25/10/2021

Operations
Auditing
THE EIGHT (8) E

Prepared by: C. Guerrero

The 8 Es of Operations Audit

These provide a simple, yet, effective model to keep the
essential concepts of audit in mind – “focus on management
practices that facilitate or hinder the accomplishment of objectives,
and helping management improve their operating practices.

In planning for the audit, the auditor should:

 Ensure the presence of these attributes in the conduct of audit
 Verify that these are functioning effectively
 Consider these attributes when making recommendations

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The 8 Es of Operations Audit

 Effectiveness  Ethics
 Efficiency  Equity
 Economy  Ecology
 Excellence  Emotion

The 8 Es – Effectiveness
Effectiveness is the process of evaluating the degree to which the
organization, program, or process is achieving its goals and objectives

 It consists of comparing the planned outputs with the actual outputs

 Trending effectiveness metrics is a useful technique to allow the review

in order to ascertain the degree to which there is consistent
accomplishment of goals; it provides context to
metrics that, in isolation, may appear satisfactory

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The 8 Es – Effectiveness
Mission and vision – drives employees action towards its achievement
 This should be clear and communicated to all employees, providing a sense
of direction, motivating, and sparking ambition towards its achievement
 Long-lasting and providing consistency to the long-term aspirations and
actions of the organization

Goals and objectives – provide identifiable markers of the

achievement of something, and help establish tactical
actions. These are more immediate and facilitate assignment
of resources that can be aligned with the mission.

The 8 Es – Efficiency
Efficiency relates to the use of inputs and other resources toward the
achievement of goals and objectives in some form of productive activity

 Organizations much thrive to produce goods and services at, or below,

cost levels – lessen the burn rate, or the rate at which an organization’s
resources are used in operations

 Managers are hired to become stewards of the organization’s resources;

as such, managers are supposed to act responsibly and make sure that
they extract the maximum utility from these resources

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The 8 Es – Efficiency
In terms of employees:
 Recruit individuals that meet present and future requirements
 Assign in roles where they can use their skills best
 Give freedom, flexibility, resources, and encouragement
 Create a workplace that expects high results
 Reward achievement of goals

In terms of technology:
 Having modern machines with capacity to work effectively
 Training employees to use the organizations technology
effectively

The 8 Es – Economy

Economy refers to the price paid for organization resources

The key is to buy base on value, not merely price – the

organization’s procedures should focus on the assessment of
value when defining allowable purchases

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The 8 Es – Excellence
Excellence is the performance of all work with high quality
 Organizations are increasingly pursuing a strategy to gain differentiation based
on quality (vs. merely relying on lower costs)
 Quality should be measured to determine if it is achieved
 “People do what is measured, repeat what is rewarded, and stop doing what is
punished”
 Quality should be present in dealing with both internal and
external customers – “anyone who receives something that you
produce is your customer”

The 8 Es – Ethics
Ethics are the rules of behavior based on ideas about what
is morally good and bad; it deals with what is good and bad behavior, what
is morally right or wrong, and moral duty and obligation

“The internal audit activity must assess and make appropriate

recommendation for improving governance process, in the promotion of
appropriate ethics and values within the organization (Standard 2110)

Organizations should establish their ethical expectations, build support

mechanisms to encourage adherence, and provide the means to monitor it

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The 8 Es – Ethics
 The auditor should have a familiarity with the
underlying concepts that define ethical thought,
and apply that knowledge to review and
recommend improvements

 Lack of ethics in an organization is a key driver

of inappropriate behavior, and has significant
implications in policy-making and organizational
conduct

The 8 Es – Ethical Principles

Teleological or Prescriptive Approach determines the morality of decision based on
the outcome or consequence
 Utilitarianism – seeks as its end the greatest good for the greatest number of people,
and it is often performed through cost/benefit analyses – a common business tool
that considers the most ethical decision the one yielding the greatest gain overall
Limitations:
 Does not define whose utility is maximized (“by giving me the job, or by giving you the job”)
 Does not consider measure of intangibles (safety, happiness, health, human life)
 Does not clearly specify what is benefit and what is cost

