logo-newlogo-newlogo-newlogo-new
  • Home
  • Blog
  • Audit Trail Academy
  • Advisory Services
  • Books
✕
  • Home
  • Chambers on Internal Audit
  • Internal Audit and The Board
  • Don’t Tell Me That!

Don’t Tell Me That!

New Report Calls External Audit Independence The “Big Lie”
October 11, 2022
Internal Auditors: Put Away Your Radar Guns (and focus on traffic safety)
October 31, 2022
October 17, 2022

Chambers-Are-Companies-Capitulating-on-Cybersecurity-Risks

Things Audit Committees Don’t want to Hear From Internal Audit

Over the summer, I authored a blog for AuditBoard on the 20th anniversary of the WorldCom scandal. In researching for the piece, I was reminded of the struggles Cynthia Cooper had in raising the red flag after the fraud was discovered. In her book Extraordinary Circumstances, she recounts the challenges she had in even securing a meeting with the company’s audit committee so that she could share the internal audit results. After prolonged foot-dragging by the audit committee chairman, her patience finally wore out. In a line worthy of a ​Clint Eastwood film, she sent word to the chairman that, “if he doesn’t call a meeting today, I’m going to get on the phone and call one myself.”

Once the chairman relented and called the meeting, the source of his reluctance became clearer. Speaking to her by phone later that day, the chairman chided her: “Do you have any idea what I am about to do? I’m about to blow up this company.” There are few (if any) instances in which an internal audit has disclosed information as consequential as that in the WorldCom case. Yet it is certainly not the only time that an audit committee or its chairmen have elected to “stick their heads firmly in the sand,” rather than to hear damaging or uncomfortable information from internal audit.

In a recent conversation, the CAE of a highly respected company told me that his audit committee doesn’t appreciate the candor tries to bring to their meetings. He quoted his audit committee chair as cautioning him to “not come off like Chicken Little” in committee meetings. Other CAEs have conveyed their frustration that their audit committees hear bad news but do nothing about it.

I am also rarely surprised when CAEs cite examples of management’s reluctance to hear bad news — whether about their own operations or about the actions of colleagues or subordinates. The vast majority of executives are indeed willing to hear the truth, but there still are far too many — CEOs and chief financial officers included — who would rather not hear the bad news from internal audit. On rare occasions, they might prohibit internal audit from appropriate disclosure of results, or they might retaliate against CAEs who do. The “safety net” for those CAEs who work for nefarious executives should be the audit committee. After all, the board of directors and its audit committee have a fiduciary responsibility to look out for the shareholders — right?

What disappoints me more than the tales of obstructionist executives are the experiences of CAEs whose audit committees are reluctant to hear everything internal audit might have to share. Sometimes, the reluctance is guided by their desire to avoid bad news — as may have been the case at WorldCom or the other examples I cited above. Other times, it’s because their plate is overflowing and hearing even one more risk or control failure is just not desirable. Regardless of the motive, a disinterested or — worse yet — antagonistic audit committee is the last thing a CAE needs.

Based on my own experiences the first-hand experiences of CAEs, I have identified several examples of information or internal audit results that often make audit committees uncomfortable. These include:

  • Allegations of misconduct or inappropriate behavior on the part of the CEO or another executive.
  • A general assessment that the corporate culture may be unhealthy.
  • An inability to provide assurance on the effectiveness of internal controls or risk management.
  • An assertion that internal audit’s resources may not be adequate, or that management-directed reductions to internal audit resources have gone too deep.
  • An allegation by the CAE of management interference with the work of internal audit.
  • A discussion of the risks that internal audit will not address during the coming year because of resource constraints or limited expertise.
  • An inventory of emerging risks that should be on the audit committee’s radar *especially when management hasn’t mentioned them beforehand).

It is rare that the chairman or full audit committee explicitly precludes the CAE from discussing those topics. Instead, an audit committee’s limited appetite for such feedback is more often masked. For example, if the audit committee never asks the CAE about any resource or scope limitations, it makes it much more difficult for the subjects to come up. An audit committee can also limit the potential for bad news by limiting or concurring with limitations on internal audit’s scope. For example, if the scope of internal audit’s coverage is limited to assessing the effectiveness of financial controls, the audit committee will likely hear very little about operational, technology, or compliance risks unless the assessment is coming from management. A CAE recently shared with me that, when he tries to share his perspectives on non-financial related risks, the audit committee gently reminds him that non-financial risks are outside internal audit’s scope.

My objective is not to impugn audit committees or their beleaguered members. The vast majority are very vigilant in executing their roles. But I believe any reluctance by audit committees to hear/solicit everything internal audit needs to say presents the profession with a call to action. We must do a better job of articulating the roles we can play in enhancing risk management and internal controls in our organizations. We should encourage audit committees to ask the tough questions — and when they don’t, we should volunteer the answers anyway.

While it is unlikely that any of us will ever have to threaten to call a meeting of the audit committee on our own, we should never shirk from our responsibilities to keep the audit committee fully and promptly informed, particularly about those things they might not want to hear.

I welcome your thoughts on this delicate topic.​

Share

Related posts

March 2, 2023

6 Things Audit Committee Members Often Won’t Say to Internal Audit


Read more
January 16, 2023

Are Internal Auditors to Blame When Boards Are in the Dark?


Read more
November 7, 2022

Dear Audit Committee – Guess Who Audits The Most Critical Risks?


Read more

1 Comment

  1. