make sure the company achieves its goals."

The group also made good use of technology to automate the audit department. All staff members have laptops. In addition, Brewer found Lotus Notes to be an important efficiency tool. This program gives everyone in the company access to the internal control manual the audit department developed. The manual explains expectations for internal control standards by cycle and-as part of the effort to shift ownership of controls-details the risks an area takes if it doesn't have those controls in place. Brewer's staff also uses Lotus Notes when developing its electronic workpapers, audit programs and a database of every audit report the young company has issued.



FUTURE FINANCIAL LEADERS
The Praxair internal audit group is accustomed to change because Brewer operates a flow-through organization, which means that "everyone who comes into this department moves up and out," usually after two to three years. "We have no career auditors. Our people go to various components of the business and may become financial analysts or go into purchasing or human resources. We're constantly hiring." Brewer says the arrangement offers a lot of benefits. All of his staff positions have turned over at least once since the company's inception, "so we have former auditors throughout the corporation. That helps build our control network." They not only serve as missionaries for the company's internal control but they also are excellent goodwill ambassadors for the department. "They have experience and they've done a lot of travel and seen the Praxair world. As a result, the internal audit department is looked on to provide the future financial leaders of Praxair."

Brewer's supervisory scope is wider than that of other internal audit directors. For example, the company's internal watchdogs also fall under his supervision. They include the director of security-an ex-Federal Bureau of Investigation agent with a law degree-and a special investigation manager. The marriage of the two areas is a good one: To detect white-collar crime within the company, the investigators do the necessary interviewing and the internal auditors analyze the data. The security staff members also perform litigation support and background checks on prospective employees, as well as provide security for the board of directors and annual meetings.

BEST ADVICE

Brewer believes that making the shift in his department's philosophy is the best decision he has made. He strongly recommends the partnering approach to fellow internal auditors. "One of the keys to our success has been doing our part to help achieve the company's vision and our own. We want to be a part of the process and a part of the change." Brewer attempts to maintain his group's objectivity without functionally removing it from the organization. "You have to be an enabler of the change rather than fight it," he says.

Changing Practices

Praxair's internal audit department has had to evolve along with the company. Here's a rundown of former practices vs. new strategies for a more proactive audit group.

Department Management
The Old Way
The internal audit group was organized in a hierarchy, with managers, supervisors and seniors.

The New Way
Management is decentralized and responsibility increased using a high-performance team environment. All audit department staff members are now on one common employment level and all report directly to Brewer. Employees serve on teams to achieve different goals. For example, all audit assignments are performed by teams, and staff members take turns as leader. An administrative team might perform scheduling. A project-based team might prepare an internal audit department welcome kit to be used when the company acquires new companies or locations.

Controls
The Old Way
Internal auditors checked to see if the basic controls were operating.

The New Way
Auditors consider the overall company, how it has reengineered its processes and then take more of a process review. "We used to analyze the transactions; now we analyze the processes," Brewer says.

Enforcement
The Old Way
The internal auditor was perceived as a police officer who was responsible for controls.

The New Way
When working with another division, instead of presenting themselves as the enforcers of financial information rules, the auditors offer an independent evaluation and share best practices from other parts of the company for making internal controls work more efficiently and effectively.


Anita Dennis is a Journal contributing editor.

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