Embed Size (px)
Citation preview
1
Mark van der Velde
(UvA student number: 11158328)
Auditing transformational change – the role of Internal Audit in organizational separation projects
2
Table of Contents
EXECUTIVE SUMMARY ........................................................................................................................ 3
CHAPTER 1: INTRODUCTION .............................................................................................................. 4
1.1. REASON FOR THIS RESEARCH TOPIC ........................................................................................... 4 1.2. RESEARCH QUESTIONS .............................................................................................................. 5 1.3. METHODOLOGICAL APPROACH OF THIS THESIS ............................................................................ 6
CHAPTER 2: LITERATURE STUDY AND SETTING THESIS BOUNDARIES .................................... 8
2.1 DEFINITION OF ORGANIZATIONAL TRANSFORMATION .................................................................... 8 2.2. DEFINITION OF TRANSFORMATION PROJECTS ............................................................................ 11 2.3. DEFINITION OF THE VARIOUS STAGES IN A TRANSFORMATION PROJECT ....................................... 12 2.4. ROLES OF INTERNAL AUDIT ...................................................................................................... 13 2.5. SUMMARY OF THE THEORETICAL FRAMEWORK (INC. ANSWER RESEARCH-SUB QUESTION 1) ......... 19
CHAPTER 3: CASE STUDIES ............................................................................................................. 21
3.1. AKZONOBEL ............................................................................................................................ 22 3.1.1. An introduction .............................................................................................................. 22 3.1.2. Transformation checklist applied to AkzoNobel ............................................................ 23 3.1.3. Apply the theoretical ‘blueprint’ to the case of AkzoNobel ............................................ 24 3.1.4. Analysis case study AkzoNobel .................................................................................... 29
3.2. PHILIPS LIGHTING .................................................................................................................... 31 3.2.1. An introduction .............................................................................................................. 31 3.2.2. Transformation checklist applied to Philips Lighting ..................................................... 31 3.2.3. Apply the theoretical ‘blueprint’ to the case of Philips Lighting ..................................... 33 3.2.4. Analysis case study Philips ........................................................................................... 36
3.3. CONCLUSIONS AND ANSWER TO RESEARCH SUB-QUESTION 2 ..................................................... 37
CHAPTER 4: ANALYSIS ..................................................................................................................... 38
4.1 UPDATES TO THE CONTENT OF THE ‘BLUEPRINT’ MATRIX BASED ON EMPIRICAL EVIDENCE ............ 38 4.2. UPDATES ON THE PHASES OF THE ‘BLUEPRINT’ MATRIX BASED ON FEEDBACK .............................. 41
CHAPTER 5: SUMMARY AND ANSWERING THE CENTRAL RESEARCH QUESTION ................. 44
5.1. SUMMARY ............................................................................................................................... 44 5.2. ANSWERING THE CENTRAL RESEARCH QUESTION ...................................................................... 45
5.2.1. Summarized answer to the central research question .................................................. 45 5.2.2. Detailed activities identified per role.............................................................................. 46
5.3. LIMITATIONS IN SCOPE OF THIS THESIS AND SUGGESTIONS FOR FURTHER RESEARCH .................. 49 5.4. EPILOGUE ............................................................................................................................... 50
LITERATURE ....................................................................................................................................... 51
ANNEX 1: LIST OF INTERVIEWED PERSONS AND INTERVIEW SUMMARIES ............................. 54
ANNEX 2: CHECKLIST TO DETERMINE TRANSFORMATIONAL CHANGE .................................. 64
ANNEX 3: BACKGROUND INFORMATION ON PORTFOLIO MANAGEMENT ............................... 65
ANNEX 4: THE PRINCE2 PROJECT MANAGEMENT MODEL ......................................................... 67
3
Executive summary
In April 2017 AkzoNobel announced the separation of the company following a failed take-
over bid. The ensuing separation project had a profound impact on the company and gained
Dutch and international media attention. The separation also impacted the Internal Audit
Function, the function itself was split-up and it impacted the audit work throughout the
separation project. The separation of AkzoNobel and other recent separations led to the
central research question: “What roles can Internal Audit assume in the different stages of a
transformation project in order to support the business?” A ready answer to this question
could not be found in current research and formed a trigger for this thesis.
Literature distinguished two main factors between transformational change and ‘regular’
change. First, the future state of a company is unknown at the beginning of a change
(project), which poses challenges in the way such a project is managed. Second, the change
includes all levels of a company and as such will have an impact on the people and culture.
Furthermore, literature on project management was consulted to establish a theoretical
‘blueprint’ matrix containing activities internal auditors can employ during a transformational
change project, such as a companywide separation project. On the one axis of the model
there are the various stages in a transformational change project. On the other axis the
various roles internal auditors can have during a transformational change project. The
theoretical framework furthermore includes a ‘checklist’ to verify whether the change projects
at the two selected companies for the case studies are indeed of a transformational nature.
This ‘checklist’ and the ‘blueprint matrix’ have been assessed in two case studies:
AkzoNobel (separation of the Chemicals division in 2017-18) and Philips (separation of the
Lighting division in 2015-16). The outcome is a theoretically developed and empirically
tested ‘blueprint’ matrix’ covering the roles Internal Audit can have in the different stages of a
transformation project.
Theory and empirical research suggest that the assurance role is the most common role,
with assurance activities taking place throughout the lifecycle of a project. Both companies
performed their assurance role in different stages of their respective separation projects.
Both companies also performed non-project related assurance work on ‘business as usual’
audit objects. The second most common role is the participating role, where both companies
managed a sub-project separating their own departments. As part of the consulting role, one
of the companies facilitated a risk workshop for the project management of the separation
project, whereas in the category other role the other company managed the relationship with
the external auditor as well as setting up a joint internal-external audit work plan.
4
Chapter 1: Introduction
1.1. Reason for this research topic
Whilst writing this thesis AkzoNobel was going through a number of large changes. As a
result of a surprise take-over bid by a competitor in March 2017 AkzoNobel announced the
split-off, either via a sale to a third party, a demerger or via an Initial Public Offering (IPO), of
one third of the company. Following this announcement a large scale separation project was
initiated to untangle the two businesses (Paints and Coatings – to continue under the
AkzoNobel name and brand and the Specialty Chemicals business under a yet to be
determined name) and to prepare the latter for sale, demerger or an IPO. Throughout the
period April 2017 – March 2018 no definitive option (sale, demerger or IPO) was known,
however the transformation project was set up to cater for an independent organization. In
addition to AkzoNobel, there have been a limited number of large scale separations (be it via
sale, demerger or IPO) of Dutch listed companies in recent years. The most prominent
example is the IPO of Philips Lighting in 2016.
The separation of AkzoNobel and other recent separations begs the question what role
Internal Audit could or should play in projects which bring about transformational change in a
company, such as the sale of a large part of the company or a demerger or IPO? A ready
answer to this question could not be found in theory or literature, while a ‘blueprint’ approach
for auditing transformation projects would have had an added value to the Internal Audit
department of AkzoNobel during the separation project. It is furthermore assumed that more
companies will execute large and complex projects of a transformational nature in the (near)
future, and that Internal Audit Functions are trying to find a way to maximize the value they
offer their companies in such a journey.
The AkzoNobel Internal Audit Function (IAF) aspires to add value to the company in multiple
ways. Such as so-called business partnering where consulting input is provided, for instance
in transformation projects or perhaps even take part in parts of the projects. This aspiration
is in line with the IIA definition of internal auditing (IIA, 2004):
“Internal auditing is an independent, objective assurance and consulting activity designed
to add value and improve an organization’s operations. It helps an organization accomplish
its objectives by bringing a systematic, disciplined approach to evaluate and improve the
effectiveness of risk management, control, and governance processes”.
As mentioned before reviewing Internal Audit literature did not provide a definitive answer,
for instance is there a ‘blueprint’ audit approach how an IAF can best support its company in
5
transformation projects? More specifically a ‘blueprint’ audit approach for separation projects
which affect the whole organization.
Such a ‘blueprint’ could contain a matrix with on the one axis the various stages in a
transformation project and on the other axis the roles Internal Audit can play in these stages.
Roles could include assurance role (on the transformation project, but also on ‘business as
usual’) or a consulting role (based on the abovementioned IIA definition). Other roles that
come to mind are a participative role (as part of the project team) or no role at all (due to
reasons of independence and/or objectivity or perhaps a lack of skills and experience).
1.2. Research questions
Objective: this thesis investigates the various roles an IAF can assume in transformation
projects with a specific focus on organizational separation. The aim is to create a ‘blueprint’
audit approach (for instance in the form of a ‘matrix’). This ‘blueprint’ is a combination of
theoretical and empirical input.
Central research question
What roles can Internal Audit assume in the different stages of a transformation project in
order to support the business?
An important caveat in answering the abovementioned research question relates to the
areas of a transformation project Internal Audit cannot participate for instance due to
reasons of objectivity and independence or should not participate, for instance due to
missing skills and experience.
Research sub-questions
In order to answer the central research question the below sub-questions need to be
answered:
1. What would a ‘blueprint’ internal audit approach for transformation projects based on
theory regarding transformation processes and project / program management look like?
2. What empirical elements, based on lessons learned from Internal Audit Functions from
selected companies in their transformation projects, can be identified?
3. What would a ‘blueprint’ based on an analysis of theory and empirical elements look like?
6
1.3. Methodological approach of this thesis
The methodological approach of this thesis covers multiple data sources. Chapter 2 covers
the literature study in which a theoretical framework was developed which in turn was used
to answer research sub-question 1. In order to draft a theoretical framework regarding
transformation projects, the research object was defined (being transformation projects in
general, with a focus on organizational separation projects). Literature on transformational
change and project management was consulted to establish a definition of a transformation
project; and to understand what the various stages in such projects are (one axis of the
‘blueprint’ matrix). Furthermore the literature on ‘regular’ project management and program
management was consulted to establish if and how a transformation project differs from
‘regular’ projects and programs. Finally IIA rules and regulations and other literature
regarding the different roles internal auditors may adopt within a company (the other axis of
the proposed matrix) were consulted in order to construct the other axis of the ‘blueprint’
matrix. Based on the literature study a theoretical framework on the roles Internal Audit can
assume in the different stages of transformation projects was formulated.
Chapter 3 covers the empirical research via multi-case studies and answers sub-question 2.
In order to validate the theoretical framework as well as to enhance it with empirical input
interviews with Internal Auditors of companies that have recently undergone a transformation
process were held.
For the case studies a selection of recent (less than 5 years) separation projects of Dutch
listed companies was made. In this thesis the multi-case approach was used focusing on the
involvement of the Internal Audit Functions of Philips (demerger of Philips Lighting in 2016)
and AkzoNobel (demerger of Specialty Chemicals in 2017 / 2018) 1 in their respective
separation projects. Members of the Philips and AkzoNobel Internal Audit Functions were
interviewed in order to understand their learnings on auditing transformation projects, to
validate the theoretical framework regarding a ‘blueprint’ audit approach for auditing
transformation projects and to enhance the framework with empirical input. This resulted in
an answer to research sub-question number 2. Information regarding the AkzoNobel
Specialty Chemicals separation was obtained in interviews with the Head of Internal Audit, a
senior audit manager and reviewing (internal) documents. The information regarding the
Philips Lighting separation was obtained during an interview with a director of Internal Audit
1 This thesis was written in the period September 2017 to April 2018. As such it does not include any activities performed by the AkzoNobel (Specialty Chemicals) Internal Audit department after the announcement of the intended sale to private equity. See also: https://www.bloomberg.com/news/articles/2018-03-27/carlyle-wins-auction-to-buy-akzo-nobel-s-chemicals-unit-ft-says
7
at Philips involved in the separation project and reviewing documents. Analysis of the
outcomes of the theoretical part of this thesis (sub-question 1) and the empirical input (sub-
question 2) produced an answer to sub-question 3.
Chapter 4 covers the analysis of theory and empirical results and answers sub-question 3.
Chapter 5 covers the summary of the three sub-questions and provides an answer to the
central research question. The answer to the central research question has been structured
in such a way as to follow the identified roles an Internal Auditor can take during a
transformational change.
The methodological approach taken in this thesis is depicted in the below figure:
Figure 1: Research model for this thesis
IIA Standards
Theory on transformational
change
Theory on transformation
projects
Theory on the stages of
transformation
Further literature study
Theoretical framework (sub
question 1)
Selecting companies for empirical input
Draft interview questions
Interviews with selected Internal
Auditors
Preliminary research
Added value for IAF
Trigger at my own company + recent
events
Empirical input (sub question 2)
Analysis of theory and empirical results (sub question 3)
Literature research Ch. 2
Empirical research Ch. 3
Conclusion and answer central
research question
Analysis of interview results
Review relevant documentation
Introduction Ch. 1
Analysis Ch. 4
Conclusion Ch. 5
Enhanced ‘blueprint’ matrix
Central research question
8
Chapter 2: Literature study and setting thesis boundaries
In this chapter the ‘building blocks’ for the theoretical ‘blueprint matrix’ are developed, which
provides an answer to research sub-question 1: What would a ‘blueprint’ internal audit
approach for transformation projects based on theory regarding transformation processes
and project / program management look like. This chapter describes literature on
transformational change (paragraph 2.1), project/portfolio management (paragraphs 2.2 and
2.3) and the roles and activities Internal Audit can take (paragraph 2.4), resulting in a
theoretical ‘blueprint’ matrix in paragraph 2.5.