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The 8 Es – Ethical Principles

 Distributive justice – based on the concept of fairness and considers ethical
decisions those that lead to the equitable distribution of goods and services – “we
don’t have to help those people in the lower ranks of our society to any great extent,
we just should never hurt them”

Some limitations/challenges:
 Use of hiring standards
 Payment of just the minimum wage

The 8 Es – Ethical Principles

Deontological Approach is based on rules or principles that govern
decisions under the premise that individuals (or organizations) should do what is right
out of goodwill and duty, with no regard for the consequences of the decision

Immanuel Kant cites two categorical imperatives regarding deontological ethics:

 A person’s reasons for doing something must be the reasons that everyone would act
similarly – “do unto others as you would have them do unto you”
 People should never be treated only as a means, but always also as ends

Pluralism and ethical relativism – what is considered moral or ethical in one culture may
not be so in another

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The 8 Es – Ethical Guiding Principles

Guiding Principles
Rights and duties What are the legal and moral obligations?

Justice Guidance of fairness, equity, and impartiality

Utilitarian analysis What is the greatest good for the greatest number?

Care How will this action affect my relationships?

Virtue How does this action affect my (or my company’s) character?

Golden rule Would you want the same treatment?

The 8 Es – Equity
Equity relates to the treatment of others with dignity and respect –
fairness, reciprocity, and impartiality

The organization should not engage in practices that results to

noncompliance with laws, employee discrimination, favoritism, and
nepotism. It should also implement fair and transparent recruitment and
hiring policies.

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The 8 Es – Equity
When considering equity, the Internal Auditor should consider:

 Does the organization display the necessary care to develop and maintain productive
relationships?
 Does the organization, through its policies and practices, establish trust through openness?
 Are there mechanisms in place to make sure, that in theory and practice, the concepts of
interdependence and collaboration are promoted and rewarded?
 Does the organization recognize the importance to nurture others and show compassion,
while creating an expectation for hard work and discipline?
 Does the organization show respect toward its stakeholders and encourage dialog with
them, rather that trying to exert power over them through opportunistic practices?

The 8 Es – Ecology
Over the years, customers, employees, local communities,
regulators, and other stakeholders increasingly expect organizations to act
responsibly towards the environment
 Beyond compliance, ecological awareness and stewardship can also have a
positive impact on the organization’s profitability – lessen costs and
creating better/innovative products
 “Sustainability is a mother lode of organizational and technological
innovations that yield both bottom-and-topline returns – some businesses
treat sustainability as innovation’s new frontier

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The 8 Es – Emotion
Emotion relates to the emotional attachment and involvement that highly engaged
employees show while working and interacting with others. This is an important
element that the Internal Auditor should examine as it can enhance operational
effectiveness when present.
 When employees are emotionally invested in the organization and their work, they
tend to work beyond the minimum requirements – they go the extra mile and strive
in their efforts to delight customers
 Emotional identification with the organization’s values, mission, vision, and
objectives is motivating. Feeling that others in the organization are pursuing similar
goals creates a stronger sense of community that binds employees to one another

Triple Bottom Line (TBL)

This theory states that businesses

should commit to focusing as much
on social environment concerns, as
they do on profits. Based on the
TBL theory, instead with one
bottom line, there should be three:
profit, people, and the planet

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Implication for Internal Auditors

 Internal Auditors should not think of the 8 Es only as a theoretical construct, but
rather a framework to help them search for ways to add value to the organization
 Though operational audits are mainly focused on compliance with policies and
practices to achieve efficient and effective operations, a great deal of value can be
added to the organization by incorporating the 8Es into audit programs – “How
well this program, process, or activity in terms of each of the 8 Es?”
 The Internal Auditor should endeavor to quantify environmental benefits and
linking these to increased revenue, lower waste, better public relations, and so on –
with this, internal audit will demonstrate a strategic mindset that supersedes the
tactical approach of traditional auditors

Reference:

Murdock H., Operational Auditing: Principles and Techniques for a Changing World (Second Edition)

www.Investopedia.com

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