Internal Audit - 2019 Market Report
Various economic, political and regulatory headwinds continue to buffet the internal audit recruitment market. Here, we examine the factors that had the biggest impact on hiring last year, as well as predict key trends for 2019.
Economic and regulatory drivers
Economic and regulatory drivers Is UK economy recovering from shaky 2017?
Uncertainty was perhaps the main theme running through our last market reports. In 2017 and 2018, businesses faced massive upheavals as they prepared for GDPR, MiFID II, PSD II and other key regulatory changes. The economy also grew at its weakest rate in five years during the first six months of 2017.1 By the end of that year, the country’s long-running streak of falling unemployment had faltered, real wage growth had stagnated and lingering doubts remained over Brexit.2 Uncertainty is still a problem over one year on, particularly regarding Brexit, but there are signs 2018 was a time of transition and organisations can expect the next 12 months to provide answers to some elusive regulatory questions.
Pay growth revival
Unemployment stood at just 4% in the three months to August 2018, which was the lowest rate in 40 years.3 This figure had crept up to 4.1% by the September quarter4, but still remained significantly below the 8.1% peak seen in 2011.5 A subsequent skills shortage helped pay growth hit 3.2% at the time of writing. This was the biggest increase since the country plunged into recession in 2008.6 Real wage growth, which takes inflation into account, also steadily increased. Between April and June last year, regular pay edged forward just 0.34% in real terms.7 However, this had climbed to 0.9% for the three months leading to September, as inflation stabilised at 2.4% for October.8 Sluggish productivity remains a problem for businesses, but the results nevertheless suggest salary growth showed a strong upward trajectory throughout 2018.
GDPR and MiFID II
Significant resources went into preparing for these two comprehensive pieces of legislation. They were by no means the only regulatory changes that occurred in 2018, yet the sizeable fines attached to non-compliance guaranteed they were the primary focus for most governance teams. Compliance departments may have breathed a sigh of relief when the implementation deadlines passed, but the job is just beginning for many internal auditors. A TrustArc survey showed 26% of organisations didn’t expect to be compliant with GDPR by the end of 2018, while 7% won’t even be ready when this year comes to a close.9 Meanwhile, media reports suggest the FCA is becoming impatient with companies that remain non-compliant with MiFID II.10 Internal audit now has the task of providing assurance to businesses that their risk and compliance efforts for GDPR and MiFID II are fit for purpose.
Conduct and culture
Workplace culture has been under the spotlight in banking and other financial services firms since the global financial crisis. However, high-profile collapses at firms such as BHS and Carillion, as well workplace sexual misconduct scandals worldwide, have placed greater emphasis on eradicating toxic environments across all sectors. A growing proportion of internal auditors must now evaluate the conduct and culture within their organisation. Indeed, 42% of respondents to a Chartered Institute of Internal Auditors survey cited ‘HR and people’ as a top-five risk they face, while 6% said culture was the most important issue they must address.11 We expect audit plans to increasingly focus on conduct and culture in 2019.
Brexit burden weighing on auditors
Predicting the future is always difficult, but even the best analysts have found it impossible to forecast what will happen next with Brexit negotiations. The tension surrounding the UK’s exit from the EU was palpable in our previous market reports and not much has improved since then. Given the constantly evolving Brexit situation, we won’t delve too deeply into the current status of negotiations. However, the lingering impact on internal audit is undeniable.
Fewer people willing to move
The proportion of internal auditors who are willing to move from the UK to the EU if Brexit significantly hampers their career dropped from 53% in 2017 to 46% last year. This is despite 43% acknowledging that Brexit made their job feel less secure.
Germany? No thanks, say (most) auditors
Nearly one-quarter (24%) of clients have opened or are planning on opening new offices in other locations due to Brexit. Of these, 43% chose Frankfurt, but this appears to have put them at odds with the majority of candidates.
Frankfurt was the second least-favoured destination among internal auditors, with 61% not willing to consider the German city. Only Madrid was less popular. Dublin and Amsterdam were more attractive options, which is hardly surprising given Ireland is an Englishspeaking country and the Netherlands is second only to Sweden globally for English language skills.
Disruptive forces affecting internal audit
DA and AI deliver significant benefits
Both employers and candidates exhibited widespread support for DA and AI. Nearly 9 in 10 (88%) organisations that use data-driven audits said they led to improved findings and 81% of candidates claimed these technologies make auditing more efficient.