The focus of this thesis is on the roles Internal Audit can take during transformational change,
such as an organizational separation project.
2.1 Definition of organizational transformation
The terms ‘transformational change’ or ‘organizational transformation’ are often used in
conversation, however a theoretical definition was difficult to find. After an extensive search
some theoretical definitions and a number of indicators related to organizational
transformation were found that have been included in this thesis.
Poole (1988, p. 36) describes organizational change as an empirical observation of
differences in form, quality, or state over time in an organizational entity. Edwards (2010, p.
28) divides change in three essential aspects, (i) change is observable, (ii) change is not
merely an array of differences but an alteration in the same entity over time and (iii) change
affects all aspects of the organization.
Anderson & Anderson (2010) distinguish two types of ‘regular’ change within companies and
a third type, being transformational change. The two regular types they identify are:
• Developmental change: a change process to improve current processes / activities
rather than creating something new (for instance business process improvements,
increasing sales / production efforts etc.); and
• Transitional change: a change process to replace current processes, activities or
organizational set-up with something new. This type of change includes a design phase
(of the new state of a company, department or process) and an implementation phase.
Examples include reorganizations, creation of new products or services, IT (system)
implementations etc. An important aspect of transitional change (which sets it apart from
transformational change) is that the end-state can be determined upfront, thus allowing
for management of the change with limited impact on the staff of a company (only on the
9
skills and actions needed). In transitional change there is no impact on the mindset,
behavior and culture of the company.
Anderson & Anderson (2010) argue that transformational change (as opposed to
developmental or transitional change) is more challenging to a company and the people who
have to carry out the change for two distinct reasons:
1. The detailed future state of the company is unknown at the beginning of the change
project, and is determined during the course of the change project. This poses
challenges to managing the change as there can be no pre-determined project plans
with timeframes agreed upon upfront. As the end-state is not entirely known upfront, this
unpredictability poses a challenge to the staff of the company, who as Anderson and
Anderson (2010) put it ‘must operate in the unknown’; and
2. As the future state of the company is so different from the current state, in
transformational change there is the need for a change in the people and the culture of a
company.
These two concepts have been further elaborated in a book on transformational change
(Edwards 2010). In this book it is stated: “Transformation is a very special type of
change…All change does not constitute transformation“(Flamholtz & Randle, 1998, p. 8).
Edwards (2010, p. 29) identifies a number of components related to transformational change
that are a further elaboration of the definition of transformational change above (Anderson &
Anderson 2010), and give further detail to the specific concept of transformational change.
These components are discontinuity, adaptability, whole-system change, multidimensionality
and multilevel quality. Hence Edwards describes organizational transformation as follows:
“Organizational transformation is discontinuous in that it involves a qualitative shift towards a
more adaptive form of organizing which includes all levels (micro, meso and macro) and all
major operational domains (or dimensions) of an organization. It is a systemic process
involving both the visible, objective aspects and the invisible, subjective aspects of
individuals and groups; a process that includes structures and people” (Edwards, 2010, p.
29).
McNulty and Ferlie (2004, p. 1392) give detail on the abovementioned components of
organizational transformation: “The organizational transformation model consists of the
following indicators or transformation:
(i) multiple and interrelated changes across the system as a whole;
(ii) the creation of new organizational forms at a collective level;
10
(iii) the development of multilayered changes which impact upon the whole system, at
unit and individual level;
(iv) the creation of changes in the services provided and in the mode of delivery;
(v) the reconfiguration of power relationships (especially the formation of new leadership
groups); and
(vi) the development of new culture, ideology and organizational meaning.
Only when all six criteria have been fulfilled is it possible to talk of a complete organizational
transformation”.
These six criteria are used in this thesis as a ‘measurement’ to determine whether the case
studies in the empirical research are indeed an organizational transformation, or a ‘mere’
organizational change, by creating a ‘checklist’ based on these criteria in Annex 2.
Edwards (2010, p. 31) summarizes organizational transformation as a discontinuous change
that involves subjective and objective aspects of the whole multilevel organizational system
and which results in a radical multidimensional reconfiguration of culture, systems and
structures. As such organizational change is:
(i) a deep-seated process that results in a whole-of-system, qualitative shift.
(ii) occurring across multiple levels of the organization and
(iii) involving all of the core domains of organizational life.
Furthermore Edwards (2010, p. 33) states that transformational change requires radical
changes in organizational culture, mission, governance and structure. Soft controls are
about culture and the behavior of management and employees and their impact on
achieving organizational objectives. An assumption included in the ‘blueprint’ matrix is that
the Supervisory Board / Audit Committee and/or the Executive Board of companies in
transformational change will request the Internal Audit Function to perform audits on the
cultural aspects of the transformation (such as soft controls audits using for instance the
KPMG soft controls model) (KPMG, 2016), both prior and following the large scale change.
When reviewing the above theoretical input regarding transformational change the question
arises whether or not a separation project in which a part of a company is either spun-out or
sold constitutes an organizational transformation. The answer is affirmative, as the
characteristics of organizational transformation apply to an organizational separation
(project). A separation project is transformational change as it includes multiple changes to
the organization as a whole, creates new organizational forms (either publicly or privately
owned), has an impact on all organizational layers including individual employees, can
11
potentially create changes in services and products; reconfigures leadership relations (such
as a new Board of Management and Supervisory Board), and will create a new corporate
culture. Finally, in many cases the future state of a company is not clear upfront of a
separation project (for instance will the company be publicly owned or privately owned?).
2.2. Definition of transformation projects
Having established in paragraph 2.1 above that a transformational change affects all layers in an organization, often has an uncertain future state and requires radical changes in organizational culture, mission, governance and structure of a company, the question
arises: how to define a project that can manage such a transformational change?
An ‘off-the-shelf’ definition of what constitutes a transformation project could not be found in
literature. Instead literature on program and project management (APM, 2012; Portman,
2009 & Chartered Institute of Internal Auditors (UK & Ireland), 2016 and 2017) was reviewed
to establish a definition below that encompasses the abovementioned key characteristics of
a transformational change.
As the impact of transformational change affects the entire business (on all operational
levels) the transformational change will most likely be executed through a mechanism
closest to portfolio management, the overall management of underlying programs and
projects (executed in all levels of the organization). The Association of Project Management
(APM) Body of Knowledge 6th edition (APM, 2012) describes portfolio management in the
following way:
“Portfolio management is the selection, prioritization and control of an organization’s projects
and programs in line with its strategic objectives and capacity to deliver. The goal is to
balance change initiatives and business-as-usual while optimizing return on investment”.
A definition most relevant for the management of transformation projects such as the sale of
a part of the company, or demerger / IPO. Further information on portfolio management can
be found in Annex 3.
In summary: portfolio management is the coordinated management of projects and change
management activities to achieve the desired (transformational) change. Project
management is the application of processes, methods, knowledge, skills and experience to
achieve project objectives of individual projects included in the portfolio.
12
2.3. Definition of the various stages in a transformation project
By reading a number of books and articles (Termeer et al, 2016; Kuntz et al, 2012; Sardana,
2015; Miles et al, 2016 and Blumenthal & Haspeslagh, 1994) detailing case studies and
examples of transformation projects, there appeared to be commonalities with the principles,
themes and processes (phases) of the PRINCE2 project management methodology (see
also Annex 4 for the PRINCE2 model). For the purpose of this thesis the PRINCE2 phases
were used and elaborated on later in this chapter regarding significance for internal audit
and the expected roles internal audit can take in a transformation project.
Most relevant for the proposed ‘blueprint’ matrix of Internal Audit involvement in
transformation projects are the seven processes / phases of a (transformation) project
(Portman et al, 2009, p. 3-4)
1. Starting up a Project: in this phase a team is assembled to manage the project
(portfolio), including a project or portfolio manager. A project or portfolio brief is
completed in which high-level details of the project/portfolio including timelines are
defined.
2. Initiating a Project: in this phase the business case for the project / portfolio is finalized
and project initiation documentation (containing detailed timelines, stage-gates,
deliverables, owners, establishing oversight such as project boards etc.) is completed.
3. Directing a Project: the purpose of this phase is to enable the project / portfolio board to
be accountable for the project by making key decisions. The project/portfolio board has
overall control of the project/portfolio and delegate day-to-day management of the project
to a project manager.
4. Controlling a Stage: during this phase the project is ‘active’, during which a project
manager assigns tasks to team members, monitors the progress of these tasks, deals
with any issues and reports progress to the project board.
5. Managing Product Delivery: during this phase the delivery of project deliverables is
managed and controlled by establishing formal requirements on the accepting, execution
and delivery of project deliverables.
6. Managing a Stage Boundary: the project manager keeps the project board updated
with the performance of the project/portfolio in each stage. He/she updates the project
plan and business case (if needed – based on actual performance) and plans ahead for
the next stage in the project. The information provided will allow the project board to
review the project (for ability to deliver) and allows for a (re)confirmation of the continued
business justification (and hence the continuation of the project).
13
7. Closing a Project: after all stages in the project/portfolio are closed, and the project
deliverables have been accepted by the business, the project is formally closed /
decommissioned and the actual benefits of the project are evaluated against the
estimated benefits in the project plan.
These PRINCE2 phases are included in the theoretical ‘blueprint’ matrix. Regarding
separation projects it is assumed that there are at least three other objects, in addition to the
PRINCE2 phases, where internal audit can deliver value. These have been included in the
‘blueprint’ matrix below:
• Preparation / pre-project phase: the PRINCE2 methodology does not explicitly
mention a pre-project phase prior to the ‘Starting up a project’ phase. It is imagined that
a large scale transformation project, like a separation or demerger of a part of the
company, will have a conceptual phase before the transformation project is announced
and a project team is appointed. A role for Internal Audit in such a phase is envisaged as
well. Be it a consulting role or as a provider of information on the company.
• Portfolio / transformation project management: any transformation project will touch
upon multiple layers in the organization and will most likely consist of numerous projects
that need to be managed at a central level. Hence the analogy to portfolio management
above. A role for Internal Audit is envisaged in providing assurance over the portfolio
management, either providing assurance to the portfolio management team or the
Supervisory and Executive Boards. Alternatively Internal Audit can provide consulting
input (such as lessons learned from previous projects). This is not a separate phase in a
project but the way to control the various stages in a transformation / separation project.
• Non-project related: Internal Audit can assist the Supervisory and Executive Boards by
providing assurance on the ongoing business (‘going concern’), so that they can focus
on the complex tasks at hand regarding the separation of a business.
2.4. Roles of Internal Audit
The IIA definition of Internal Auditing is as follows (IIA, 2004): Internal auditing is an
independent, objective assurance and consulting activity designed to add value and
improve an organization’s operations. It helps an organization accomplish its objectives by
bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk
management, control, and governance processes.
The two main roles of internal audit are to provide assurance and/or to provide consulting advice. In the context of this thesis this could include providing assurance on the
14
transformation projects being performed by a company or being involved to provide
consulting advice on transformation projects.
Huibers (2013) notes a third role for internal auditors, relevant for auditing transformation
projects as well: the participative role. Meaning an internal auditor taking an active role in
(parts of) a project, provided some preconditions are met. Huibers also emphasizes that
there are roles an internal auditor cannot take in a project, for example no role in the
managing of risks associated with projects. A summary of examples is included in the figure
below:
Figure 2: Summary of core roles, legitimate roles with safeguards and roles that the auditor should not undertake
in projects, (Huibers, 2013: p. 4)
Huibers has included a detailed overview of what these assurance, consulting and
participative roles could look like. These are input for the theoretical framework, in which the
roles for an internal audit department involved in a transformational project are expanded
upon.
15
For this thesis the roles from the Huibers model described below are taken into account:
Figure 3: The roles of the auditor in projects (Huibers, 2013: p. 5)
From an assurance perspective the quality assurance role (be it on program or project
level or on project deliverables) is being seen as relevant. The post-implementation reviews,
on the achievement of project goals after the project / program has ended is also seen as
relevant, and is taken into account in the ‘blueprint matrix’.
Additionally, there is also an assurance role expected for internal audit for non-project
related activities. As there are ongoing processes, these may require attention as well.
Sarens et al. focused on the reason why internal audit adds value to the Audit Committee
(Sarens et al., 2006). Their literature review and case studies illustrate that internal audit is a
source of comfort to Audit Committees, especially in the domain of risk management and
internal control. The segregation of a company, be it via the sale of a substantial part of the
company or a demerger or IPO, can result in dissatisfaction amongst the staff of the
company. This dissatisfaction may lead to an increased risk of fraud and may put additional
strain on a company’s control framework during times of large scale organizational
transformation. The assumption is that the Supervisory Board / Audit Committee and the
Executive Board of companies in transformational change will request Internal Audit to
16
provide additional assurance on the ‘business as usual’ or ‘going concern’, so that they can
focus on the transformation itself.
From a consulting perspective the role as sounding board, advisor on (project / program)
risk management (including the facilitation of risk workshops) and the role of advisor on
content / deliverables are deemed relevant and have been included in the ‘blueprint’ matrix.
