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Measuring Success:
Using a Balanced Scorecard Approach
6 New Perspectives Association of Healthcare Internal Auditors May 2008
Introduction
Internal audit departments routinely
face questions from key stakeholders
such as senior management and the
audit committee regarding how the
department measures performance and
adds value to the organization. While
numerous metrics to measure internal
audit performance are available, the
challenge often faced is selecting ones
most meaningful to the department,
the organization, and key stakeholders.
Is the number of certied internal
auditors important? Is completion
of the annual audit plan the most
important measure of success? Is the
dollar amount of revenue recovered or
costs saved through audit department
ndings as important as audit customer
satisfaction? How about the size and
cost of the internal audit department?
How does it compare to the internal
audit departments of other healthcare
organizations?
Likewise, an internal audit department
must continually consider which
strategies are needed to ensure the
department will be able to continue to
deliver high quality, cost effective service
to our customers. The emergence of
signicant risk areas such as regulatory
compliance, Sarbanes-Oxley and internal
controls over nancial reporting, and
enterprise risk management are just
a few examples of new or expanded
responsibilities for healthcare internal
auditors during the past 10 years.
Communicating the departments
strategies in response to these changes
to key stakeholders and linking them
to the departments operating activities
and performance measures is often
challenging.
This article discusses the use of a
balanced-scorecard framework as an
effective tool to link an internal audit
departments strategies to its performance
management system, and how we are
using such a system today at Trinity
Health.
The Balanced Scorecard Framework
Balanced scorecards as a performance
management tool are widely used in
many industries. Robert Kaplan and
David Norton are credited for initially
developing the balanced scorecard model
in the early to mid-1990s.
A balanced scorecard measures
performance across multiple areas of
an organization, all linked directly
to the organizations strategy and
vision. Rather than focus solely on a
single factor such as nancial earnings,
a balanced scorecard considers an
organizations performance in multiple
key strategic and operating areas. The
linkage of strategy to the organizations
operating activities is key to the balanced
scorecard system.
The Kaplan-Norton Framework identied
the following four principal areas for
measuring the performance of companies:
Financialstrategy for growth,
protability and risk as viewed by
shareholders
Customerstrategy for creating value
and differentiation from the view of
the customer
Internal Business Processstrategic
priorities for various business
processes that create value for
customers and shareholders
Innovation and Growthstrategies
that support change, innovation and
growth
Balanced Scorecard Benets for
Internal Audit Departments
In addition to measuring the
performance of an organization,
business units or departments within
an organization can also use a balanced
scorecard framework to link strategy
to key operating activities and
performance. Its particularly useful for
developing performance measures for
departments that have unique mission
and strategic objectives like internal
audit. A balanced scorecard can assist an
internal audit department in proactively
responding to typical stakeholder
questions such as:
How does internal audit measure
performance?
How does our organizations internal
audit department compare to other
healthcare organizations?
Executive Summary
A balanced-scorecard framework can be an effective tool to link an internal audit
departments strategies to its performance management system. A balanced
scorecard can be useful in responding to questions from key stakeholders, such
as senior management and the audit committee, regarding how the department
measures performance and adds value to the organization, and in demonstrating
alignment of the internal audit departments objectives to the organizations
key strategies. A balanced scorecard can assist in focusing department staff on
performance improvement/quality assurance activities and can also be used for
benchmarking an internal department to other internal audit departments. The
strategies and key operating activities selected for a balanced scorecard should be
specic to the needs or opportunities identied for the internal audit department.
May 2008 Association of Healthcare Internal Auditors New Perspectives 7
How is the internal audit department
adding value to our organization?
What are the internal audit
departments key strategies and
objectives?
A balanced scorecard can effectively
demonstrate alignment of the internal
audit departments performance
measures to the organizations
key strategies. It can incorporate
benchmarking information that
compares information on the internal
audit department to peer data, such
as that obtained from the Institute of
Internal Auditors Global Auditing
Information Network (GAIN). Finally,
a balanced scorecard can be used
to measure progress in initiatives
undertaken in response to Quality
Assurance Review (QAR) activities.
A Balanced Scorecard Framework
for Internal Audit
The Institute of Internal Auditors
Research Foundation published an
excellent study in 2002 on the growing
use of balanced scorecards in internal
auditing. In the study titled A Balanced
Scorecard Framework for Internal Auditing
Departments, author Mark Frigo
suggested modications to the Kaplan/
Norton framework for use by internal
audit departments. An example of one
framework that might be used is shown
in Exhibit I.
As shown above, the Kaplan/Norton
framework previously discussed has been
modied to present four perspectives
appropriate for an internal audit
department. Two primary customer
groups are identied: 1) the board
of directors/audit committee and 2)
management and audit customers.
Similar to the original Kaplan/Norton
framework, internal audit department
processes (e.g. quality, timeliness, cost)
and innovation and learning capabilities
(e.g. staff, technology and training) are
identied as the other perspectives in the
balanced scorecard.
The above areas are just examples to
consider and modications should be
considered based on appropriateness
to your organization. For example, an
internal audit department of a publicly-
traded healthcare company could
consider external groups, such as the
Securities and Exchange Commission,
other regulatory agencies, shareholders,
external auditors, etc., to be of sufcient
importance to warrant a separate area of
focus in the balanced scorecard.