Baylor Scandal Offers Lessons on Governance and Culture

A situation is playing out in Houston that should interest anyone who is part of or follows the internal audit profession. Its repercussions are far reaching for two important reasons. The first involves the challenges internal auditors face with intimidation by their employers, and the second involves how far practitioners can go in responding to such tactics while maintaining objectivity.

This case involves the chief audit executive (CAE) of the Houston Independent School District who took over a poorly performing function and quickly restored it to meet IIA quality assurance and improvement standards, according to media reports. In the course of doing his job – and quite well by most accounts – he apparently ruffled the feathers of a number of elected officials who oversaw the function.

Earlier this year, he was suspended with little notice ostensibly for violating the organization’s rules on use of agency equipment. Earlier this month, five months after he was sent home, the CAE was reinstated with significantly reduced duties and fewer staff.

So he filed suit.

Rules for certain public sector positions, which afford additional protections for seeking legal recourse, allow for employees to file suit against the same people who sign their checks. By contrast, it is highly unlikely that a CAE of a corporate entity would be permitted to remain in the company’s employment if litigation was pending.

According to published reports, an attorney for the CAE said his client is seeking “… ‘Some level of job security’ to allay concerns that he’ll face repercussions should he, ‘issue a report that somebody might not like.'”

The lawyer’s comments succinctly summarize a significant and surprisingly pervasive challenge for internal auditors. Whether in the public or private sector, internal auditors are routinely pressured or intimidated for simply doing their jobs.

A seminal work in this area was published last year by The IIA Research Foundation. The authors of The Politics of Internal Auditing, who conducted interviews with focus groups and surveyed more than 500 CAEs, found every participant at a focus group of leading CAEs had experienced political pressure, and more than a quarter said they had left a position because of it.

Additionally, the research found:

• 55 percent of CAEs surveyed said they had been directed to omit or modify an important audit finding at least once, with 17 percent indicating it had happened three or more times.
• 49 percent reported they were directed to not perform audit work in an area that the CAE viewed as high risk.
• 32 percent said they were directed to perform work in a low-risk area so that an executive could investigate or retaliate against another individual.​

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While the research did not examine how many were suspended, demoted, or dismissed for doing their jobs, we see this all too frequently in the public sector where transparency is the law. I also know of several instances where corporate CAEs have also been shown the door by executives who don’t appreciate the scrutiny that internal audit sometimes brings.​

But is seeking le​gal relief a smart move for practitioners who have the option?

One must weigh the potential benefits of being able to stay at a post and, if successful, remove or reduce political pressure from the internal audit process against the perception or reality of compromised objectivity. In addition, some government CAEs who have taken their complaints to the courts have told me that it was crucial that they do so in order to clear their name and professional reputation after public officials had besmirched them – something that a corporate CAE would almost never have to endure because companies rarely publicize their disputes with or dismissals of internal auditors.

However, a bigger question may be, “Can someone remain objective if they’re suing their employer?” And, if they prevail in their legal battle, can CAEs ever hope to gain “a seat at the table” as a trusted advisor to management once they have sat at the plaintiff’s table?

Standard 1100 from the International Standards for the Professional Practice of Internal Auditing (Standards) states, “The internal audit activity must be independent, and internal auditors must be objective in performing their work.”

The interpretation elaborates in part, “Objectivity is an unbiased mental attitude that allows internal auditors to perform engagements in such a manner that they believe in their work product and that no quality compromises are made.” Is it possible to maintain “an unbiased mental attitude” about those whom you are staring down in the courtroom?

A CAE who is litigating against his or her employer is engaged in a very public process that can quickly create at least a perception of bias, and once such a perception exists, the internal audit function’s credibility is compromised. The wheels of justice often turn slowly, so the potential for an extended objectivity impairment certainly exists. In such instances, I would encourage litigant CAEs to recuse themselves from auditing functions/programs of individuals who are defendants in their legal complaints. The CAE should either assign complete control over such audits to subordinate staff or engage qualified independent third-parties to take on sensitive audits. In taking these actions, a plaintiff CAE will signal their commitment to objectivity and foster the kind of public trust in internal audit that practitioners seek to foster in government.

I cannot conclude this discussion without noting that public officials are often the real culprits in these disputes with government auditors. Far too often, elected and appointed officials prove thin skinned and vindictive when their pet projects or public policies are questioned by internal auditors. These are the circumstances that can lead to a legal standoff. From my perspective, a preventive solution is for public agencies to put checks and balances in place to diminish politics and afford greater independence for the internal audit process. Such checks and balances could greatly reduce the likelihood of public feuds and lawsuits involving internal audit. Appointing audit committees for public agencies made up of a majority of non-elected members of the community would be a step in the right direction toward addressing this issue.

As always, I look forward to your comments.