Relationships between audit committees and chief audit executives (CAEs) have become increasingly more complex as the risks facing organizations have become more diverse and dynamic. Indeed, audit committee members often comment that they are turning to internal audit more often for an expanding scope of assurance and advisory services.
But the relationship between the audit committee and the CAE is often complicated by personal dynamics and the awkwardness that comes with “constructive feedback.” As a result, I have often found that audit committees are uncomfortable pointing out to the CAE what internal audit could do better. Instead, they leave it to management to deliver the news, and the translation isn’t always pure. I first shared my view that some audit committee members keep their true views of internal audit bottled up back in 2014. The blog gained a lot of attention, and I was even invited by the National Association of Corporate Directors to discuss the list at an Audit Committee Forum.
Although a bit blunt, I have updated my list over the years based on things I see and hear – particularly when speaking off the record with audit committee members. With the passage of time, there is even more evidence to indicate that some feedback goes unspoken. So, I believe it is time to update the list of things that audit committees are often reluctant to tell the CAE.
TRIGGER WARNING: This list is uncomfortable!
In the past, I have described how audit committee charters often spend much more time articulating the audit committee’s responsibility over external auditors. This is driven largely by compliance and regulatory considerations related to the accuracy of financial reporting and the external auditor’s associated assurance role. It also is influenced by the makeup of audit committees, which often include retired partners of public accounting firms.
The key to changing this is for internal audit to better demonstrate and articulate its value to the organization. The growing array of nonfinancial risks threatening organizations is helping to heighten awareness of what internal audit has to offer. However, the challenge is for the profession to step up and meet those new demands. This will require mastering a wider portfolio of competencies, updating our processes, and becoming agile while maintaining our independence.
Audit committees are feeling overwhelmed today more than ever. The growing demands placed on them by regulators, shareholders, and the breakneck speed at which risks can develop and mature can quickly overwhelm even experienced audit committee members. Consider then the dangers of further overwhelming audit committee members with dozens of lengthy written audit reports each year. This is a recipe for having crucial information overlooked or, worse yet, ignored.
The IIA’s recent Common Body of Knowledge (CBOK) stakeholder study provides clear direction from audit committees that communication must be more than written reports. We must consider the quality, frequency, and method of communications. According to CBOK respondents, internal audit is best served by building relationships and communicating in person. The clear message — sit down and talk to us to explain what you are seeing.
This is closely related to the previous point, and it is one whose importance I can’t stress enough. Internal auditors take pride in bringing an enterprise wide perspective to their work. Over time, our work should provide our stakeholders a complete picture of the organization’s risk and controls. But busy audit committee members tell a different story. Their message: “We don’t have time to make sense of seemingly random detail. Give us a simple, clear, big picture.”
I call this connecting the dots. As I wrote previously, we need to provide the context that answers the essential “so what” question. Get into the habit of using language such as, “Why I tell you this is . . .”, “Why this is important is . . .”, or “The consequences of this might or will be. . . .”
We must also be prepared to offer opinions and ratings if the audit committee seeks them. Opinions on the overall effectiveness of internal controls or risk management are tricky. If we do not perform enough work to warrant positive assurance, we must be clear about what we are saying.
The single biggest way to maximize internal audit’s value to the organization is to expand the audit plan in key areas outside of finance and compliance, according to a KPMG report a few years back. This is an invitation for internal audit to step up and a clear sign that recognition of its value is growing. However, lingering doubts about the internal audit function’s ability to deliver threatens to derail this progress.
Many CAEs bristle at the idea that their functions don’t have the skills in house to take on their organizations’ full portfolio of risks, but a recent survey of CAE’s confirmed that is often the truth. In fact, 17% of the CAE respondents indicated they often don’t take on critical risks because their team lacks the expertise. Add that to an addition 27% who don’t tackle some risks because they lack the resources, and it is understandable why some audit committee members are skeptical of internal audit’s skills.
CAEs must check their egos at the door and make a clear-eyed assessment of strengths and weaknesses. They must be willing to take all necessary steps to raise staff competencies to meet the level of service desired by the audit committee, whether through new hires, expanded training, co-sourcing, or outsourcing.
Surveys in recent years have confirmed that boards receive extensive information from management but express concerns about the quality of that information. Indeed, about half of board respondents in one survey “noted a glaring need for improvement in the quality of information provided by management.” Often, internal audit is in such lock-step with management when communicating with the board that it is tarnished by the aforementioned concerns.
Internal audit must step up and provide an informed and independent assessment not just on the myriad of risks organizations face today, but also on the quality and completeness of information they receive from management. Boards and audit committees are desperately seeking someone who can help them drill down to what is most important, and internal audit can serve that role.
In some companies, management is uncomfortable with an independent internal audit function that provides a different perspective on the effectiveness of the organization’s risk management and internal controls. That is where courageous CAEs really earn their pay.
In some ways, this is a contradictory statement from the prior one. Audit committees often want internal audit to be independent from management, however, many are uncomfortable having to run the interference that internal audit needs to be independent. I have been privy to a number of situations over the years where the audit committee sat on its collective hands while management ushered capable CAEs out the door who took their roles a little “too seriously.”
I recognize the foregoing list may be a bit harsh, and the sentiments do not reflect the views of a majority of audit committee members (I hope). But it behooves us to remain self-aware enough to always consider the possibility that our audit committee members may have unspoken thoughts that we should address.
As always, I look forward to your comments.