Chapter 4

The 7 Es
The 7 Es
-Operational audits often incorporate into their scope of work the 7 Es that play a key role in the
success or failure of organizations. These Es, when used in the form of themes, can help the auditor
add considerable value to the engagement and show audit clients that auditors are genuinely
interested in helping the organization succeed. 7 Es model very useful as a tool to organize the focus
themes while planning operational audits. It is simple, yet it addresses some of the most important
aspects of any organization. They are used to examine the short-term dynamics as well as the long-
term ones. They are helpful when considering the structure of the organization and the operating
practices of the organization. They highlight the responsibility that every organization should have
toward its stakeholders, both internal and external. They also highlight the treatment of employees,
suppliers, customers, lenders, and other stakeholders, even the environment. It reminds us of the
importance of delivering everything, every time, to everyone, with high quality.
The 7 Es are:
Effectiveness
Efficiency
Economy
Excellence
Ethics
Equity
Ecology
Effectiveness
-Every organization should have a mission and vision, and establish goals and objectives
that drive employee actions toward their achievement. Without a mission and vision, the
organization will move erratically like a ship without a clear destination. The mission should
be clear and be communicated to all employees, providing a sense of direction, motivating,
and sparking ambition toward its achievement. The mission is also long lasting, providing
consistency to the long-term aspirations and actions of the entity. Effectiveness is the
process of evaluating the degree to which the organization, program, or process is
achieving its goals and objectives.
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 must thrive to produce goods and
services at or below cost levels. The ratio between the actual production (i.e., outputs) and the
actual inputs (i.e., resources) constitutes the degree of efficiency of the organization’s operations.
-In many organizations, in fact, in many countries, efficiency rates are abnormally low. This
creates lower productivity, lower growth, and the waste of resources that if used more efficiently
would result in higher rates of return. The key to higher efficiency and productivity lies in more
education, and a better use of individual’s skills and their tools at work.
Economy
- refers to the price paid for organizational resources. Historically, the main criteria to assess
economy was the price of goods and services used by the organization. While price is an
important element, it has become quite apparent that buying shoddy merchandise or tools
will most likely lead to having to buy replacements with greater frequency than if a higher
quality item had been bought in the first place. The key is to buy based on value, not merely
price, so company procedures should focus on the assessment of value when defining
allowable purchases. A better approach to assessing economy is to consider the entire
value of the item. This includes warranties, replacement or repair guarantees, speed and
reliability of delivery, expected useful life of the item, and so on. It is important to mention
that this criteria applies to tangible goods like materials, machinery, equipment and tools, as
well as financial inputs.
Excellence
- Another key aspect of organizational priorities is the performance of all work with high
quality. Quality in all everyone does is essential for continued success. Measuring quality is
essential to determine if it is being achieved and always remember that people do what is
measured, repeat what is rewarded, and stop doing what is punished. Quality is clearly an
important value element when selling to customers.Most people think of customer service,
quality, and similar attributes as being related to external customers, but similar
expectations should be created internally as well while promoting the understanding that
anyone who receives something that you produce, is your customer.
Ethics
- The Merriam-Webster dictionary defines ethics as 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. It is a critical subject for internal
auditors because an individual’s viewpoint regarding what is right and wrong will drive
most aspects of decision-making and corporate behavior, including that related to the
performance of control activities and treatment of others.
-The Standards state “The internal audit activity must assess and make appropriate
recommendations for improving the governance process in the promotion of appropriate
ethics and values within the organization.” (Standard 2110).
Being ethical is not the same as merely following the law. Being ethical is not the same as
doing whatever society accepts. Being and acting ethically refers to abiding by well-founded
standards of right and wrong that prescribe what individuals should do. It begins with a way
of thinking about the world, and the societal environment in which the organization and
individual operates. It is also concerned with the impacts the decisions and actions have on
others in the short and longer term. Organizations are required to establish their ethical
expectations, build support mechanisms to encourage adherence, and provide the means to
monitor it all.
Equity
-Equity relates to the treatment of others with dignity and respect. This should be done
consistently, by everyone, always. Equity is often thought of in terms of fairness, reciprocity,
and impartiality. When discussing the subject of equity, most people think about it in the
context of compliance with laws and regulations, and that is a reasonable assumption. In
the United States, there are federally protected classes: race, color, religion or creed,
national origin or ancestry, sex, age physical or mental disability, and veteran status.
Organizations should be careful not to engage in practices that can place them in a situation
of noncompliance and trigger government fines and penalties. Furthermore, some
employees negatively affected by discriminatory actions could seek recourse by hiring a
lawyer individually, or collectively, seeking remediation through class action lawsuits.
Ecology
- Environmental concerns have reached high levels over the past years and will likely
continue to garner much attention in the future. In addition, customers, employees, local
communities, regulators, and other stakeholders increasingly expect organizations to act
responsibly toward the environment. Beyond compliance, ecological awareness and
stewardship can also have a positive impact on the organization’s profitability. Companies
can reduce their operating costs by limiting their water usage, lowering their consumption of
electricity, and generating electricity themselves. Metrics related to ecology help to drive
appropriate behaviors and provide a means to analyze, compare, benchmark, and improve
results. Examples include amount of water used, electricity, and natural gas consumed in
manufacturing and support activities, the amount of CO2s generated during production, the
amount of fuel consumed in transportation activities, and the amount and types of waste
generated in manufacturing and support activities.
Implications for Internal Auditors
-Internal auditors should not think of the 7 Es only as a theoretical construct, but rather a
framework to help them search for ways to add value to their organizations. While
compliance is an integral component of what internal auditors do, and widely expected of
auditors, a great deal of value can be added to organizations by incorporating the 7 Es into
auditors’ work programs.
The 7 Es can help auditors define themes for the scope and programs of their audit and
consulting engagements. It is a great yet simple method to remind us about the seven key
focus areas of all successful organizations:
We must establish ambitious goals, and achieve them: effectiveness
We must minimize the use of resources: efficiency
We must only acquire what we need and do so at the optimal value point: economy
We must do everything with high quality: excellence
We must always act with integrity: ethics
We must preserve the environment for ourselves and future generations: ecology