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NOT a Declaration of Independence

Blogs Mike Jacka, CIA, CPA, CPCU, CLU Jul 07, 2020

Here in the U.S., we just celebrated the Fourth of July — Independence Day.

(Old joke: Do they have the Fourth of July in England? Yes, and the fifth, and the sixth, and the seventh ... Sitting on the shelf next to my desk is a book I have had since my early childhood, The Real Book of Jokes, published in 1954. That should explain a lot.) The point of this celebration is to mark the point in time when the United States officially announced we were no longer a part of any other nation. We were separate. We were independent.

Any day celebrating a country's independence holds an important place in the history of the country and the hearts of its people. In four syllables (or however many syllables the local language uses) is embodied pride and recognition. Even when other countries are using that word, I feel a slight sense of excitement, sharing with them what that word can mean.

Funny, when I hear internal auditors use this word, I have a different reaction. I'm trepidatious and just a little bit frightened. You see, independence is one of the most important, but most maligned and misused, words in the internal audit lexicon. Here are a few examples.

As I was leading a training session, one of the auditors shared that he refused to be part of the company's bowling league. Such refusal was based on his belief that his independence and objectivity would be impaired. (Luckily, the CEO was in the room and, after the entire class and facilitator did a spot-on imitation of Mel Brooks's audience upon seeing "Springtime for Hitler," she proceeded to tell him that he was wrong.)

I worked for a supervisor at Farmers Insurance who did not have insurance with the company because he felt it would impair his independence and objectivity.

I have had more than one auditor — from newbie to oldie — advise that internal audit should not be doing consulting work because it impacts their independence.

I have had audit executives tell me they do not feel their bonuses should be based on the organization's success because (wait for it) their independence would be impaired.

And in replies to certain blog posts, respondents have felt some action I suggested would cross the line of (you're catching on at this point, aren't you?) independence.

Every single one of these responses reveals a misunderstanding of the word independence. The characters in these little set pieces are reacting as though internal audit must declare it is no longer a part of the organization — we are separate, we are independent.

Such is not the case.

Related to internal audit, the term independence does not require a complete severing of ties from the organization. Instead independence in internal audit is "the freedom from conditions that threaten the ability of the internal audit activity to carry out internal audit responsibilities in an unbiased manner." (I knew keeping a copy of the International Professional Practices Framework (IPPF) on hand would come in, you'll excuse the expression, handy.) The definition focuses on allowing internal auditors to unimpededly do the work they need to do. A big hunk of it relates to reporting relationship.

What confuses people is that independence and objectivity are closely intertwined in internal audit's roles and responsibilities, causing confusion between the two terms. As defined by the IPPF, objectivity is "an unbiased mental attitude that allows internal auditors to perform engagements in such a manner that they believe in their work quality and that no quality compromises were made."

Independence is about who directs the work, while objectivity is about the way we think about the work — carrying out our responsibilities in an unbiased manner versus having an unbiased mental attitude. (This may be too simplistic and I may have it all wrong. But I think I'll stand by it. Then again, I haven't had to take the Certified Internal Auditor exam for a very long time. Feel free to correct me if I'm wrong.)

Bowling, being a customer, sharing bonuses, doing consulting work — these are all potential objectivity issues, not issues of independence. For example, the time my boss had me do a petty cash audit even though my sister was in charge of petty cash was an objectivity issue, not an issue of independence. (Yes, a true story.) And that is the basis upon which these situations should be debated. But to argue they are inappropriate because of independence is to misunderstand a primary building block of our profession.

I do not believe objectivity is hindered in any of the examples above. (Well, except for that whole petty cash and sister thing. Although, honest, she was honest. There was no problem. Really.) But discussing each of them helps us better understand how we should do the work we do. And I would suggest they are discussions that, if you are involved in them, will strengthen your understanding of that very important principle.

So, why am I making a big deal about what some may see as a small semantics point? Because, when you get right down to it, the only things internal audit can bring to any department, organization, or project that no one else can bring — that no one else in any department, organization, or project can claim to have — is independence and objectivity. And, if we can't even tell the difference between the two, why should our clients care?

Mike Jacka, CIA, CPA, CPCU, CLU

Co-founder and Chief Creative Pilot, Flying Pig Audit, Consulting, and Training Services (FPACTS), based in Phoenix.