On the Frontlines: Independence and Objectivity in Auditing

However, some people confuse the concepts of independence and objectivity and mistakenly use them interchangeably. To maintain and strengthen independence and objectivity, it’s important to understand the difference between the two.

Independence

Independence in internal audit refers to the freedom from being under the influence of, and not being biased toward, the stakeholders, the management, and other interested individuals. Freedom from such bias and influence allows internal auditors to perform their duties fairly and without interference. The IIA’s definition of independence is "The freedom from conditions that may impair the ability of the internal audit function to carry out internal audit responsibilities in an unbiased manner," according to the Global Internal Audit Standards.

There are various forms of independence that impact internal audit. Organizational independence ensures the internal audit function has unobstructed access to senior management and the board, with the CAE reporting functionally to the board and not to the senior management. Personal independence ensures individual auditors are unbiased, without conflicts of interest, and free from external pressure. Professional independence ensures professional skepticism and critical thinking, preventing preconceived notions or personal relationships from affecting judgments.

Maintaining the internal audit function’s independence is paramount for many reasons. It lends credibility to the function because stakeholders can trust internal audit’s recommendations and findings. It ensures independent risk assessments, allowing internal audit to identify and manage risks without outside influence. It strengthens the value of legal requirements such as the U.S. Sarbanes-Oxley Act of 2002 and ISO 37001 (Anti-bribery management systems). Lastly, it enhances corporate governance by assuring the board and audit committee of effective risk management.

Objectivity

Objectivity in internal audit means being unbiased, fair, and unprejudiced. Turning once again to the Global Internal Audit Standards, The IIA defines objectivity as “An unbiased mental attitude that allows internal auditors to make professional judgments, fulfill their responsibilities, and achieve the Purpose of Internal Auditing without compromise.” This means that auditors must be factual and evidence-based and must not be influenced by conflicts of interest when making judgments.

Maintaining objectivity is of utmost importance because it ensures fair reporting and maintains the integrity of the internal audit process. It ensures auditors are delivering a truthful and factual opinion of the firm's processes, risks, and controls. Internal auditors must present their findings truthfully, even if the results are not in management’s best interest. Objectivity also supports fraud and malpractice identification, with independent internal auditors able to identify and report fraudulent practices without hesitation. Internal auditors also facilitate ethical decision-making for an organization by upholding rigorous ethical requirements and ensuring that business practices conform to regulations and compliance standards.

Factors that can compromise objectivity include self-interest, which can come into play when internal auditors have a financial stake in what they are auditing or worry about their job security. Work relationships can also play a role in compromising objectivity if internal auditors allow themselves to become lenient or complacent when auditing long-time colleagues. Moreover, objectivity is compromised when internal auditors are expected to audit their previous work. Internal auditors must constantly be on the lookout for threats to their objectivity to prevent and manage them.

Overcoming Challenges

Internal audit can find it challenging to maintain independence and objectivity due to numerous factors. While it is relatively straightforward to create a reporting structure where internal audit reports functionally to the board or governing body and administratively to senior management, the fact remains that internal audit is usually managing its day-to-day activities with senior management, and senior management can have a considerable impact on what internal audit communicates to the board, as well as a significantly influence the board’s decisions. Even when the board makes decisions for internal audit, it’s possible that senior management could still exert control over internal audit through budgeting, recruitment, procurement, and more.

So, how can the internal audit function manage its independence and objectivity? Building a robust relationship with the audit committee is the strongest defense. Likewise, the audit committee should be well-educated on its role in supporting the internal audit function so that senior management cannot manipulate it. This means ensuring that internal auditors have unrestricted access to the board, personnel, and organizational data because, without it, the function’s duties are compromised. Finally, internal audit’s ability to communicate and report observations should be free from management’s influence and editorial liberties.

Independence and objectivity are the foundations of an effective internal audit function. Without them, internal audit’s ability to be effective is all but nullified. By implementing robust governance structures, organizations can help ensure that internal audit remains independent and objective in its roles.