The survey results also revealed tangible benefits for businesses leveraging DA and AI; 57% enjoyed increased output, while a further 14% reported both better output and cost savings. Our research supports other findings that show DA-driven audit departments outperform less tech-savvy rivals. PwC found that three-quarters of ‘Evolvers’ (audit departments with advanced technology adoption) contributed significant value to their organisation, compared with just 34% of teams with little or no technology use.
Nevertheless, we discovered adoption rates and maturity levels vary significantly between internal audit departments. Some 41% of businesses weren’t currently using DA or AI, although 26% had them under consideration. Departments are largely in favour of introducing more technology but are potentially facing other adoption challenges.
For example, financial services is at the forefront of innovation in these areas, yet uptake is lagging for some firms even here. DA and AI require significant investment and lead-in times to produce tangible benefits, and some clients are already reporting systems issues. Integrating data feeds across multiple legacy systems is a considerable task, often leading to delays in performing audits.
We must wait and see whether or not increased use of DA and AI has an impact on demand for candidates. Increased technology adoption could lead to a slight drop in headcounts over the mid-to-long term, although we may just as easily see more coverage from the same number of auditors.
Ultimately, DA and AI tools are not yet sufficiently advanced to materially impact internal audit recruitment. Professionals remain largely optimistic, however, with 42% believing these technologies will make their jobs more secure. Just 14% fear less job security.
Agile auditing meets mixed reception
Expectations on internal auditors are rising. Just 44% of organisations felt the function provided significant value in 2017, compared with 54% the previous year.14 Agile auditing has therefore become increasingly popular among departments looking to improve efficiency, deliver more valuable insights and reduce documentation, among other benefits.
For the first time, we asked employers whether or not they used Agile methodologies and nearly half (47%) confirmed they already do or intend to in the future. Adoption was far higher in banking and asset management than across insurance, commerce and the public sector. Banks have always been at the forefront of audit development, as they typically have more resources dedicated to this purpose. Large professional practice departments that examine training, development and methodology are common among the top banks.
Audit innovation tends to flow from banking into asset and wealth management due to high levels of interchange between the sectors. Banking auditors are often attracted to asset and wealth management because of this crossover, as well as the chance to add value and enjoy what is often perceived as a more flexible working culture.
Diversity and inclusion
Diversity is a hot topic, and rightly so, with businesses worldwide keen to be more inclusive during their recruitment processes. Countless studies have emphasised the benefits of diverse workforces, which include:
- Enhanced profitability;15
- Improved decision-making;16
- Better innovation17; and
- Improved customer experiences.18
Financial services still has room for improvement when it comes to diversity; for example, the average gap between men and women is 22% for basic salaries and 46% for bonuses.19 This can be compared to the UK average, where men’s full-time salaries are, on average, 8.6% higher than women’s.20 The world is split equally between the sexes, yet 85% of financial services executives are men.21 As a result, gender has been the primary focus for diversity in recent years, with initiatives such as the Women in Finance Charter gaining significant support from the industry’s biggest names.
Our research shows the gender balance across internal audit was 73:24 in favour of men last year (3% chose not to disclose). This was roughly the same outcome as 2017, suggesting little progress has been made across the function in recent years to level the playing field. A similar pattern was seen outside financial services; the split between male and female auditors was 70:30 in the public sector and 76:24 for commerce and industry.
Did employers focus less on diversity?
Our results showed a decrease in diversity-led recruitment among internal audit departments. In 2017, one-fifth of employers had diversity and inclusion targets guiding their recruitment decisions. Last year, the figure dropped to 14%, indicating fewer organisations took these factors into account.
The unfortunate truth of the internal audit recruitment market is that securing top talent is hard enough. LinkedIn research revealed finding enough applicants to interview is the main hurdle for diversity-focused employers.22 Our results seemed to echo these frustrations, with 42% of hiring managers reporting that recruitment efforts prioritising diversity were unsuccessful.
Recruitment, salary and compensation trends
We’ve discussed the major factors influencing the market, but what impact are they having? This section examines key client and candidate insights from our surveys.
How active is the internal audit recruitment market?
Just under one-quarter (24%) of candidates changed jobs last year, which was broadly the same as the 25% who moved in 2017.
Switching organisations didn’t bring as many remuneration benefits as in previous years. The average salary boost dropped from 17% to 13% between 2017 and 2018.
However, the market was busier than the survey results would suggest, according to our internal figures.
- A 10% jump in permanent vacancies;
- A 7% rise in placements; and
- An increase in the average salary and seniority of roles.
What factors are affecting the market?
Recruitment continued to be regulatory driven in banking last year, with functions looking to fill skills gaps and tackle emerging risks as part of their audit plans. For IT auditors, information and cyber security were the hot topics and this is seen as the number one technology risk by many companies.
