Enforce or Enlighten? This Should Not Be a Dilemma for Internal Audit
Blogs Richard F. Chambers, CIA, CRMA, CFE, CGAP Nov 12, 2019
I have lost count of the number of times in my career when I heard someone refer to internal auditors as "corporate police" who hide behind the trees with their proverbial radar gun waiting on a transgression by a company official or other employee. This perception is unfortunate, because internal auditors can be so much more effective and valued when they are not seen as the organizational "cops."
To be sure, we have an important mission of providing assurance on the effectiveness of internal controls. Ineffective or nonexistent controls, which can be breached intentionally or unintentionally, present risks to the organization. Our obligation is to highlight those risks as part of our audit work. In many instances, that may entail identifying officials who "didn't do their job." It is those scenarios, I believe, that give us a bad name.
We are often tagged with the "police" euphemism because of how we report, not what we report. I have written extensively about using the appropriate tone in our communications, and ensuring that we outline findings in the proper context. In 2017, I re-shared my popular blog:Ten Things Not to Say in an Internal Audit Report. At least four of the practices I discouraged in the blog are common in reports of "enforcer" audit departments that are thought of as corporate police:Use intensifiers sparingly. Intensifiers raise questions, such as "'significant' compared with what?" and "'clearly' according to whose criteria?" If you use intensifiers freely, two readers of the same report may be left with very different impressions: Actual data, such as a specific percentage or dollar amount, will tell a story, but just what does "very large" mean?Avoid the blame game. The purpose of internal audit reports is to bring about positive change, not to assign blame. We're more likely to achieve buy-in when our reports come across as neutral rather than confrontational. The goal is to get to the root cause, rather than to call out the name of the guilty party. It's fine for a report to identify the party responsible for taking action on a recommendation; it's not so fine to say, "It was Fred's fault."Don't say "management failed."
Making statements such as "management failed to implement adequate controls" will invariably annoy those to whom we are looking to implement corrective action. Simply stating the condition without assigning blame through words like "fail" is much more likely to result in the needed corrective action and help to preserve our relationship with management for the next time we conduct an audit of their area.Avoid taking all the credit. It is tempting in audit reports to use phrases such as "internal audit found" or "we found." Management will often bristle when you take credit for identifying something that wasn't all that well-concealed. It comes off like you threw them under the bus, and then backed over them.
While protecting our organizations from control and risk management failures is an inherent part of our mission, protecting organizational value by being an enforcer is not where our greatest potential lies. To truly earn and sustain the trust of those we serve, we must also strive to enhance value. In fact, The IIA's current strategic vision calls for "enabling professionals to be recognized as critical to enhancing and protecting organizational value."
There are many ways that internal auditors can enhance organizational value, and very few of them involve enforcement. I believe it is through enlightenment that we provide the greatest value for those we serve. And by illuminating risks and opportunities, we better enable our organizations to navigate treacherous threats that often lie ahead. Identifying emerging risks and providing the foresight that I so often speak about will allow us to serve as an important resource for executive management and our boards.
I first explored the concept of foresight by internal auditors in a2015 blog. I observed that:
For internal auditors, foresight is the ability to contemplate key risks and challenges that our organizations could conceivably face, so that we can share those perspectives with management and the board. This way, we help our clients prepare for challenges or opportunities before they materialize. Foresight enables us to warn of pending disasters that may befall our organizations in the event management is ignoring strategic or business risks. For example, foresight might have saved Kodak, Blockbuster, or Lehman Brothers. Of course, management might choose to ignore the foresight that internal auditors provide. But at least the flag will have been waved.
In a 2017 blog, I took a deeper dive into the concept of foresight, and shared a blog by Daniel A. Clark that our colleagues at Galvanize had published. His blog outlined a five-step plan for internal auditors to provide greater foresight:
Step 1: Gain or refine your ability to provide insight. By understanding the nature of things, one begins to more fully comprehend the predictable aspects of behavior. If you don't have insight today, create a work group that can help you obtain the knowledge you seek through their own experiences. This will cut your own learning time in half, and you will be ready much sooner to move toward the future.
Step 2: Understand the changing environment. There are indicators in the environment that provide a roadmap of possibilities, and your insight will narrow those possibilities down into probabilities. Always remember that the environment includes your team, your company, your geography, your industry, and your planet. Global events do impact even small regional or community banks, for example. Don't sell yourself short by forgetting about those items.
Step 3: Use of data analytics is the key! Migrate to data-driven auditing as fast as you can. Teach yourself and your team the ins and outs of analysis, data interpretation, and data management.
Step 4: Know what your business partner's strategic decisions are and on what they are based. This will provide you a general geography, if you will, of where you will be able to go in your discussions with them. Linking your foresight to their strategy will resound in a meaningful manner, and they will objectively listen to your suggestions.
Step 5: Finally, take a stand. Make a decision based on the information you have obtained. You can determine, with a good degree of predictability, what probably will occur tomorrow if some things do not happen today. Communication of your conviction will be the difficult part, as many managers do not like to decide on things without concrete evidence that it has happened.
In the final analysis, there should be no dilemma when it comes to internal audit's mission. Despite our best efforts, there are times when we will be seen as an enforcer. However, we should never be content to be seen as the organizational police. Instead, we should strive to be a value enhancer by enlightening those we serve with the insights we glean from our role in the organization.