By Richard Chambers | July 18, 2021
As the world slowly emerges from the historic Covid-19 pandemic, I have been giving a lot of thought to the lessons the internal audit profession should take from the past year. One observation has been that those internal auditors who rolled up their sleeves and helped their organizations rally in the face of unprecedented disruption have fared the best. They won or sustained the support of their key stakeholders, and can take pride in knowing the value they delivered. From the conversations I have had with these internal auditors, I have been impressed by their passion, courage and innovation. While some in the profession kept their heads down and followed their audit plans developed before the pandemic, the courageous internal auditors sought out the turbulence their organizations faced and sailed toward the storms.
Danger is something most people avoid. With rare exception, the desire for safety and security is deep seated. The same holds true in business where often there is an instinct in the corporate sector to focus on opportunities and not risks. Controversial topics such as executive compensation, legal compliance, culture, equity and inclusion and others are avoided because of the concern they could bring the wrath of those who might have failed the organization.
But experience has taught me that this tendency to look the other way more often than not compounds unexamined problems that may exist. After all, ignoring the source of smoke may well lead to an uncontrolled fire.
Sadly, some internal auditors fear that auditing high-risk areas will not resonate well with executive management. Others are reluctant to take on emerging or volatile risks out of insecurity or fear of failure. And, history has taught us that many executives and organizations don’t value oversight, and will retaliate against those who call them out. But a brief examination of this avoidance game quickly reveals the fallacy that sidestepping controversy will keep management happy or the organization out of trouble.
In a previous blog post, I described executive compensation as a “third rail” for internal audit. Indeed, surveys over the years have revealed that most internal auditors dedicate minimal to no effort in looking at C-suite remuneration. CAEs have often privately shared with me that they steer clear of the topic because of the extraordinary sensitivity and perceived career risk of examining or questioning their bosses’ pay.
Unfortunately, avoiding executive compensation doesn’t make it any less of a risk. In fact, executive compensation programs become even greater risks over time if they are never reviewed by independent and objective sources.
I’ve also written about the sometimes uneasy relationship between internal audit and the general counsel. Too often, CAEs express frustration with general counsels whom they believe are more concerned about reputational and legal risks than affording internal audit the opportunity to fully articulate the results of their work. I’ll concede that reputational and legal risks are important. However, general counsels too often would prefer to eliminate these risks altogether in internal audit reports — in effect, silencing internal audit from sharing critical information with the board or audit committee.
Fear of reputational risks is not limited to legal counsel. Often, public-sector auditors are discouraged by elected officials from reporting unflattering findings. The Internal Audit Foundation’s book, The Politics of Internal Auditing, offers a case study where one city’s internal audit team found appraisal and negotiation processes had been compromised in land purchases. Based on independent appraisals, it appeared the city had overpaid on real estate by as much as 25 percent. Despite pressure from elected officials and senior staff, the CAE made public his team’s findings. Unfortunately, doing the right thing cost the CAE his job when the same elected board did not renew his contract.
For several years, I have been raising awareness of the influence of culture on risk. This too can be an area viewed as taboo for internal audit, especially in companies or regions of the world where there is a strong deference to authority. The challenge here is overcoming an assumed infallibility of high-ranking company executives, or more precisely defeating the cultural convention that such challenges are disrespectful or improper.
We have all likely encountered one or more C-level executives in our organizations who bristle at real or perceived criticism in our reports. When taken to the extreme, these executives can become open adversaries of internal audit. When that happens, we must not shy away from risk-based audit coverage in their areas of responsibilities. That takes courage, and courageous internal auditors are willing to push against close doors and sail toward turbulent storms. That brings us back to lessons from the pandemic.
When Covid rapidly emerged in early 2020, many internal audit plans for the year were already in place. The safe path would have been to stay the course. It would have been easier to undertake the audits in the plan, and leave it to management to deal with the volatile and daunting risks facing the organization. After all, what could internal audit do to assess business continuity plans, supply chain disruption or health and safety risks if they had already emerged? The storm chasers in the profession were not deterred. They jumped in to assess the effectiveness of business continuity plans and offered assurance and timely recommendations where warranted. They were quick to identify emerging supply chain risks, and they were among the first to recognize heightened cyber security risks related to a quarantined workforce.
The lessons from 2020 are very much applicable to 2021. Cyber criminals are operating at a fever pitch, climate-related risks are materializing around the world, and Covid-related risks continue to morph almost daily. I encourage internal audit leaders everywhere to embrace the opportunities, focus on the new and emerging risks and to sail toward the storms.
I welcome your comments via LinkedIn or Twitter (@rfchambers).