There was a significant reduction in year-on-year candidate registrations in 2018, exacerbating the skills shortage that already existed in the market. This can largely be traced back to EU citizens being hesitant to move jobs. Many candidates refuse to relocate to the UK and some are beginning to move back to mainland Europe.
The market, however, was not as depressed as many had predicted and the UK economy performed reasonably well overall. Fewer candidates found it difficult to secure a new role in 2018, with 59% confirming it was easier than expected, which was up from 53% the previous year.
More generally, employers now recognise the importance of fast and efficient hiring processes as competition for top talent heats up. Candidates are also making greater use of technology, such as smartphones and tablets, to facilitate their job search while on the move. LinkedIn was overwhelmingly the most popular place to look for vacancies among the various job boards.
What drivers are affecting candidate choices?
Career development crucial, but salaries are an issue
Traditionally, career development has been the main driver that encourages candidates to search for new jobs and 2018 was no exception. Last year, 50% of employees who changed organisations cited career development as the primary motive, rising from 46% in 2017. Salary is also becoming more important, with 18% of candidates moving due to dissatisfaction with pay in 2018, compared to 15% the previous year.
Auditors are expecting higher salaries due to general inflation rises and significant remuneration uplifts for the best candidates. These increases are either secured through moving roles or because existing employers want to reduce employees’ motivations to explore the external market. Newly qualified applicants seeking financial services positions in London have secured offers of up to £65,000 per annum, while experienced Big 4 talent earning mid-£50s have moved for more than £80,000.
These uplifts are due to simple supply and demand; very few candidates demonstrate both good technical and interpersonal skills. Employers realise they have to offer large salary increases to stay competitive. Overall, the proportion of internal auditors who felt they were adequately compensated for the work they do rose from 51% in 2017 to 54% last year. This indicates those who moved may have had an inflationary effect on salaries within the profession as a whole, increasing overall satisfaction.
Desire for job security and flexibility drops
Nearly 4 in 10 (38.5%) internal auditors who moved jobs in 2017 did so due to wanting better job security or a healthier work-life balance. This figure dropped to less than one-third (32%) last year.
Ultimately, the recruitment market still has a fair amount of confidence. People generally perceived their jobs to be safe throughout 2018, so job security decreased as a motivator (from 15% to 12%). For non-movers, job security is even less of a concern. Just 5% of auditors who remained with their current employer last year said this would be the main reason for them to begin looking for another job.
Employers battle over skills
Certain sectors are beginning to see salary demands increase, as the remuneration packages available in financial services exert pressure elsewhere in the internal audit market. Many candidates across the public sector, commerce and not-for-profits feel undervalued, particularly when financial services firms are now more willing to look beyond sector experience in order to secure highly sought-after stakeholder skills.
Public sector and mid-tier consultancies struggle to pay market rates, but some commercial FTSE businesses and the Big 4 are trying to stretch their bandings to compete with financial services.
Technology audit candidates are also expecting high salary uplifts to move, which is causing some stagnation in the market. With the prospect of a hard Brexit still on the cards at the time of writing, candidates want to ensure the risk of moving to a new company is offset by financial rewards, especially with the possibility of ‘last in, first out’ policies.
What recruitment challenges did employers face?
More than three-quarters (76%) of departments recruited or attempted to recruit internal auditors externally in 2018. However, 58% said hiring was more difficult than they expected.
Here are some of the reasons why:
The war for talent is fairly fierce across most sectors, and sourcing candidates with the right technical skills was the biggest challenge for 44% of clients last year. This figure increased from 39% in 2017, highlighting how prevalent technical skills shortages are becoming.
Nearly one-third (32%) of employers said finding candidates with the right interpersonal skills was their main recruitment dilemma, which is up from 29%. Employers increasingly require someone who can communicate well with the business and take a pragmatic, rather than prescriptive, interpretation of regulations. The ability to convey complex information in a non-technical, friendly way is also key.
Interestingly, finding auditors in the right location has become less of a hurdle, despite candidate availability being on the decline overall. Just 7% of employers highlighted geographic obstacles as problematic last year, compared with 14% in 2017. Many businesses have mitigated location issues through remote working and promoting flexible working, so the ordeal of peak travel can be avoided.
A lack of cyber security talent
Skills shortages are a problem across the board, but talented auditors with cyber security experience are in such demand they deserve special mention. Deloitte has ranked cyber security as the number one hot topic among IT auditors since 2015.23
The introduction of GDPR last year is only likely to see demand rise further in the future, especially if large fines are handed down for high-profile breaches in 2019. GDPR non-compliance comes with a maximum penalty of €20 million or 4% of revenue, whichever is higher.
