One of the highlights from each year’s International Internal Audit Awareness Month is the numerous public proclamations promoting the profession. They typically praise internal auditing’s role in enhancing public trust and promoting economy, effectiveness, and efficiency in government. In my mind, such proclamations acknowledge a fundamental truth: Internal audit boosts transparency and accountability in the public sector.
This is why I am particularly disappointed and frustrated when jurisdictions that have already recognized internal auditing’s value take a step backward. Such is the case for Glendale, Ariz., a city of about 250,000 people in the Phoenix metro area. City leaders there voted recently to eliminate its long-established internal auditor position and replace it with an outside contractor.
The action is being promoted as a way to strengthen accountability, but I fear it will have the opposite effect. What drives my concern most is that outsourcing internal audit in the way envisioned in Glendale can undermine the independent assurance that an internal audit function provides. A properly resourced and independent internal audit function can proactively prevent problems by evaluating controls on a regular basis. Because an internal audit function is more familiar with operations and processes, it can swiftly respond to requests and is well-suited to follow up on recommendations and how those recommendations are implemented.
This is not to say that an outside contractor cannot provide such assurance. But to maintain the level of service, perspective, and insight offered by an established internal audit function may cost significantly more in some cases.
I have written and spoken frankly on many occasions about the actions of public officials designed to undermine internal audit’s independence, and subsequently hamper transparency and accountability. In Glendale’s case, city management is claiming the move to an outside contractor will allow for more frequent and more sophisticated audits. At the same time, the funds allocated for audit services will remain the same. I am highly skeptical that the same amount of money spent on outside contractors will provide the same level of responsiveness and immediacy as having a dedicated internal audit function. To reach the same level of service, the city will have to spend more money, and that isn’t likely to happen.
I’ve quoted an old saying before in a similar context, and it rings true today: “Good work ain’t cheap. Cheap work ain’t good.”
An examination of the Glendale case is not complete without noting that recent work by the city’s internal auditor exposed questionable reimbursement requests related to an elected official’s travel to Europe on city business. This may be feeding the sudden desire for eliminating the internal auditor position. As I have also noted in the past: “Everyone loves a watchdog, until it barks!”
To be clear, I have written before and still believe that most government officials and corporate boards and executives appreciate a strong and effective internal audit function and the oversight it brings. They recognize internal auditing is vital to healthy risk management and internal controls. They also understand that, to get the most out of the internal audit function, it must be well-resourced and independent.
Time will tell whether Glendale’s experiment with an outside internal audit contractor will produce effective independent assurance. The changes adopted by the city also include creation of an audit committee made up of citizens, which is good. Also encouraging is the fact that the outside contractor will report functionally to the audit committee, not city management.
But all that fails to address a fundamental question: If Glendale’s internal audit function already was providing effective independent assurance, what is truly driving such a radical change?
As always, I look forward to your comments.