Providing consulting services (prior and during a large scale organizational separation
project) is a way for Internal Audit to add value to the business. This is consistent with the IIA
definition of 2004 that emphasizes value-added activities. It is also line with developments in
the Internal Audit profession towards prevention-focused services, away from a sole control
approach to a risk-based approach, which also leaves room for consulting services (Hass et
al., 2006). Consulting services are a way to create added value for a company, according to
the IIA. Most common consulting activities concern risk management facilitation, project
management, legislative compliance evaluations and contingency planning and disaster
recovery evaluations and involvement in mergers, acquisitions and divestitures (McNamee
et al., 1998). It is assumed that such services are equally applicable to an organizational
transformation project and have hence been included in the ‘blueprint’ matrix.
From a participative perspective the roles of proactive expert and project coordinator
(especially in any sub-projects directly impacting on the Internal Audit function) are deemed
relevant and have been included in the ‘blueprint’ matrix. The Internal Audit Function is a
separate department within a company, and it (and its auditors) is also affected by any
transformation in the company. It is assumed that there will be transformation related
activities involving the split of the audit department itself, where the audit department will
have a participative role.
17
Huibers (2013) clearly mentions the category ‘No role’ in his model and describes the below
roles as not to be undertaken by an internal auditor:
Figure 4: Roles not to be undertaken by the auditor: Huibers (2013, p.10)
There are two main reasons for an auditor not to take a role during a project. The first being
when the objectivity and/or independence of an Internal Auditor are jeopardized. However,
it is assumed in this thesis that for transformational changes Internal Audit may be more
involved, as the change to the company is so profound, all knowledgeable and skilled staff in
the company (including Internal Auditors) might be called upon to assist in the transformation
in an active capacity. This might mean that some of the roles Huibers includes in his ‘No role’
category might be taken by Internal Auditors. The assumption is that Internal Audit (or a sub-
set of individual auditors) could perform a prominent role on the risk management side of the
transformation process, by helping management to set the risk appetite, identify risks and
help in the management of identified risks in the transformation project, and being
accountable for certain project deliverables (especially where these impact the Internal Audit
function itself).
An important note here is that afterwards the Internal Audit Function cannot audit those
topics as they are accountable for the execution.
The second reason relates to the skills and knowledge required by an Internal Auditor to
provide a meaningful contribution with regards to a transformational change project. Audit
literature connecting this topic with transformation change could not be found, however in a
discussion paper written by the IIA and KPMG in 2015 on strategy auditing, lack of
18
knowledge and skills is described in great detail (IIA, 2015). This is equally applicable to
auditing transformational change. Before assuming any role in transformation projects, be it
to provide assurance, provide advice (for example consulting), participating in projects or
other roles, the internal auditor must ask himself whether or not he or she possesses the
right knowledge and/or experience (from previous portfolio/program/project audits) to provide
a meaningful input into the transformation project.
A category not included in the model of Huibers (2013) is that of ‘Other role’. For this thesis
that role relates to management of external parties during a transformation project. There is
already a long history of literature on the reliance of external audit on the work of internal
audit (see for example Glover, Prawitt, & Wood, 2008; Munro & Stewart, 2010; Suwaidan &
Qasim, 2010). The background of the discussion relates to leveraging experience and
reducing duplication of work, in effect the cost of external audit. The same may be applicable
during a transformational change, when a company involves experts (consultants, lawyers,
external auditors, pension experts, etc.) in order to assist in managing the transformation. As
the Internal Audit Function has a deep knowledge of the company, the risks it faces and its
control framework, the assumption is that there is a role for Internal Audit in transformational
change to cooperate with the external experts and to provide them with information. This role
might even encompass certain elements of relationship management (for instance with the
external auditor – as in some companies that relationship management role is an integral
part of the responsibilities of an IAF).
19
2.5. Summary of the theoretical framework (inc. answer research-sub question 1)
‘Blueprint’ matrix
Based on the theory reviewed above in this chapter (stages in a project as per PRINCE2
and the roles Internal Audit can take) and the assumptions made the below (theory based)
matrix of activities an internal auditor can assume in a transformation project, was drafted.
The assumptions made in this first cut ‘blueprint’ matrix were reviewed against the reality of
the case studies in Chapter 3. Based on the input from the practical experiences of the
auditors involved in the transformational change in the companies in the case studies the
‘blueprint’ matrix was updated accordingly in Chapter 4.
Cells marked in GREY refer to a combination of Internal Audit roles and phases in the
transformation project where no discernable role for internal audit could be seen. Cells
populated in the column ‘No role’ are activities where Internal Audit in principles can and
should not play a role due to lack of independence, objectivity or knowledge / skills. However
in some exceptional circumstances a limited role may be possible.
Building blocks of the ‘blueprint’ matrix
The various stages of the transformation project on the Y-axis of the model are derived from
the PRINCE 2 project management model (refer to paragraph 2.3 above) augmented with
the three objects identified above (“Preparation / pre-project phase”, “Portfolio /
transformation project management” and “Non-project related” referring to ‘going-concern’).
The roles an Internal Auditor can assume during a transformation project on the X-axis of the
model are derived from the IIA definition and augmented with the input from Huibers (refer to
paragraph 2.4 above).
The content of the individual blocks of the model below are Internal Audit activities (as per
IIA definition and the input from the article of Huibers) per various stages in the
transformation project. Some of the content of the building blocks are based on the
assumptions stated above in this Chapter.
20
Answer to research-sub question 1: a ‘blueprint matrix’ derived from theory and assumptions
Assurance role Consulting role Participating role Other role(s) No role
Preparation / pre-project phase
(Quality) assurance review Cultural audits.
Assist in Risk Assessment. Provide information. ‘Sounding
board’ role.
Only when some conditions are met.
Limited involvement audit staff in risk management
Assist in setting risk appetite
In principle no role for internal audit, however a
limited role may be possible
(incl. setting project risks,
managing the project process, managing
identified risks, implementing solutions /
being accountable for deliverables)*
Port
folio
man
agem
ent
Starting up a Project (Project) (Quality) assurance review
Provide advice (e.g. on project plan, business case and feasibility of
timelines). Provide lessons learned.
Roles could include: setting project risks, ,
provide expertise, managing identified risks, implementing solutions /
being accountable for deliverables, project / program coordination and/or managing of a
stage
Also active participation if there is a (sub) project
that directly involves the Internal Audit Department
(e.g. split of the department in case of a
separation).
Initiating a Project (Project) (Quality)
assurance review (incl. Project Initiation Documentation).
Provide advice (on the mechanisms to ensure quality. Provide lessons learned from previous
projects
Directing a Project (Project) (Quality) assurance review
Coaching / Sounding Board.
Directing input from external parties (e.g.
external audit)
Controlling a Stage (Project) (Quality)
assurance review (incl. progress reporting).
Controlling input from external parties (e.g.
external audit)
Managing Product Delivery
(Project) (Quality) assurance (incl. QA on
deliverables) Advise on (content of)
deliverables
Implementing deliverables – only for
areas under direct influence
Managing a Stage Boundary
(Project) (Quality) assurance review (incl.
adherence to project plan and management of risk
registers).
Closing a Project (Project) (Quality) assurance review,
including on deliverables
Post-project review Post implementation reviews (incl. cultural
audits)
Managing external parties involved in a post-project
review.
No role, if internal audit was an active participant
in a project
Non-project related Assurance over ongoing
business processes during the project (‘going
concern’)
Assurance role Consulting role Participating role Other role(s) No role *= when the transformation concerns the Internal Audit Department itself
21
Chapter 3: Case studies
This chapter will provide an answer on the second sub question: What empirical elements,
based on lessons learned from Internal Audit Functions from selected companies in their
transformation projects, can be identified?
In order to answer this sub question, two case studies are performed of two Dutch listed
companies that have executed a large companywide separation project in recent years,
being AkzoNobel and Philips. The research method of case studies was selected as this
method offers the possibility to obtain direct empirical evidence via use of interviews and
review of documentation. It also offers the possibility to compare the two selected companies
with each other regarding the audit approach they took during their separation projects, and
to compare their approach to the theoretical ‘blueprint matrix’.
The structure of the chapter starts with the assessment of the ‘checklist’ from Annex 2 to
confirm that the case studies constitute transformational change. The next step was to
perform interviews with senior internal audit professionals from both companies based on
their involvement in the separation projects in their companies. The interviews have been
structured using the theoretical ‘blueprint matrix’ as an ‘agenda’. During the interviews open
questions were asked about the activities and roles employed in the various stages of the
separation projects. Furthermore, direct feedback from the interviewees was requested on
the ‘blueprint matrix’ itself. The interview reports (refer to Annex 1) have been confirmed with
the interviewees. In addition to the interviews held, relevant internal audit documentation
was reviewed in both cases. Due to reasons of confidentiality no internal (audit)
documentation has been directly included in the thesis. The reviewed documents have been
described.
22
3.1. AkzoNobel
3.1.1. An introduction
At the moment of writing this thesis AkzoNobel was going through a large scale change
process, by demerging or selling roughly a third of the company.
AkzoNobel is a global manufacturing company which produces Decorative Paints (for
instance Sikkens paint), Performance Coatings (for instance on airplanes and boats) and
Specialty Chemicals (sold to other businesses, but also directly to end-customers, for
instance Jozo salt)2. AkzoNobel has 46,000 employees, are located in over 80 countries,
with an annual turnover of over €14bn and an EBIT of close to €1.5bn3.
In March 2017 PPG, an American competitor of AkzoNobel, made an unsolicited offer to buy
the whole of AkzoNobel (including the Specially Chemicals business)4. AkzoNobel rejected
the various offers from PPG and announced the plan to split the Specialty Chemicals
business in order to create a focused Paints and Coatings only company5. This split was due
to be carried out within 12 months, and at the moment of writing this thesis a large
separation project was on the go within AkzoNobel in order to prepare the Specialty
Chemicals business for demerger or sale. The first stage of this separation project focused
on the internal separation of the two businesses by January 1st 2018 and the second part of
the project focused on the external separation (after the decision of sale or demerger –
announced in March 2018). This separation project also impacts on the Internal Audit
Function itself, where roughly one-third of the department (including the author of this thesis)
joined the new Specialty Chemicals business, and where the other two-thirds remained with
AkzoNobel.
In October 2017 AkzoNobel confirmed its intention to merge with another American
competitor, Axalta, in order to create a larger dedicated Paints and Coatings business6,
however quickly afterwards it became apparent that this merger would not take place
2 For more information on AkzoNobel, its structure, its products and its history: https://www.akzonobel.com/about-us/about-overview 3 AkzoNobel Annual Report 2017 4 Refer to: https://84e1202b204d21a1cb9b-0e1ab5244fd095dbeb138ed6f973369e.ssl.cf3.rackcdn.com/ppg-initial-proposal.pdf 5 Refer to: https://www.akzonobel.com/for-media/media-releases-and-features/akzonobel-reviewing-strategic-options-separate-specialty 6 Refer to: https://www.akzonobel.com/for-media/media-releases-and-features/akzonobel-confirms-constructive-discussions-axalta-regarding
23
immediately7. This topic would have been related to transformational change, but due to
reasons of scoping is not included in this thesis.
3.1.2. Transformation checklist applied to AkzoNobel
In order to ascertain if the separation project at AkzoNobel qualifies as a transformational
change the checklist in Annex 2 was applied.
As the Specialty Chemicals business is split from the rest of the company as a whole the
effects of this split will affect both the remaining part of the company (Paints & Coatings) as
well the part that is split off. As such there are multiple and interrelated changes envisaged
for the company as a whole.
By splitting roughly one-third of the company (either via sale or demerger) two new
companies will be created, hence creating two new organizational forms 8 . As it was
announced at the end of March 2018 that AkzoNobel intends to sell the Specialty Chemicals
business to private equity, a new organizational form will be created for that part of the
business during 2018, prior to external separation9.
The sale means that all layers of the company, either the Specialty Chemicals business or
the remainder of AkzoNobel are impacted by the change. For instance employees allotted to
the Specialty Chemicals business will join a new company and will in due time receive new
job contracts.
As the Specialty Chemicals business will become independent from the rest of AkzoNobel it
can now focus investments solely to develop new products and solutions. As such it is most
likely that new products and service offerings can be developed in the near future.
The new organizational form will lead to new leadership structures which impact the
governance structure of the company10 certainly now that the Specialty Chemicals business
is sold to private equity.
Similarly, the fact that Specialty Chemicals will be separated from the rest of AkzoNobel will
lead to a new corporate culture and ideology in that part of the business.
7 Refer to: https://fd.nl/ondernemen/1228341/akzo-en-axalta-beeindigen-fusiegesprekken?_sm_au_=i6stJSb7WGJ0nG7P 8 Refer to: https://www.akzonobel.com/for-media/media-releases-and-features/akzonobel-announces-extraordinary-general-meeting-november-30 9 Refer to: https://www.bloomberg.com/news/articles/2018-03-27/carlyle-wins-auction-to-buy-akzo-nobel-s-chemicals-unit-ft-says 10 Refer to: https://www.akzonobel.com/for-media/media-releases-and-features/akzonobel-announces-new-management-structure-and-measures
24
Finally, throughout the separation project in 2017 and early 2018 there was uncertainty
about the future state of the company. Would it become an independently listed company or
would it be sold (to private equity)? Only with the announcement of the intended sale of the
company to private equity at the end of March 2018 did this uncertainty end.