Brexit exodus of auditors begins
Heading into 2018, MiFID II, GDPR and PSD II were generally considered the biggest drivers of the internal audit recruitment market. By the end of the year, Brexit had become the front-running market concern.
Our results show the number of non-British employees in audit departments has already dropped from 37.5% in 2017 to 27% last year. Fewer Europeans are applying for new roles, which is having a significant impact on recruitment, as they formed a sizeable proportion of the candidate pool before Brexit.
Attractive remuneration packages were a key incentive for European professionals to move to London, but the pound’s value has dropped since the EU Referendum. The financial allure of the City has therefore plummeted for many Europeans, particularly as uncertainty continues to plague the nation.
Interim staff help plug gaps in expertise
Audit contractors enjoyed a busy year in 2018. Many organisations turned to interim staff to help with MiFID II, GDPR and PSD II, resulting in more contractors in work last year compared with 2017 (83% versus 77%).
New regulations absorbed contractor resource both directly and indirectly, as some permanent in-house auditors were pulled across to work on projects while interim staff temporarily backfilled their roles. A number of permanent employees have also opted to move into contracting, citing flexibility in working patterns and better pay as the key attractions.
Ongoing issues surrounding Brexit continue to create demand for contractors, with many firms using interim resource to fill gaps where clients are having difficulty finding permanent employees.
Another key factor in the contractor market was the introduction of off-payroll regulations (IR35) within the public sector in April 2018. They aim to combat suspected tax avoidance by those operating as consultants via their own limited company, pushing many of the better consultants from the public to the private sector.
A combination of IR35 and more permanent candidates moving into contracting has increased competition for contracts. These findings are backed up by our survey, where 67% of respondents said securing a new contract was more difficult than they expected, rising from 60% last year. This also helps to explain why the proportion of contractors who landed new contracts within three months dropped from 88% in 2017 to 79% last year.
Contractor rates rose slightly in 2018 but slowed in comparison to the previous year. This is likely partially driven by regulatory deadlines in early 2018 having an effect on rates towards the end of 2017. However, candidates will be encouraged to hear that fewer contractors have seen their rates decrease.
Looking ahead to 2019
More internal audit departments felt adequately resourced last year than in 2017. However, 48% still believe they’re not sufficiently prepared for the workloads they face and nearly 30% aren’t happy with their recruitment model. What does this mean for 2019?
Hiring will remain healthy
Seven out of 10 employers expect to hire in 2019, which exactly matches hiring intentions from last year. The results emphasise the buoyancy of the market, and we feel confident the next 12 months will be busy. It’s also worth noting that more businesses ended up hiring in 2018 than originally had intended (76% versus 70%), so candidates may be hoping this trend repeats itself.
Overall, auditors found looking for roles easier in 2018 because there were more vacancies. This created recruitment challenges for employers, many of whom raised bonuses as a way of attracting and retaining the best talent.
More hours on audit plans
Nearly 40% of organisations are increasing the number of hours on audit plans next year, while just 7% are setting aside less time. The simple answer for this trend is businesses are placing more reliance on their audit departments to provide assurance and consultancy advice. Many firms will want to see how well they complied with GDPR, MiFID II and other regulations.
We also believe plans will contain more hours because businesses are increasingly moving towards datadriven auditing capabilities. Collecting the appropriate information and ensuring the data is in the right format remains a challenge for departments, particularly those that have only recently adopted DA processes. Investment of time now is likely to pay greater dividends in efficiency gains for the future.
Audit environments continue to evolve
Internal audit is changing, and candidates must also adapt to remain competitive for the best roles. Vacancies increased in 2018 and we expect similar patterns to emerge this year, but employers’ expectations are higher than ever before.
Non-dynamic, non-personable and largely compliancefocused auditors will find securing a better role challenging, despite numerous opportunities within the market. Professionals may therefore wish to proactively upskill to make themselves more marketable. Industry qualifications, such as the CFA programme for auditors working in asset management, could help candidates edge ahead of rivals.
Every industry had unique challenges and opportunities for internal audit professionals in 2018. This analysis drills down into the data to draw out key insights for each sector.
The internal audit recruitment market remained resilient throughout 2018, despite Brexit headwinds. Regulatory changes, technology innovation and certain skills shortages have helped drive recruitment activity, with many candidates expecting at least a 10-20% salary increase to move. We have seen more activity at the Audit Manager and Senior Audit Manager (VP) level than for Heads of Audit, and the key drivers of growth have been the need to upskill departments and acquire regulatory expertise.
