Harvard Case - Bharat Petroleum: Redesigning the Internal Audit Organization
"Bharat Petroleum: Redesigning the Internal Audit Organization" Harvard business case study is written by Noel Machado, Vijayakumar Parameswara Unnithan, Ganesan Jaibal, Manish Didwania, Ritika Maheshwari. It deals with the challenges in the field of General Management. The case study is 8 page(s) long and it was first published on : Nov 13, 2020
At Fern Fort University, we recommend a comprehensive redesign of Bharat Petroleum's Internal Audit Organization (IAO) to enhance its effectiveness, relevance, and value to the organization. This redesign should focus on transforming the IAO into a strategic partner, fostering a culture of continuous improvement, and leveraging technology and analytics to enhance audit efficiency and effectiveness.
2. Background
Bharat Petroleum, a leading Indian oil and gas company, faces a complex operating environment with increasing regulatory scrutiny, evolving business models, and a need to adapt to digital transformation. The current IAO, while performing its basic functions, struggles to keep pace with these changes. The case highlights concerns regarding the IAO's perceived lack of independence, its limited focus on strategic risks, and its reliance on traditional audit methods.
The key protagonists in this case are:
- Mr. S.K. Jain: The Chairman and Managing Director of Bharat Petroleum, who recognizes the need for a more proactive and value-adding IAO.
- Mr. R.K. Sharma: The Head of Internal Audit, who is tasked with leading the transformation of the IAO.
- The IAO team: Comprised of experienced auditors who are accustomed to traditional audit practices.
3. Analysis of the Case Study
To analyze the case, we can apply a framework that considers both internal and external factors influencing the IAO's effectiveness:
Internal Factors:
- Organizational Structure: The IAO's current structure, reporting directly to the Finance department, raises concerns about its independence and ability to provide objective assessments.
- Organizational Culture: The IAO's culture is characterized by a focus on compliance and a lack of proactive risk management. This needs to shift towards a more strategic and value-adding approach.
- Talent and Skills: The IAO team lacks the necessary expertise in areas such as digital transformation, data analytics, and emerging technologies.
- Technology and Processes: The IAO relies heavily on manual processes and lacks the use of technology and data analytics for risk assessment and audit efficiency.
External Factors:
- Regulatory Environment: The Indian oil and gas sector is subject to increasingly stringent regulations, requiring the IAO to adapt and provide assurance on compliance.
- Competitive Landscape: Bharat Petroleum faces intense competition in the domestic and international markets, necessitating a focus on strategic risks and opportunities.
- Digital Transformation: The rapid adoption of digital technologies across the industry requires the IAO to develop expertise in cyber security, data privacy, and other emerging risks.
- Stakeholder Expectations: Shareholders, regulators, and other stakeholders expect Bharat Petroleum to operate with high ethical standards and transparency, demanding a robust internal audit function.
4. Recommendations
To address the challenges and enhance the IAO's effectiveness, we recommend the following:
1. Redefine the IAO's Role and Structure:
- Elevate the IAO's reporting line: The IAO should report directly to the Audit Committee of the Board, ensuring its independence and access to senior management.
- Establish a dedicated Risk Management function: This function, working closely with the IAO, should proactively identify and assess strategic risks across the organization.
- Develop a clear charter for the IAO: This charter should define the IAO's scope, objectives, and responsibilities, emphasizing its role as a strategic partner.
2. Cultivate a Culture of Continuous Improvement:
- Implement a performance management system: This system should track the IAO's performance against key performance indicators (KPIs) aligned with its strategic objectives.
- Foster a culture of learning and development: Encourage the IAO team to acquire new skills and expertise in areas such as digital transformation, data analytics, and risk management.
- Promote a culture of collaboration: Encourage the IAO to work collaboratively with other departments to identify and mitigate risks, improve processes, and enhance operational efficiency.