Based on the answers to the seven questions in the checklist in Annex 2 it can be concluded
that the separation project at AkzoNobel constitutes transformational change. Hence
AkzoNobel could be included as a case study in this thesis.
3.1.3. Apply the theoretical ‘blueprint’ to the case of AkzoNobel
= separation related activities in which AkzoNobel Internal Audit is involved Figure 5: the AkzoNobel Internal Audit activities plotted on the theoretical model
Based on interviews with a senior manager within the AkzoNobel Specialty Chemicals
Internal Audit Function (IAF) and the Head of Internal Audit of AkzoNobel (Paints & Coatings
and ad interim for Specialty Chemicals), review of documentation (including audit planning,
scoping documents and final reports of post-implementation reviews) and knowledge
obtained by the author as a member of the internal audit function the above depicted
activities have been identified for the AkzoNobel Internal Audit Function during the
transformation project, called Starfruit.
25
The interviewed audit professionals were asked to describe the activities employed by their
internal audit function based on the roles as per the ‘blueprint matrix’.
3.1.3.1. Assurance Role
Both the senior manager and the Head of Audit confirmed that as per request of the Audit
Committee (part of the Supervisory Board) the IAF is not involved in providing assurance on
the Starfruit separation project itself (neither on the portfolio management stage nor the
individual project steps). The request of the Audit Committee was motivated that the
transformation process is taking place in such a short timeframe (less than a year), that an
internal audit on the (limited in size) project team will create too much of a distraction and
might potentially lead to a delay in the actual separation. In order to mitigate a number of
associated transformation portfolio and project risks, AkzoNobel have engaged external
consultants and hired experienced project management to assist the company in this
transformation. The Audit Committee also made a specific request that the IAF focus on the
‘going concern’ risks, meaning risks in day-to-day activities as a result of the transformation
project and the stress this brings to the company. Also, in order to placate shareholders in
the wake of the dismissal of the PPG offer in 2017, AkzoNobel has set some challenging
financial targets (which are under pressure of being met – given the fact AkzoNobel is facing
financial headwinds and had to issue a profit warning)11. Internal Audit has identified specific
risks, which may appear due to staff focus on other matters or even fraud due to staff
malcontent as a result of the transformation. These risks have been included in the standard
audit reference models and a few additional audit objects have been scoped in 2017 order to
cover these risks.
On January 1st 2018 an ‘internal separation’ was achieved: both the Paints & Coatings and
Specialty Chemicals companies continue to operate under the AkzoNobel umbrella, but are
internally run as two separate companies in preparation for the external separation (sale or
demerger – announced in March 2018) 12. For the first half of 2018 a number of post
implementation audits have been scheduled, with the expectation that in the remainder of
2018 (prior to the external separation, a.k.a. closing of the deal) further audits will take place
on projects related to building new capabilities in the Specialty Chemicals company
previously provided by AkzoNobel.
11 Refer to: https://www.akzonobel.com/for-media/media-releases-and-features/akzonobel-publishes-q3-2017-results 12 Refer to: https://www.bloomberg.com/news/articles/2018-03-27/carlyle-wins-auction-to-buy-akzo-nobel-s-chemicals-unit-ft-says
26
The senior manager interviewed indicated that these post implementation audits, from the
point of view of the part of the company that is spun-out or sold, constitute three main types
of audits:
1. IT audits to provide assurance on the separation of key IT systems (including ERP
systems) and to assure proper segregation of duties between users of both the Paints &
Coatings and Specialty Chemicals. Also the topic of logical access controls is tested;
2. Reviews of the Service Level Agreements that have been drafted for back office
services (IT, HR and Finance) between the Specialty Chemicals part and the remainder
of AkzoNobel; and
3. Review of the legal separation at country level, where existing AkzoNobel entities
have to be separated as well; and issues regarding bank accounts, tax / local VAT,
Treasury and HR/payroll had to be solved.
At the moment of writing this thesis the external separation had not yet happened.
Consequently any post implementation audits after external separation as a separate
Specialty Chemicals entity had not been planned.
3.1.3.2. Consulting role
The Internal Audit Function provides input to the Executive Committee of AkzoNobel on
emerging risks on a continuous basis, hence also with respect to the separation of the
Specialty Chemicals business. When interviewed the Head of Internal Audit refers to this as
the ‘natural’ advisory role of a Chief Audit Executive. As such this activity has a box with a
dotted-line in the ‘blueprint’ model.
A risk assessment was carried out on the separation project(s), without direct involvement
from Internal Audit. On high level the identified risks related to the project governance of the
transformation project, the project change management processes and a number of risks
Assurance role:
At AkzoNobel assurance activities took place predominantly in the final stages of the Starfruit separation project. Per request of the Audit Committee assurance work on ‘business as usual’ audit objects took place throughout the lifecycle of the separation project.
27
associated with the transformation project (for instance loss of management focus, pressure
on results and loss of experienced staff due to the abovementioned turmoil).
Internal Audit has selected audit objects for the duration and after the transformation project,
based on this risk assessment. In partial mitigation to the risk of pressure(s) on results a
number of existing audit procedures have been updated to take potential fraud indicators
into consideration.
3.1.3.3. Participating role
The Head of Internal Audit, in her ‘natural’ advisory function to the company, provides input
in the transformation project where requested, where she assists in identifying risks and acts
as a ‘sounding board’ for the project team. Due to the ongoing process of the transformation
and the confidential nature of the project, no further details are included in this thesis.
As a result of the separation, the Internal Audit Function itself was separated as well.
Roughly 2/3 of the Function remained with the AkzoNobel company (Paints & Coatings),
roughly 1/3 of the Function (including yours truly) was moved to the Specialty Chemicals
company. In order to arrange for a smooth separation, a number of Internal Audit separation
specific projects have been initiated where Internal Audit staff actively participated. During
his interview the senior manager elaborated on these projects:
• Selection process of which staff members go to Specialty Chemicals. At the moment of
writing this thesis this process was completed;
• Set up of the new audit organizations, including leadership, office locations,
organizational charts and roles and responsibilities. At the moment of writing this thesis
this part of the project was still ongoing;
• Setting up a new audit universe for both companies. At the moment of writing this thesis
this part of the project was still ongoing;
• Developing two separate audit plans for 2018. At the moment of writing this thesis this
process was completed. However given the uncertainty of the new ownership structure
Consulting role:
At AkzoNobel only limited consulting activities took place. Based on a project risk assessment; in which the IAF was not involved; a number of audit procedures have been updated.
28
of the Specialty Chemicals company prior to March 2018, the audit plan was revised to
cater for management requests coming from the separation;
• Separation of Internal Audit systems and data (including licenses for tooling). At the
moment of writing this thesis this part of the project was still ongoing;
• Creation of two separate budgets. At the moment of writing this thesis this part of the
project was completed; and
• Recruitment of a new Head of Internal Audit for the Specialty Chemicals audit team. At
the moment of writing this thesis this part of the project was still ongoing.
In order to ensure these activities are executed timely and completely a project team was set
up within the Internal Audit Function.
3.1.3.4. Other role(s)
As the Head of Internal Audit at AkzoNobel is managing the relationship with the external
auditor, she is also involved in managing the efforts employed by the external auditor during
the transformation project. As the company will be split in two there is a need of split audited
financial data, for instance for inclusion in the data-room for the potential sale of the
Chemicals business. Also, during the year-end review of the financials the Head of Audit is
managing the efforts of the external auditor when it comes to the auditing of the financial and
non-financial information for AkzoNobel as a whole and split out into the two new companies.
In order to ensure efficiency in the deployment of resources during the separation project,
the Head of Audit indicated during her interview that a joint assurance plan detailing the
efforts of both the Internal Audit function and the external auditor has been drafted. Joint
efforts are particularly taking place in the post-implementation project reviews where the
external auditor reviews the financial outcomes and the Internal Audit Function the
processes in place to ensure smooth separation of both companies.
Participating role:
The entire AkzoNobel IAF took part in a sub-project in which the Internal Audit Function was split between Paints & Coatings (2/3 of the team) and Specialty Chemicals (1/3 of the team).
29
3.1.4. Analysis case study AkzoNobel
The Internal Audit Function of AkzoNobel has taken three distinct roles during the
transformation project: assurance role, participative role, and other role. Within these roles
the activities performed could be mapped to the distinct stages of the transformation project
(refer to figure 5 above). It is noted however that the AkzoNobel Internal Audit Function only
plays a limited role in the separation project(s). When plotting the activities to the theoretical
model it becomes evident that most of the activities of the AkzoNobel IAF are performed in
the later stages of the separation project, notably in the post-implementation stage. There
have been almost no activities employed in the early stages of the separation project.
One of the main aspects that set transformational change apart from ‘normal’ change is the
fact that transformational change has an impact on the culture of the organization. There
have however not been any audits related to the cultural aspects of the separation project
(for instance. a ‘baseline audit’ at the beginning and a comparison later on in the project).
Another aspect that sets transformation change, such as a separation project, apart from
‘normal’ change is the uncertainty of the outcome of the change. This uncertainty was there
from the moment of the announcement of the separation until the moment that the new
ownership structure was revealed in March 2018. This uncertainty has led to a number of
(key) employees quitting their jobs, which in turn led to a strain on the internal control
framework of the company. It is hence understandable that the Audit Committee requested
the AkzoNobel IAF to focus on ‘business as usual’ audits throughout 2017 and only focus on
separation related activities in early 2018 after the main separation related activities had run
its course. An additional issue here was that also a number of (experienced) Internal
Auditors left the company; hence the execution of the audit plan became more difficult.
Upfront it could have been expected that an Internal Audit Function with a considerable size
(35+ FTE) and capabilities (CPAs, RAs, REs, ROs, CIAs) would play a more prominent role
Other role:
There was a lot of communication and coordination between the AkzoNobel IAF and the external auditor (PwC) during the lifecycle of the separation project. A joint audit plan was devised in order to leverage off each other and to minimize the cost spent on external audit fees.
30
in the separation project. A role that most likely could have included providing assurance on
the project / portfolio aspects with regards to the stages of the separation project (as have
elapsed during the writing of this thesis) such as ‘Starting up a Project’, ‘Initiating a Project,
Directing a Project’, ‘Controlling a stage’ and ‘Managing Product Delivery’. As AkzoNobel do
not have a good track record when it comes to the execution of transformation projects, such
as integrating large acquisitions (refer to the ICI acquisition of 2008), Quality Assurance
input from Internal Audit on the earlier stages of the transformation program (including the
inclusion of ‘lessons learned’) might have been beneficial.
Good practices taken from the AkzoNobel case include the establishment of a joint audit
plan with the external auditor and the detailed post-implementation audits which took place
in the first half of 2018.
31
3.2. Philips Lighting
3.2.1. An introduction
Philips started as a manufacturer of light-bulbs in 1891. Over the years the company grew
into a multinational electronics company with various divisions. Amongst other innovations
Philips invented the compact-disc. Since the 1990s Philips has moved out of a number of
less profitable businesses, including televisions, audio equipment and the music industry
(Polygram).
In the years before the separation of the Lighting division Philips focused on healthcare
equipment, consumer lifestyle and lighting. The lighting division required further investment
to capitalize on the LED market and in general did not produce the same margins as the
healthcare and consumer lifestyle divisions of the company.
In September 2014 Philips announced the separation of the Lighting division, either via sale
to a third party or via an IPO. The separation project was called Gemini and took 18 months
to complete. On the 27th of May 2016 Philips Lighting obtained an independent stock listing
at the Amsterdam Stock Exchange (AEX).
In March 2018 Philips Lighting announced a name-change; the company will henceforth be
called Signify.
3.2.2. Transformation checklist applied to Philips Lighting
In order to ascertain if the separation project at Phillips qualifies as a transformational
change the checklist in Annex 2 was applied.
By splitting the Philips Lighting business from Royal Philips two new stand-alone companies
were created. This affected the company as a whole, as well as all the employees working at
the company.
The separation has led to the creation of a new organizational form, the AEX listed company
Philips Lighting in addition to the already existing Royal Philips. As part of the separation
Philips Lighting was allowed to use the Philips brand-name for a period of time. In 2018 the
company was rebranded to Signify.
The separation project leading to the IPO of Philips Lighting meant that all layers of the
company, either the Lighting business or the remainder of Philips were impacted by the
32
change. For instance employees allotted to the Philips Lighting business joined a new legal
entity.
Philips named as one of the main reasons to split Philips Lighting the ability “be better
positioned to build on its existing market leadership in LED lamps, luminaires and connected
lighting systems & services and benefit from fundamental lighting industry changes”13. It can
hence be concluded that the change can lead to changes in the services and products
provided by the company.
The separation has led to a new leadership structure, with a corresponding governance
structure at Philips Lighting. It is now a stand-alone company with its own Board of
Management and Board of Directors.
Similarly, the separation project has led to the creation of two separate companies with their
own corporate culture.
Finally, there was uncertainty prior to the commencement of the separation project about the
future state of the company. As with AkzoNobel it was not clear at the beginning of the
separation project if Philips Lighting was either sold (to private equity) or would become a
stand-alone listed company via an IPO14.