Banks are also willing to go above budget for junior candidates at the AVP level who have prior investment banking experience, as these auditors typically have more offers on the table. Specialist skills, such as market and model risk auditing, are highly prized at the senior end of VP and SVP roles. Organisations have also sought methodology and QA auditors to assist with mergers, transformation projects and efficiency programmes.
More broadly, nearly all our banking clients highlighted diversity and inclusion as an important objective last year. We expect this to be a key focus again in 2019, with our survey results showing 85% of internal auditors in banking are male.
Asset and Wealth Management
The buy-side was active in 2018. Going into 2019 some major asset managers have announced headcount reductions across their businesses. We are potentially entering choppy waters but at the time of printing there are no immediate signs that internal audit will be materially affected. Heads of Audit seem confident there will be replacement recruitment and in some cases they will add headcount. We have for example seen an increase in demand for front-office focused asset management and generalist wealth management auditors.
In London, we saw some mainly US private equity firms and hedge funds reach critical mass and set up a local audit capability, often hiring a standalone Regional Head of Audit or Audit Manager.
Restructuring and consolidation within the asset management sector has created movement and change, but this was only modestly higher than in previous years. That said, over one-third of internal auditors said they changed employers, compared with 24% of candidates across all sectors.
Established insurance giants have traditionally been slow to embrace change, but the industry is currently undergoing a period of major disruption. Amazon, Airbnb and other tech businesses have set the standard for seamless customer interactions and experiences.
As a result, consumers are beginning to expect the same level of service from all providers, including insurers. The digital purchase process is now becoming easier through chatbots and other forms of automation. There is also a general movement of data to the cloud, with InsureTech optimising back-end processes, such as claims and policy administration. Furthermore, DA and IA allow personalised products and offerings to be customised and offered online.
Change inevitably creates risk and control issues, which feed through into increased audit requirements. We expect to see more in-house audit functions form at insurers as they reach critical mass due to technology developments. Technology auditors, particularly those with cyber skills, will be a natural fit for many roles within these departments.
Restrictive budgets across the sector have led to limited external recruitment, with many companies preferring to replace leavers at entry level and offer internal secondments to staff from other functions. The finance department is the most common source of secondees, and many organisations are seeking internal SMEs alongside a heavier reliance on co-sourced agreements.
Organisational restructures and new initiatives like the Government Internal Audit Agency have spurred some internal movement across the sector. An increased number of shared services are being created to utilise a more affordable skills network. Nevertheless, salaries and budgets continue to be the main challenges to attracting candidates at all grades, with 43% of public sector organisations citing this as their greatest recruitment hurdle.
The sector is still perceived to be the safe haven that offers a better work-life balance in comparison to the private sector, but good internal auditors are now being headhunted and enticed away. Many organisations are willing to look past industry-specific business experience, resulting in a continual struggle to retain skills in the sector.
Both Big 4 and the wider Top 10 firms recruited in 2018, with a preference for sub-managerial level roles. The Big 4 have reacted to candidate shortages by offering better financial packages to compete with commercial businesses. Mid-tier firms are still behind the curve regarding salaries; however, they are leading the way with softer benefits, such as promoting a healthier work-life balance.
Newly qualified candidates still seek their first move into the industry relatively swiftly after completing their studies. Consultancies are placing a number of opportunities in front of these junior auditors, with many searching for strong interpersonal skills over sector knowledge at this grade. At a senior level, we’ve seen candidates within the industry, who are at the level of Senior Manager and Head of Audit, increasingly consider a return or first move into the practice environment. Many believe this is an opportunity to gain exposure to different sectors on either a permanent or interim basis, while others see this as a shorter-term route back to another senior-level position.
The internal audit market continued to evolve in 2018. Departments faced significant headwinds, including regulatory changes, uncertain political and economic forces, growing stakeholder expectations and disruptive technologies.
Yet the recruitment market remained surprisingly buoyant, with permanent vacancies, placements and the seniority of roles all rising. Demand continues to be strong for high-calibre candidates with the right mix of skills and experience, to excel in today’s increasingly technology-focused audit world.
Heading deeper into 2019, skills shortages show no signs of abating. As salary dissatisfaction grows, the war for talent looks set to continue, particularly for talented IT auditors with cyber security expertise.
The internal audit landscape is becoming harder to navigate for both candidates and clients. This is where the right partner who understands the market can help guide the way.