3. Leverage Technology and Analytics:
- Invest in advanced audit tools and technologies: This includes data analytics platforms, robotic process automation (RPA), and other tools that enhance audit efficiency and effectiveness.
- Develop a data-driven approach to risk assessment: Utilize data analytics to identify and assess emerging risks, predict potential issues, and prioritize audit resources.
- Implement a centralized data repository: This repository will facilitate data sharing, improve audit efficiency, and support data-driven decision making.
4. Enhance Talent Management:
- Develop a robust talent management strategy: This strategy should focus on attracting, developing, and retaining skilled auditors with expertise in areas such as digital transformation, risk management, and data analytics.
- Implement a comprehensive training and development program: This program should provide the IAO team with the necessary skills and knowledge to perform their duties effectively.
- Promote diversity and inclusion: Encourage a diverse and inclusive IAO team to foster a culture of innovation and creativity.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: The proposed changes align with Bharat Petroleum's mission to operate responsibly, ethically, and sustainably.
- External customers and internal clients: The recommendations address the needs of shareholders, regulators, and other stakeholders, while also providing value to internal clients through improved risk management and operational efficiency.
- Competitors: The recommendations help Bharat Petroleum stay ahead of its competitors by adopting best practices in internal audit and risk management.
- Attractiveness ' quantitative measures: The proposed changes are expected to improve the IAO's effectiveness, leading to cost savings, reduced risks, and enhanced compliance.
6. Conclusion
By implementing these recommendations, Bharat Petroleum can transform its IAO into a strategic partner, fostering a culture of continuous improvement and leveraging technology and analytics to enhance audit efficiency and effectiveness. This will enable the company to navigate the complex operating environment, mitigate risks, and achieve its strategic goals.
7. Discussion
Alternatives not selected:
- Outsourcing the IAO: While outsourcing could provide access to specialized expertise, it may compromise independence and control over internal audit processes.
- Maintaining the status quo: This option would fail to address the IAO's shortcomings and could lead to increased risks and regulatory scrutiny.
Risks and key assumptions:
- Resistance to change: The IAO team may resist changes to their traditional practices.
- Investment in technology: The implementation of new technologies may require significant investment.
- Data availability and quality: The effectiveness of data-driven risk assessment depends on the availability and quality of data.
Options Grid:
| Option | Advantages | Disadvantages | Risk |
|---|---|---|---|
| Transform the IAO | Enhanced effectiveness, strategic partnership, improved risk management | Resistance to change, investment in technology | Data availability and quality |
| Outsourcing the IAO | Access to specialized expertise, cost savings | Compromise independence, control over processes | Lack of internal knowledge |
| Status quo | No immediate change | Failure to address shortcomings, increased risks | Regulatory scrutiny, loss of competitive edge |
8. Next Steps
- Develop a detailed implementation plan: This plan should outline the steps, timelines, and resources required to implement the recommendations.
- Communicate the changes to stakeholders: Clearly communicate the rationale for the changes and the expected benefits to all stakeholders.
- Pilot test new technologies and processes: Implement pilot programs to test the effectiveness of new technologies and processes before full-scale deployment.
- Monitor progress and make adjustments: Regularly monitor the IAO's performance against KPIs and make adjustments to the implementation plan as needed.
By taking these steps, Bharat Petroleum can successfully redesign its IAO, enhancing its effectiveness and positioning it as a strategic partner in achieving the company's long-term goals.
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Case Description
In 2014, Bharat Petroleum Corporation Limited (BPCL), a large, government-owned, global, Fortune 500 petroleum refining and marketing company in India, was facing a variety of issues around its audit process. The internal audit department had been facing delays in completion of audits and compliance of recommendations. The executive director and head of the Internal Audit (IA) department believed that performance problems were due to the organization of the department. Changes were needed to the processes, technology, and structure of the department, and he wanted his team to find solutions to put some fundamental changes in place. What changes should be made to IA's processes, staffing, and structure so the company could complete more audits and comply with the recommendations?
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