Based on the answers to the seven questions in the checklist in Annex 2 it can be concluded
that the separation project at Philips constituted transformational change. Hence Philips
could be included as a case study in this thesis.
13 Refer to: https://www.philips.com/a-w/about/news/archive/standard/news/press/2014/20140923-Philips-to-sharpen-strategic-focus-by-establishing-two-market-leading-companies-in-lighting-solutions-and-in-healthtech.html 14 Refer to: https://www.reuters.com/article/us-philips-spin-off/breaking-with-tradition-philips-splits-off-lighting-idUSKCN0HI0FV20140923
33
3.2.3. Apply the theoretical ‘blueprint’ to the case of Philips Lighting
= activities in which Philips Internal Audit was involved
Figure 6: the Philips Internal Audit activities plotted on the theoretical model
The above depicted activities of the Philips Internal Audit department during the Gemini
separation project (late 2014 to early 2016) were derived from information obtained during
an interview with a Director of the Philips Internal Audit department (who was involved in
auditing the separation project(s)) as well as reviewing some Philips Internal Audit
documentation (including audit planning, approach memo and scoping documentation).
3.2.3.1. Assurance Role
After the announcement of the Gemini separation project in late 2014 the Philips Internal
Audit department started preparation of the 2015 audit plan, in which a number of
separation-related audits were included.
In order to gain insights on the separation’s impact for Internal Audit operations, the Head of
Internal Audit visited a peer company (Dutch AEX listed) who had undergone a separation in
the past in order to obtain lessons learned. Also the input of internal key stakeholders was
sought in order to prepare the Internal Audit plan for 2015. Audit reviews related to the
34
separation kicked off in the second quarter of 2015 once the Philips separation teams were
in place.
The Philips Internal Audit also prepared a separate document in which the added value of
the department during the separation project was detailed. It set out the role of the Philips
Internal Audit department in the context of the Gemini project, such as: identifying relevant
risks (refer to the risk management role described below under ‘Consulting Role’),
performing audits on key risk areas, and ensuring close contact with the stakeholders via
short audit cycles allowing stakeholders to address risks in a timely fashion. This document
was furthermore an outline of the strategy, stakeholder management (for instance. a
relationship map) and knowledge management during the Gemini project. It also includes
the establishment of an Internal Audit Alignment Team, which was in contact with the Gemini
project organization throughout the project. The ‘dotted line’ box in the ‘blueprint’ model on
the previous page refers to these two preparatory activities.
The first audit in an assurance role on the Gemini project was an audit aimed at reviewing
the effectiveness of the set-up of the Gemini project organization (including Project
Management, Project Support and ‘work-streams’ per (corporate) function) and the ability of
the project to deliver according to timetable and desired quality. In terms of the theoretical
model this was an audit on the portfolio management of the Gemini project. The audit was
executed by Philips Internal Audit staff with experience of project / program management.
In addition to the assurance provided on the portfolio management, the Philips Internal Audit
department provided assurance on the set-up of the separation teams in the main local
markets such as India and China. This review was not called an audit, but was rather a
‘progress review’ in which the robustness of the controls in place at the local separation
teams to ensure the timely delivery of separation activities was judged.
Also, a number of ‘deep-dive’ audits were performed on a number of critical functions
involved in the separation; such as the IT (for systems separation), HR (payroll etc.), the
impact on the pensions (for both parts of the company), Treasury and Finance.
Finally, regular audits were conducted throughout the lifecycle of the Gemini project in order
to ensure ‘going concern’.
It is understood from the interview and reviewing the documentation that the assurance role
of the Philips Internal Audit department predominantly took place during the early stages of
the separation project, in terms of the theoretical model in the stages ‘Starting up a project’
35
and ‘Initiating a project’, where some of the ‘deep dive’ and country separation audits appear
to focus on the ‘Directing a project’ and ‘Managing product delivery’ stages.
It is understood that the Philips Internal Audit department was not involved in post-project
reviews.
3.2.3.2. Consulting Role
As the mandate of the Philips Internal Audit department also covers Risk Management, the
department was involved in a consulting and facilitating role by conducting a risk workshop
for the Gemini project (in terms of the theoretical model at portfolio management level). In
order to make the contribution as valuable as possible a specific approach was taken for this
risk workshop.
Per ‘work-stream’ bottom-up risk scenarios were collected and collated into one risk-register.
This activity was led by the Gemini Project Management Organization (PMO).
At the same time top-down risk scenarios were acquired from the Gemini project steering
committee. This activity was led by Philips Internal Audit.
Following the gathering of bottom-up and top-down inputs, Philips Internal Audit
consolidated the long list of risk items and identified the main risks from this long list. During
a risk workshop, facilitated by the Philips Internal Audit department, the main risk scenarios
were then discussed. Via voting the risk scenarios were rated and risk mitigation activities
defined.
Assurance role:
At Philips the assurance activities took place predominantly in the early stages of the separation project. Also, the Philips audit department performed audits on the portfolio management of the Gemini project; and ‘business as usual’ audit objects.
Consulting role:
The Philips Internal Audit department facilitated a risk workshop to identify project risks and to define risk mitigating activities.
36
3.2.3.3. Participating Role
As part of the separation activities the Philips Internal Audit department was separated as
well, with roughly one-third of the staff joining a newly formed Philips Lighting Internal Audit
department. Various (sub) projects were initiated at departmental level, with two resources
working on the split of data and supporting tools. These activities were performed ‘on top of’
their regular jobs.
3.2.4. Analysis case study Philips
The Philips Internal Audit department wrote a specific document detailing the strategy to be
adopted to add maximum value during the separation project. This document was based
upon input from relevant stakeholders in the company and augmented with lessons learned
regarding auditing project management from own employees and a peer company. This is a
good practice, and combined with the detailed 2015 audit plan with ample room for
separation project audits it demonstrates the good anticipation and preparation of the
Internal Audit department prior to the actual audits.
The audits performed on the Gemini project are twofold: an audit on the portfolio
management of the group of projects, as well as detailed audits on parts of the Gemini
audits. All designed to give the management of Philips assurance in an early stage of the
project on the design of the project controls and the feasibility of delivering the required
project deliverables.
One note here is that the assurance related activities all appeared to be conducted early on
in the project lifecycle, no ‘check-up’ audits were conducted later on in the project, nor do
there appear to have been any post-implementation reviews to ‘close the loop’ on the
recommendations done early on in the project.
The role the Philips Internal Audit department played in the risk management of the Gemini
project stems from their regular risk management tasks, which allowed them to add value in
the beginning of the project by identifying risk scenarios that might impact the timely delivery
of the project results.
Participating role:
At Philips Internal Audit a few employees oversaw the split of the audit department.
37
One of the main aspects that set transformational change apart from ‘normal’ change is the
fact that transformational change has an impact on the culture of the organization. There
have however not been any audits related to the cultural aspects of the separation project
(for instance. a ‘baseline audit’ at the beginning and a comparison later on in the project).
3.3. Conclusions and answer to research sub-question 2
Combining the input received from both the case studies provided below answer for sub-question 2: What empirical elements, based on lessons learned from Internal Audit
Functions from selected companies in their transformation projects, can be identified?
Based on the interviews conducted with a limited number of internal audit professionals at
AkzoNobel and Philips; as well as the review of a number of relevant audit documents the
below presented empirical elements have been obtained.
Empirical elements identified from the AkzoNobel case study include:
1. The establishment of a joint audit plan between the internal and external auditors to
maximize assurance provided to the Executive Committee and the Audit Committee.
2. The execution of detailed post-implementation reviews, during the period between
internal and external separation (with a focus on IT separation, legal / country separation
and the services being delivered between the two different companies (such as HR,
payroll, Treasury etc.)).
3. Involvement of the whole audit department in a sub-project concerning in the separation
of the Internal Audit Department itself.
4. Involvement of the Head of Audit in managing the relationship with the external auditor
and providing advisory feedback to the project team and Executive Committee.
Empirical elements identified from the Philips case study include:
1. Obtaining input from peer companies prior to drafting an audit plan for separation related
audits.
2. Establishing a core team within the Internal Audit function, with a relationship map with
regards to members in the separation project team.
3. A detailed audit approach to be taken with regards to separation related audits in a
separate document, including audit strategy, knowledge management and stakeholder
management.
4. Auditing the portfolio management of the separation project(s).
5. Involvement in the identification of risks, via facilitation of a risk workshop.
38
Chapter 4: Analysis
In this chapter the theoretical model and the empirical input obtained from the case studies
are combined in order to create a combined ‘blueprint’ model. This answers sub-question 3:
“What would a ‘blueprint’ based on an analysis of theory and empirical elements look like”?
The answer to sub-question 3 is presented in the form of an updated ‘blueprint’ model at the
end of this chapter.
Based on the feedback received during the interviews a few changes / additions were made
to the theoretical model. These are described below per stage / phase of the separation
project, including the reasons why these were included in the final ‘blueprint’ matrix.
4.1 Updates to the content of the ‘blueprint’ matrix based on empirical evidence
The portfolio management stage was expanded to include both assurance and consulting
activities, predominantly based on input from the Philips case. Given the importance of this
stage in the process of managing a project the Philips Internal Audit department performed a
review on the Gemini program management to ascertain the effective setup of scoping,
planning, staffing, governance, communication and reporting. The aim of the review was to
provide assurance on the ability of the program management organization to execute the
program on budget, on time and as per the agreed upon quality. Their review also included
typical project management elements such as reviewing critical path and dependencies.
Assurance - preparation phase: the theory regarding transformational change places great
emphasis on (change of) culture in an organization. It was hence assumed that the Internal
Audit departments would perform cultural audits (such as soft controls audits), and as such
cultural audits at the preparation stage and in the post-project review phase of the project
were added to the theoretical model in Chapter 2.
In practice, neither AkzoNobel nor Philips executed cultural audits (either to ascertain the
culture at the beginning stage or to verify the culture at the end stage of a project).
As change in (corporate) culture is a main feature distinguishing transformational change
from ‘normal’ change it remains as an activity in the final ‘blueprint’ model.
Assurance - preparation phase: the theoretical model was enhanced with the best
practices observed at Philips, such as obtaining input from peer companies prior to
commencing audit work (assurance or consulting) during a separation project, and the
drafting of a strategy document detailing the audit approach to be taken during a separation
project.
39
Assurance - post-implementation review phase: the theoretical model was augmented
with some specific audit objects that have been observed at AkzoNobel, so-called special
topic reviews related to the separation of joint corporate activities such as HR, IT, Finance,
Treasury etc.
Assurance - overall: based on the interviews at AkzoNobel and Philips a difference in focus
of assurance activities was observed.
At AkzoNobel the assurance activities took place (and at the moment of writing this thesis
are still taking place) at the backend of the project, post-implementation reviews on several
separation related topics.
At Philips the focus of assurance activities was on the early stages of their separation project,
without ‘closing the loop’ at a later stage.
In the blueprint based on theory and practice there should be assurance activities by Internal
Audit in all phases of the project in order for Executive Management / Supervisory Board to
have assurance during the entirety of the separation project.
Non-project related phase in Chapter 2 it was assumed that the Supervisory Board / Audit
Committee and/or the Executive Board of companies in transformational change will request
Internal Audit to provide additional assurance on the ‘business as usual’ or ‘going concern’,
so that they can focus on the transformation itself.
In the case of AkzoNobel this was the case. During 2017, when most of the separation
related activities took place, the Internal Audit Function had a focus on carrying out regular
audits, in order to give assurance to the Board on the control framework of the company.
In the case of Philips this was slightly different. The Philips Internal Audit department did
carry out a number of separation project related activities during the lifecycle of the project.
In addition they performed regular audits on ‘business as usual’ processes to give their
Executive Committee assurance on the control framework.
The input from both companies verifies this assumption and as such the non-project related
phase has a prominent place amongst the audit activities performed during a separation
project.
Consulting: in Chapter 2 it was assumed that the Internal Audit department (or a sub-set of
individual auditors) could perform a more prominent role on the risk management side of the
transformation process, for instance by helping to set the risk appetite and help in the
management of identified risks in the transformation project. The facilitation of risk
40
management workshops is a normal role for the Philips Internal Audit department; hence
they were involved in the risk management part of the separation project in a (limited)
consulting capacity. As there is a separate risk management department within AkzoNobel
(2nd line of defense) there was no distinct consulting or facilitation role during the separation
project. There was limited involvement of the Head of Audit (refer to the point below on
‘natural advisory role’).
Consulting: as mentioned in the point above there was a specific request by senior
management of Philips for the Philips Internal Audit department to be involved in the risk
management of the Gemini program (as Philips Internal Audit have a risk management
function). At AkzoNobel the Head of Audit provided limited advisory input as part of the
‘natural’ advisory role any internal auditor has. In conversation and meetings with separation
team members she provided input where requested.
Participating role: in Chapter 2 it was assumed that there will be transformation related
activities involving the split of the audit department itself, where the audit department will
have a participative role. In both companies this was the case.
Other role(s): in Chapter 2 it was assumed that there is a role for Internal Audit in
transformational change to cooperate with external parties and to provide them with
information. During any separation project there is a role for the external auditor to provide
assurance on the accuracy of the financial data relevant to the separation.
