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Mark van der Velde
(UvA student number: 11158328)
Auditing transformational change – the
role of Internal Audit in organizational
separation projects
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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
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
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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?
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
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at Philips involved in the separation project and reviewing documents. Analysis of the outcomes of the theoretical part of this thesis question 1) and the empirical input (sub-question 2) produced an answer to sub-(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
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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
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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;
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(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
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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.
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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).
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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
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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.
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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
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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.
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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
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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).
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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)* Por tfol io m an ag em en t
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 assurance review (incl. (Project) (Quality)
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 assurance review, (Project) (Quality)
including on deliverables
Post-project review reviews (incl. cultural Post implementation
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
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:
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 forms8. 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:
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:
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
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:
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