At AkzoNobel the external auditor reviewed financial statements going back a number of
years, any restatements (due to allocation of overhead costs) per company and so-called
carve-out financials. At AkzoNobel the Head of Internal Audit manages the relationship
between the company and the external auditor. In order to maximize the efficiency of
assurance she agreed upon a joint audit plan, in which external audit can rely on work
performed by the internal auditor, and in which internal audit can focus on process related
audits relevant in the post-implementation phase of the project.
In the case of Philips is the relationship with the external auditor was unclear based on the
interviews conducted.
Based on feedback received on the theoretical model during the interviews, some complexity
was taken out of the model by removing the ‘no role’ column. Where no role for Internal
Audit could be discerned, either due to lack of skills or knowledge or due to reasons of
independence a GREY block was included in the final ‘blueprint’ model.
41
4.2. Updates on the phases of the ‘blueprint’ matrix based on feedback
Some changes were made to the phases in the project, based on feedback from the
interviewees from both companies. Neither company used the strict phases of PRINCE2 in
the execution of the separation project. Based on the interviews there were roughly three
phases in the separation project (in which Internal Audit could be involved).
Beginning stage: denoted in the model below in combining the ‘Preparation / pre-project
phase’, ‘Starting up a project’ and ‘Initiating a project’ into a beginning (of a separation
project) stage, colored BLUE.
Beginning stage
Preparation / pre-project
phase
Starting up a Project
Initiating a Project
Operating stage: by combining the ‘Directing a project’, ‘Controlling a stage’ and ‘Managing
stage boundary’ phases the operating stage (when the project is meant to be achieving its
goals), colored PURPLE.
Operating stage
Directing a Project
Controlling a Stage
Managing Product Delivery
Managing a Stage
Boundary
End stage: by combining the ‘Closing a project’ and ‘Post-project review’ phases the end-
stage of a separation project is defined, colored ORANGE.
End stage
Closing a Project
Post-project review
42
Explanations to the figure on the next page:
The text in BLUE in the textboxes in the figure below refers to input regarding internal audit
activities derived from the empirical information obtained during the case studies (refer to
paragraph 4.1). The text in BLACK refers to the input derived from theory (refer to the
theoretical model in Chapter 2). The cells in GREY represent those parts of the project
where no role for Internal Audit could be discerned based on theoretical and empirical input.
43
Answer to research sub-question 3: What would a ‘blueprint’ based on an analysis of theory and empirical elements look like?
Assurance role Consulting role Participating role Other role(s)
Port
folio
man
agem
ent (
i.e. m
anag
ing
the
sepa
ratio
n pr
ojec
t)
• Pr
ovid
e as
sura
nce
on th
e ef
fect
iven
ess
of th
e p
ortfo
lio m
anag
emen
t and
the
abilit
y to
pr
ovid
e re
sults
in a
tim
ely
man
ner
• Pr
ovid
e co
nsul
ting
inpu
t / le
sson
s le
arne
d to
the
portf
olio
man
ager
and
team
Beginning stage
Preparation / pre-project
phase
• (Quality) assurance review (incl. cultural audits).
• Obtain feedback from peers • Establish core audit team • Create audit approach /
strategy
• Facilitate Risk Assessment. (e.g. via a workshop)
• Provide information. ‘ • Sounding board’ role.
• Only when some conditions are met.
• Limited involvement audit staff in risk management
• Create joint audit approach with external auditor
Starting up a Project
• (Project) (Quality) assurance review
• Review proposed deliverables
• Provide advice (e.g. on project plan, business case and feasibility of timelines).
• Provide lessons learned. Roles could include: • setting project risks; • managing the project process; • managing identified risks; • implementing solutions / being
accountable for deliverables; • accountability for sub-project
budget; • accountability for sub-project
deliverables; • project / program coordination
and/or; • managing of a stage. Also active participation if there is a (sub) project that directly involves the Internal Audit Department (e.g. split of the department in case of a separation).
Initiating a Project
• (Project) (Quality) assurance review (incl. Project Initiation Documentation).
• Provide advice (on the mechanisms to ensure quality.
• Provide lessons learned from previous projects
Operating stage
Directing a Project
• (Project) (Quality) assurance review • Coaching /
• Sounding Board, either via specific request or in the ‘natural’ advisory role IA has
• Directing input from external parties (e.g. external audit)
Controlling a Stage
• (Project) (Quality) assurance review (incl. progress reporting).
• Controlling input from external parties (e.g. external audit)
Managing Product Delivery
• (Project) (Quality) assurance (incl. QA on deliverables)
• Advise on (content of) deliverables
• Implementing deliverables – only for areas under direct influence
Managing a Stage
Boundary
• (Project) (Quality) assurance review (incl. adherence to project plan and management of risk registers).
End stage
Closing a project
• (Project) (Quality) assurance review
Post-project review
Post implementation reviews, including: • Cultural audits; • Separation topics, incl. IT, HR,
Legal, Finance topics
• Managing external parties
involved in a post-project review.
Non-project related
• Assurance over ongoing business processes during the project (‘going concern’)
Assurance role Consulting role Participating role Other role(s)
44
Chapter 5: summary and answering the central research question
5.1. Summary
In Chapter 2 a theoretical ‘blueprint’ matrix on how to audit transformational change was
presented. This matrix provides the answer to the research sub-question “What would a
‘blueprint’ internal audit approach for transformation projects based on theory regarding
transformation processes and project / program management look like?” This matrix was
constructed using theory on transformational change, establishing a definition of
transformational change which sets it apart from ‘normal’ change, and establishing a
definition for a project how to manage such change. A checklist to ascertain if the changes
which have occurred at the two companies in the case studies are indeed of a
transformational nature, as opposed to regular change, was established in Annex 2 and
applied to both AkzoNobel and Philips in Chapter 3.
The two axis of the theoretical ‘blueprint’ matrix were constructed by using literature on
project and portfolio management (the stages of a transformational change project based on
PRINCE2 in which Internal Audit can perform work on the Y-axis). On the X-axis the different
roles an Internal Auditor can take (based on IIA definitions and an additional article on the
role of Internal Audit during project management reviews) are displayed. The content of the
boxes in the ‘blueprint matrix’ are the perceived activities per Internal Audit role per stage in
the transformation project. A number of assumptions on the roles an auditor can take as well
as some additional audit objects in addition to PRINCE2 have been included. Finally the
types of audits to conduct have been included in the matrix.
Two companies have been selected for the case studies in Chapter 3, being AkzoNobel and
Philips. Both are Dutch listed companies that in the last 5 years have separated a large part
of the business (Philips did an IPO for Philips Lighting, whereas AkzoNobel opted for a sale
to private equity for its Specialty Chemicals division). During interviews with Internal Audit
staff of both companies information was received to answer the research sub-question
“What empirical elements, based on lessons learned from Internal Audit Functions from
selected companies in their transformation projects, can be identified?”. These empirical
elements, detailed in paragraph 3.3, include amongst others the establishment of a joint
Internal and External Audit plan, direct Internal Audit involvement in the separation projects
at both companies with regards to the separation of the Internal Audit Functions, the
execution of audits in different stages of the separation projects (Philips in the earlier stages,
AkzoNobel in the later stages of the project), drafting a detailed audit approach to the
45
separation audits by Philips as well as involvement in the risk management process of the
project.
The information obtained during the interviews show a diverse picture of Internal Audit
involvement during large scale organizational separation projects. The Philips Internal Audit
department provided assurance on the earlier stages of the separation project and also
facilitated a project risk workshop. The AkzoNobel Internal Audit was predominantly involved
in the back-end of the separation project, by performing post-implementation reviews. During
much of the course of the separation related activities both Internal Audit departments spend
time covering ‘business as usual’ risks.
The interviewees at both companies also provided direct feedback on the theoretical
‘blueprint’ matrix. Both their direct feedback and the empirical elements taken from the case
studies have been combined to answer research sub-question “What would a ‘blueprint’
based on an analysis of theory and empirical elements look like?”
This led to an updated version of the ‘blueprint’ matrix in Chapter 4. The main differences
compared to the theoretical ‘blueprint’ from Chapter 2 consist of combining a number of
stages (Y-axis), combining the ‘no-role’ fields in the matrix, adding more details on auditing
the ‘portfolio management’ stage and adding a number of activities observed in the empirical
research.
5.2. Answering the central research question
Based on the answers to the sub-questions 1, 2 and 3 in Chapters 2, 3 and 4 respectively,
the answer to the central research question “What roles can Internal Audit assume in the
different stages of a transformation project in order to support the business?” is detailed
below per identified role. First, a summarized answer to the research question is provided in
paragraph 5.2.1. Further details on each of the identified roles are given in paragraph 5.2.2.
5.2.1. Summarized answer to the central research question
Theory and empirical research suggest that the assurance role is the most common role
auditors can assume in a transformational change project such as a companywide
separation. Assurance activities are taking place throughout the lifecycle of a project. Both
companies performed their assurance role in different stages of their respective separation
projects. Both companies also performed non-project related assurance work on ‘business
as usual’ audit objects.
46
The second most common role is the participating role, where both companies managed a
sub-project separating their own departments. Within AkzoNobel this involved all members
of the audit function, at Philips only a limited number of employees.
As part of the consulting role, Philips facilitated a risk workshop for the project
management of the separation project, whereas AkzoNobel did not have a distinct consulting
role.
In the category other role AkzoNobel managed the relationship with the external auditor as
well as setting up a joint internal-external audit work plan.
5.2.2. Detailed activities identified per role
Elaborating on the summarized answer above, specific activities per role are listed (based
on theory enhanced with empirical elements).
Assurance role: based on theory and empirical input the assurance role appears to be the
most common role Internal Audit takes during a transformation project, such as the
separation of a company. Assurance can be provided during all stages of the separation
project.
In both companies the audit plans for the period in which the separation project was
conducted had been agreed upon upfront with key stakeholders in the company (such as
Executive Committee and Supervisory Board). In both companies these key stakeholders
provided their input into the audit plans in a way that maximized value for them during the
separation projects. As the input obtained from and the direction given by these key
stakeholders differed per company the two case studies show two different perspectives.
At Philips the assurance was predominantly provided during the early stages of the
separation project as well as on the portfolio management of the separation project. Good
practices observed at Philips include the drafting of a specific audit plan for separation
related audits, including input from a peer company that had gone through a separation
project previously.
The assurance activities provided by Philips Internal Audit included reviews of project
management organizations (in functions and key countries) when these project management
organizations had commenced operating. The assurance provided was on the design of the
separation project, and the ability to complete the separation project on-time, within budget
and against the desired quality.
47
In contrast, at AkzoNobel the assurance activities took place towards the backend of the
separation project, with an onus on post-project reviews. These reviews took place on
deliverables like the set-up of new departments and the ability for the separated companies
to function properly on their own.
Both companies considered the non-project related reviews (meaning reviews on the
‘business as usual’ or ‘going concern’) important. At Philips these reviews were conducted in
tandem with separation related audits during the operational phase of the separation project.
At AkzoNobel there was a specific request to focus almost exclusively on assurance
activities aimed at giving the Executive Committee and Supervisory Board assurance that
the business was being conducted in line with the controls as set out in the internal control
framework during the operational phase of the separation project.
Cultural change is a major distinguishing factor of transformational change; neither company
however included audits on cultural aspects in their audit plans for the separation project.
The combination of theory and empirical insights results in an assurance role for Internal
Audit throughout the lifecycle of a separation project. Ideally the Internal Audit involvement in
a separation project is a combination of the approaches taken by Philips and AkzoNobel.
This means involvement in the beginning phase of a project (by providing quality assurance
on the design of the controls and proposed deliverables during the separation project),
involvement in the operating phase (by providing assurance on the operating effectiveness
of the controls in place) and in the post-project review (giving assurance that the separation
project has delivered on targets such as timeliness, budget and quality). This is in line with
the project roles described by Huibers (2013).
Consulting role: the two case studies provide a different picture related to the consulting
role the Internal Audit functions took during the separation projects.
As the Philips Internal Audit department has a risk management role (in addition to their
internal audit responsibilities) they were involved in the risk management assessment of the
separation project in a facilitating role. Together with the project management organization
they collected risk scenarios, which were prioritized during a risk management workshop.
This comes close to the project role of ‘Coach / trainer’ described by Huibers (2013). In his
article he explicitly mentions the facilitation of a project risk workshop as an activity in this
consulting role.
In contrast the consulting role AkzoNobel Internal Audit played during the separation project
was limited to a ‘natural advisory’ role, akin to the ‘Sounding board’ project role described by
48
Huibers (2013) in his article. When asked, the Head of Audit raised reflective questions and
provided advice.
Ideally there should be a consulting role for Internal Audit in a separation project; be it to
facilitate a risk workshop, to be a ‘sounding board’ regarding risk mitigating activities taking
place, or sharing lessons learned from previous projects.
Participating role: in both case studies the participating role in the separation project
focused only on the separation related activities involving the internal audit function itself. At
AkzoNobel all team members had been allocated to either the audit function at the Paints &
Coatings company or to the newly established audit function at the Specialty Chemicals
company. All employees participated in the separation project, for instance in activities such
as the separation of data, separation of audit tools, the transfer of (audit and business)
knowledge between the two departments and hand-over of ongoing audit activities.
It is understood that at Philips a select number of employees participated in the separation of
the audit department (in addition to their daily activities).
When aligning the participating activities to the model of Huibers (2013), the activities
performed by both companies come closest to ‘Project/process coordinator’.
From interviews (at Philips) and personal involvement (at AkzoNobel) it is noted that none of
the other participating roles Huibers (2013) mentions in his article, such as ‘Proactive expert
role’, ‘Documentation controls’ or ‘Proactive QA partner’, were executed.
Other role(s): the ‘other role’ internal audit can play during a separation project observed in
practice at AkzoNobel was the relationship management and coordination role with the
external auditor. In order to maximize value and audit efficiency a joint audit plan (internal
and external audit) was established, in which both parties were responsible for auditing
certain elements of the separation project. The external audit focused on financial (reporting)
risks and reviewing financial statements (going back a number of years). Internal audit
focused on reviewing controls post-implementation, on which external audit can support
during their financial (interim) audits.
This cooperation with the external auditor in part stems from the fact that the Head of Audit
at AkzoNobel manages the relationship with the external audit.
Based on the interview no ‘other role’ could be discerned at Philips.
No role: prior to commencing the case studies of this thesis there was a belief that Internal
Audit could take on some roles that are usually a ‘no-go’ due to reasons of independence
49
and objectivity. This was assumed as transformational change has such a profound impact
on a company that ‘all bets are off’ when it comes to involvement of staff. Huibers (2013)
mentions a number of roles Internal Audit should not take during a project, such as ‘setting
the project risk appetite’, ‘imposing the project management process’, ‘managing risks
identified in quality assurance’, ‘taking managerial decisions regarding the proposed
solutions’, ‘implementing solutions on behalf of management’ and ‘being accountable for
embedding project deliverables in the organization’. None of these roles were undertaken in
either Philips or AkzoNobel. The only two roles Huibers (2013) mentions as roles not to be
undertaken that were applicable to both Philips and AkzoNobel were ‘being accountable for
project deliverables’ and ‘being accountable for project budget and/or progress against
milestones’ in so far these concern the sub-project related to the separation of the Internal
Audit departments themselves. Given the nature of the separation projects (and the
transformational change it brings not only to the company as a whole but also to the involved
internal audit departments) these roles are deemed acceptable.
5.3. Limitations in scope of this thesis and suggestions for further research
There are some limitations regarding the outcomes of this thesis that should be taken into
account.
The empirical elements have been gathered in two case studies only, involving recent large
scale separation projects of two Dutch AEX-listed companies, and are based on a limited
number of interviews and documents reviewed. The two companies are also both in roughly
the same industry, as they are both manufacturing companies.
As this thesis has been written for the Executive Internal Audit Program at the University of
Amsterdam it has looked exclusively at the internal audit side of the separation projects. As
such only internal audit professionals have been interviewed.
Further research on this topic might include obtaining the ‘business view’ on the role of
internal audit in separation projects and how the contribution of internal audit is perceived by
the management of the company that is separating.
Other dimensions of future research might include the application of this ‘blueprint matrix’ in
practice, such as in any upcoming separation projects. Other suggestions include application
of the ‘blueprint matrix’ to different industries, to different sizes of companies (not just large
listed companies), or application to companies in different countries.
50
The model might also be used in a retrospective fashion, by applying it to other separation
projects in the past (for example. the dismantling of other industrial conglomerates) and see
what additional lessons learned will emerge.
5.4. Epilogue
On March 27th 2018 it was announced that the Specialty Chemicals business of AkzoNobel
has been sold to an American private equity firm15. The actual date of transfer of ownership
will be later in 2018. Until then the AkzoNobel Specialty Chemicals Internal Audit department
will continue to perform audits on separation related activities, where processes, systems
and personnel will be separated from AkzoNobel. AkzoNobel will from the moment of
external separation onwards be a dedicated paints and coatings company only.
15 Refer to: https://www.bloomberg.com/news/articles/2018-03-27/carlyle-wins-auction-to-buy-akzo-nobel-s-chemicals-unit-ft-says
51
Literature
• Anderson, D. & Ackerman Anderson, L. (2010). What is transformation and why is it so
hard to manage? Retrieved from: http://changeleadersnetwork.com/free-resources/what-
is-transformation-and-why-is-it-so-hard-to-manage
• Association for Project Management (2012). What is portfolio management? Retrieved
from: https://www.apm.org.uk/body-of-knowledge/context/governance/portfolio-
management/
• Blumenthal, B. & Haspeslagh, P, (1994). Towards a Definition of Corporate
Transformation. Sloan Management Review, Spring 1994
• Chartered Institute of Internal Auditors (UK & Ireland) (version 27 September 2016).
Auditing projects in the early stages. Practice Guide. Retrieved from:
https://www.iia.org.uk/
• Chartered Institute of Internal Auditors (UK & Ireland) (version 17 January 2017).
Organisational change. Practice Guide. Retrieved from: https://www.iia.org.uk/
• Edwards, M. (2010). Organisational transformation for sustainability: an integral
metatheory. New York: Routledge
• Flamholtz, E. & Randle, Y. (1998). Changing the game: Organizational Transformations
of the First, Second and Third kind. Oxford University Press, Oxford.
• Glover, S., Prawitt, D. & Wood, D. (2008). Internal Audit Sourcing Arrangement and the
External Auditor's Reliance Decision. Contemporary Accounting Research, Volume 25,
Issue 1 (spring 2008).
• Hass, S., Abdolmohammadi, M. & Burnaby, P. (2006). The Americas literature review on
internal auditing. Managerial Auditing Journal. Volume 21 Number 8, 2006; pp.835-844
• Huibers, S. (2013). The role(s) of the auditor in projects: Proactive Project Auditing.
EDPACS Issue 5, 2013 – Taylor and Francis. Retrieved from:
52
https://www.iia.nl/SiteFiles/Role__auditor_in_projects_Huibers_2013_AOM_article%20p
ublished%20in%20EDPACS.pdf
• IIA Netherlands & KPMG (2015). Discussion paper: Strategy Related Auditing. Retrieved
from
https://www.iia.nl/SiteFiles/Publicaties/IIA_Bro%20A4%20Strategy%20Related%20Audit
s%20DEF.pdf
• KPMG (2016). Acht basis soft controls. Tijd voor next level compliance. Retrieved from:
https://assets.kpmg.com/content/dam/kpmg/pdf/2016/04/20160218-acht-basis-soft-
controls.pdf
• Kuntz, J. & Gomes, J. (2012). Transformational change in organisations: a self-
regulation approach. Journal of Organizational Change Management, 2012, Vol.25(1),
pp.143-162
• McNamee, D. & Selim, G. (1998). Risk Management: Changing the Internal Auditor's
Paradigm. Florida Institute of Internal Auditors, 1998.
• McNulty, T & Ferlie, E. (2004). Process transformation: Limitations to radical
organizational change within public service organizations. Organization Studies, vol. 25,
no. 8, pp. 1389 – 1412.
• Miles, R. & Kanazawa, M. (2016). Big ideas to big results: leading corporate
transformation in a disruptive world. Old Tappan, New Jersey: Pearson Education LTD.
Second edition.
• Munro, L. & Stewart, J. (2010). External auditors’ reliance on internal audit: the impact of
sourcing arrangements and consulting activities. Accounting and Finance Magazine,
Volume 50, Issue 2. June 2010 pp. 371-387.
• Poole, P. (1998). Words and deeds of organizational change. Journal of Managerial
Issues, vol. 10, no.1, pp. 45 – 49, 1998
53
• Portman, H. & Newton, S. (2009). PRINCE2 in practice: a practical approach to creating
project management documents: how to avoid bulky, inaccessible, stand alone, and
illegible document. Zaltbommel: Van Haren Publishing.
• Sardana, G. (2015). Managing Organizational Transformation. South Asian Journal of
Business and Management Cases, 2015, Vol.4(1), pp.vii-xii
• Sarens, G. & De Beelde, I. (2006). The Relationship Between Internal Audit and Senior
Management: A Qualitative Analysis of Expectations and Perceptions. International
Journal of Auditing 10(3). March 2007
• Smith, M. (2002) Success Rates for Different Types of Organizational Change.
Performance Improvement, 2002, Vol.41(1), pp.26-35
• Suwaidan, M. & Qasim, A. (2010). External auditors' reliance on internal auditors and its
impact on audit fees: An empirical investigation. Managerial Auditing Journal, Vol. 25
Issue: 6, pp.509-525
• Termeer, K., Dewulf., A.& Biesbroek, R. (2016). Transformational change. Journal of
Environmental Planning and Management, NARCIS (National Academic Research and
Collaborations Information System)
54
Annex 1: list of interviewed persons and interview summaries
• Donald Schut, senior-manager Internal Audit AkzoNobel Specialty Chemicals
• Marie-Pauline Lauret, Head of Internal Audit AkzoNobel (Paints & Coatings); ad interim
Head of Internal Audit AkzoNobel Specialty Chemicals
• Esther Sorin – Director Internal Audit Philips
Prior to the interview the theoretical ‘blueprint’ matrix was sent to the interviewees. During
the interview their input was sought on the matrix; in order to enhance the model with
empirical research.
The interviews themselves were semi-structured around the various roles an Internal Auditor
can take during a transformational change project: assurance, consulting, participative and
other (as per theoretical ‘blueprint’ matrix).
During the interviews the interviewees provided details on the respective separation projects,
the phases of the project/program and the involvement of Internal Audit.
During the interviews internal (audit) documentation was shared and reviewed. Per request
of the interviewees no text was directly referenced from the documentation in this thesis.
Interview notes have been made of the meetings (refer below) and have been agreed with
the interviewees for factual accuracy and use in this thesis.
55
Interview summary – meeting Esther Sorin Philips Internal Audit Department
01 March 2018
During the interview, which took place at the Philips Office in Amsterdam, the involvement of the
Philips Internal Audit department in the split-off of Philips Lighting, the so-called Gemini project, was
discussed. This interview summary is structured along the different roles and internal auditor can
assume during a separation project which were discussed during the interview.
At the start of the interview Ms. Sorin gave a summary of the Gemini project (end-2014 to mid-2016)
and the activities performed by the Philips Internal Audit department during that project. The three
main phases of the Gemini project were discussed:
• Phase 1: Streamlining of the two businesses (HealthTech and Lighting);
• Phase 2: Separation; and
• Phase 3: Benchmark level
The audit activities detailed below mainly took place in phase 2 of the project.
Assurance Role:
After the announcement of the Gemini separation project in late 2014 the Philips Internal Audit
department started preparation of the 2015 audit plan; in which a number of separation related audits
were included.
In order to ensure the correct Internal Audit activities were included the Head of Internal Audit visited
a peer company who had undergone a separation in the past in order to obtain lessons learned. Also
the input of internal key stakeholders was sought in order to prepare the Internal Audit plan for 2015.
Audit reviews related to the separation kicked off in the second quarter of 2015 once the Philips
separation teams were in place.
The Philips Internal Audit also prepared a separate document in which the added value of the
department during the separation project was detailed. This document was an outline of the strategy,
stakeholder management and knowledge management during the Gemini project.
The first audit in an assurance role on the Gemini project was an audit aimed at reviewing the
effectiveness of the set-up of the Gemini project organization (including Project Management; Project
Support and ‘work-streams’ per (corporate) function) and the ability of the project to deliver according
to timetable and desired quality. I.e. this could be viewed as an audit on the portfolio management of
the Gemini project. The audit was executed by Philips Internal Audit staff with experience of project /
program management.
In addition to the assurance provided on the portfolio management; the Philips Internal Audit
department provided assurance on the set-up of the separation teams in the main local markets such
as India and China. This review was not called an audit, but was rather a ‘progress review’ in which
56
the robustness of the controls in place at the local separation teams to ensure the timely delivery of
separation activities was reviewed.
Also, a number of ‘deep-dive’ audits were performed on a number of critical functions involved in the
separation; such as IT (for systems separation); HR (payroll etc.), Treasury and Finance.
Finally, regular audits were conducted throughout the lifecycle of the Gemini project in order to ensure
‘going concern’.
It is understood from the interview and reviewing the documentation that the assurance role of the
Philips Internal Audit department took place during the early stages of the separation project; i.e. in
terms of PRINCE2 in the stages ‘Starting up a project’ and ‘Initiating a project’; where some of the
‘deep dive’ and country separation audits appear to focus on the ‘Directing a project’ and ‘Managing
product delivery’ stages.
It is understood that the Philips Internal Audit department was not involved in post-project reviews.
Consulting Role:
As the mandate of the Philips Internal Audit department also covers Risk Management, the
department was involved in a consulting and facilitating role by conducting a risk workshop for the
Gemini project (i.e. in terms of the theoretical model at portfolio management level). In order to make
the contribution as valuable as possible a specific approach was taken for this risk workshop.
Per ‘work-stream’ bottom-up risk scenarios were collected and collated into one risk-register. This
activity was led by the Gemini PMO.
At the same time top-down risk scenarios were acquired from the Gemini project steering committee.
This activity was led by Philips Internal Audit.
During a risk workshop, facilitated by the Philips Internal Audit department, the main risk scenarios
were discussed. Via voting the risk scenarios were rated; and risk mitigation activities defined.
Following the gathering of bottom-up and top-down inputs, Philips Internal Audit consolidated the long
list of risk items and identified the main risks from this long list
Participating Role:
As part of the separation activities the Philips Internal Audit department was separated as well; with
roughly one-third of the staff joining a newly formed Philips Lighting Internal Audit department.
Various (sub) projects were initiated at departmental level, with two resources working on the split of
data and supporting tools. The 2 resources were not dedicated to the separation activities; the work
was performed ‘on top of their daily job’.
Other Role:
57
The topic of interaction and cooperation with the external auditor during the Gemini-project was briefly
discussed; as Ms. Sorin was not directly involved in this topic no details were discussed.
Other topics covered:
During the interview a few other topics, not related to the thesis or the Gemini project were discussed;
including:
• Philips Internal Audit methodology.
58
Interview summary – meeting Donald Schut AkzoNobel Specialty Chemicals Internal Audit
department
31 January 2018
During the interview, which took place at the AkzoNobel Head office in Amsterdam, the involvement
of the AkzoNobel Internal Audit department (both prior and following the internal separation on 01
January 2018) in the split-off of Specialty Chemicals, the so-called Starfruit project, was discussed.
This interview summary is structured along the different roles and internal auditor can assume during
a separation project which were discussed during the interview. Also, as part of the interview the
application of the theoretical ‘blueprint’ to AkzoNobel was discussed as well.
Part of the conversation also focused on the involvement of Mr. Schut in another separation project
(when DSM sold part of their company to Sabic); due to limitations in scoping of this thesis the case
study DSM/Sabic was not included in the thesis.
Theoretical ‘blueprint’ applied to AkzoNobel
= separation related activities in which AkzoNobel Internal Audit is involved
Figure 01: the AkzoNobel Internal Audit activities plotted on the theoretical model
Based on the knowledge of Mr. Schut on the activities deployed by AkzoNobel Internal Audit during
the Starfruit separation project the above depicted involvement of the AkzoNobel IAF was verified.
59
Assurance Role:
As per request of the Audit Committee (part of the Supervisory Board) the IAF is not involved in
providing assurance on the Starfruit separation project (neither on the portfolio management stage
nor the individual project steps). The request of the Audit Committee was motivated that the
transformation process is taking place in such a short timeframe (less than a year), that an internal
audit on the (limited in size) project team will create too much of a distraction and might potentially
lead to a delay in the actual separation. In order to mitigate a number of associated transformation
portfolio and project risks, AkzoNobel have engaged external consultants and hired experienced
project management to assist the company in this transformation. The Audit Committee also made a
specific request that the IAF focus on the ‘going concern’ risks, i.e. risks in day-to-day activities as a
result of the transformation project and the stress this brings to the company.
On January 1st 2018 an ‘internal separation’ was achieved: both the Paints & Coatings and Specialty
Chemicals companies continue to be under the AkzoNobel umbrella, but are internally run as two
separate companies in preparation for the external separation (sale or demerger – announced in
March 2018). For the first half of 2018 a number of post implementation audits have been scheduled;
with the expectation that in the remainder of 2018 (prior to the external separation; a.k.a. closing of
the deal) further audits will take place on project related to building new capabilities in the Specialty
Chemicals company previously provided by AkzoNobel.
These post implementation audits, from the point of view of the part of the company that is spun-out
or sold, constitute three main types of audits:
1. IT audits to provide assurance on the separation of key IT systems (including ERP systems) and
to assure proper segregation of duties between users of both the Paints & Coatings and Specialty
Chemicals. Also the topic of logical access controls is tested;
2. Reviews of the Service Level Agreements that have been drafted for back office services (IT,
HR and Finance) between the Specialty Chemicals part and the remainder of AkzoNobel;
3. Review of the legal separation at country level; where existing AkzoNobel entities have to be
separated as well; and issues regarding bank accounts, tax / local VAT, Treasury and HR/payroll
had to be solved.
Consulting role: The Internal Audit Function provides input to the Executive Committee of AkzoNobel on emerging
risks on a continuous basis; hence also with respect to the separation of the Specialty Chemicals
business. A risk assessment was carried out on the separation project(s), without direct involvement
from Internal Audit. On high level the identified risks related to the project governance of the
transformation project, the project change management processes and a number of risks associated
with the transformation project (e.g. loss of management focus, pressure on results and loss of
experienced staff due to the abovementioned turmoil).
60
Internal Audit has selected audit objects for the duration and after the transformation project, based
on this risk assessment. In partial mitigation to the risk of pressure(s) on results a number of existing
audit procedures have been updated to take potential fraud indicators into consideration.
Participating role:
As a result of the separation, the Internal Audit Function itself was separated as well. Roughly 2/3 of
the Function remained with the AkzoNobel company (Paints & Coatings), roughly 1/3 of the Function
(including yours truly) was moved to the Specialty Chemicals company. In order to arrange for a
smooth separation, a number of Internal Audit separation specific projects have been initiated where
Internal Audit staff actively participated. These include:
• Selection process of which staff members go to Specialty Chemicals. At the moment of writing
this thesis this process was completed;
• Set up of the new audit organizations, including leadership, office locations, organizational charts
and roles and responsibilities. At the moment of writing this thesis this part of the project was still
ongoing;
• Setting up a new audit universe for both companies. At the moment of writing this thesis this part
of the project was still ongoing;
• Developing two separate audit plans for 2018. At the moment of writing this thesis this process
was completed. However given the uncertainty of the new ownership structure of the Specialty
Chemicals company prior to March 2018, the audit plan was revised to cater for management
requests coming from the separation;
• Separation of Internal Audit systems and data (including licenses for tooling). At the moment of
writing this thesis this part of the project was still ongoing;
• Creation of two separate budgets. At the moment of writing this thesis this part of the project was
completed; and
• Recruitment of a new Head of Internal Audit for the Specialty Chemicals audit team. At the
moment of writing this thesis this part of the project was still ongoing.
In order to ensure these activities are executed timely and completely a project team was set up
within the Internal Audit Function.
61
Interview summary – meeting Marie-Pauline Lauret AkzoNobel Internal Audit department
19 February 2018
During the interview, which took place at the AkzoNobel Head office in Amsterdam, the involvement
of the AkzoNobel Internal Audit department (both prior and following the internal separation on 01
January 2018) in the split-off of Specialty Chemicals, the so-called Starfruit project, was discussed.
Also the role that Marie-Pauline as Head of Audit took was discussed. As the timeslot for this
interview was shorter than for the other interviews (30 minutes) a meeting presentation was prepared
and submitted to Marie-Pauline for her review prior to the meeting.
This interview summary is structured along the different roles and internal auditor can assume during
a separation project which were discussed during the interview. Also, as part of the interview the
application of the theoretical ‘blueprint’ to AkzoNobel was discussed as well.
1. Role(s) AkzoNobel Internal Audit Function in the separation of Paints & Coatings and Specialty Coatings:
• Prior to Day 1 (01 January 2018 – internal separation date);
• Between Day 1 and Day 2 (external separation date – yet to be determined); and
• After Day 2.
The role of the Internal Audit department prior to Day 1 was predominantly to provide assurance to
the Executive Committee on ‘going concern’ audit objects. This was done as per specific request of
the Audit Committee.
No project management review on the Starfruit project took place. During the period prior to 01
January 2018 there was also a sub-project at the go within the Internal Audit Function to split the IAF.
Members within the IAF could choose which company they wanted to join. This process was
completed at the time of the interview.
Between Day 1 and Day 2 (moment of interview) there were two separate internal audit teams (both
under management of Marie-Pauline) who were executing post-implementation audits to verify that
the internal separation had gone according to plan. Audit objects were predominantly corporate
functions where staff had always performed tasks for both sides of the company; e.g. Finance, IT, HR
and Treasury.
The role of Internal Audit after Day 2 has yet to be defined. The date for Day 2 was not yet known at
the moment of interview.
62
2. Role(s) Corporate Director Internal Audit: Starfruit Project; other separation related activities
• Audit related roles; and
• Non-audit related roles.
As Head of Audit Marie-Pauline was not directly involved in the Starfruit project. As the project was
executed at very high speed there was a specific request from the Audit Committee to not perform
internal audits; as not to hamper the speed of implementation. The audit department, and by
extension Marie-Pauline also did not perform any consulting role during the Starfruit project. A risk
assessment was performed on the project; and the results shared with the IAF. Some additional
‘going concern’ audit objects were scoped as a result of this risk assessment.
Marie-Pauline explained that a Head of Audit (just as any other internal auditor) has a ‘natural
advisory function’. This means that when the company request formal or informal advice the auditor
can give this advice. In the case of the Starfruit project Marie-Pauline was asked to give some advice
on an ad-hoc basis. When asked to provide this advice she provided this.
The main role that Marie-Pauline took during the separation project was to manage the relationship
with the external auditor (PwC). The management of the relationship was already a task that she had;
so this task was extended during the separation project. The external auditor had to re-audit financial
figures going back a number of years; as all of the AkzoNobel figures were consolidated. In order to
provide prospective buyers with accurate financial information the overhead figures had to be split.
Between Day 1 and Day 2 the external auditor performed a number of financial audits. At the same
time the IAFs (Paints & Coatings and Specialty Chemicals) performed a number of operational and IT
audits to validate that the separation processes had run according to plan. In order to avoid the
duplication of efforts and to allow the external auditor to leverage off the results of the operational and
IT audits a joint audit plan was agreed with PwC. The two IAFs would first audit the processes around
the separation before the external auditor would audit the Q1 results for 2018 for the two separated
companies.
63
3. Plotting the activities of the AkzoNobel Internal Audit Function on the theoretical model (see next slide):
• Various stages in the separation project(s) (Y-axis);
• Various roles Internal Audit can take: assurance role, consulting role, participating role; and/or other roles (X-axis); and
• Any input on the theoretical model.
The model is too complicated, and too complex. The model should be simplified. For instance the
PRINCE2 stages are not used within the Starfruit project. Consider combining the stages to make the
model more ‘user friendly’.
64
Annex 2: Checklist to determine transformational change
As mentioned in paragraph 2.1 there is a difference between ‘regular’ organizational change
and transformational change. In order to ascertain if a change is indeed considered a
transformational change a number of indicators need to be in place. For the case studies in
Chapter 3 the indicators below were applied, which have been derived from the work of
McNulty and Ferlie (2004):
1. Are there multiple and interrelated changes envisaged for the company as a whole?
2. Will the change lead to the creation of a new organizational form?
3. Will the envisaged change impact upon all layers in the company, including at sub-unit
and individual level?
4. Will the envisaged change lead to changes in the services or products provided by the
company and their mode of delivery?
5. Will the envisaged change lead to new leadership structures? I.e. will it fundamentally
change the governance structure of the entity?
6. Will the envisaged change lead to a new corporate culture, ideology and/or
organizational meaning?
7. Is there uncertainty prior to commencement of the change project about future state of
the company?
If these questions can be answered with ‘yes’ for the companies included in the case studies
in Chapter 3, the organizational change is considered to be of a transformational nature.
65
Annex 3: background information on portfolio management
The definition of the APM continues: “Portfolios can be managed at an organizational or
functional level and address three questions:
4. Are these the projects and programs needed to deliver the strategic objectives, subject
to risk, resource constraints and affordability?
5. Is the organization delivering them effectively and efficiently?
6. Are the full potential benefits from the organization’s investment being realized?
As a result, portfolio management integrates the disciplines of:
• strategic planning;
• change management;
• project and program management.
The portfolio life cycle encompasses techniques such as:
• segmenting the portfolio into categories and tailoring the investment criteria accordingly;
• portfolio prioritization based on assessments of risk and return;
• assessments of progress via stage gates;
• periodic portfolio-level reviews and regular portfolio reporting;
• consistent portfolio-wide approaches to benefits management.
The portfolio management process must constantly review the balance of investment and
benefit, creating and closing projects and programs as necessary. This will include
prematurely closing projects or programs where they are no longer viable.
The benefits of applying a portfolio approach include:
• maintaining a balanced and strategically aligned portfolio in the context of changing
conditions;
• improved delivery of projects and programs through a portfolio-wide view of risk,
dependencies, and scheduling to reflect the capacity of different parts of the organization
to absorb change;
• reduced costs by removing overlapping, poorly performing and non-strategically aligned
projects and programs;
• more efficient and effective use of limited resources, by matching demand and supply,
and optimizing allocation of available resources;
66
• increased realization of forecast benefits and the identification and realization of
unplanned benefits to create additional value.
Achieving these benefits is dependent on repeatable processes supported by:
• a clearly articulated strategy;
• senior management commitment to, and active championing of, the portfolio
management processes to ensure that stakeholders collaborate in pursuit of shared
goals;
• a clear governance structure that is understood by stakeholders;
• a portfolio management office function to provide impartial and credible analysis and
decision-making support to the portfolio management team, along with support to
projects and programs.
Good governance of an organization’s portfolio provides an opportunity to improve the
management of projects and programs consistently. A well-managed portfolio provides the
structure and commitment needed to improve an organization or function’s maturity”.
67
Annex 4: the PRINCE2 project management model
In the below model the PRINCE2 process model is visualized16:
16 Refer to: https://www.prince2.com/uk/prince2-methodology
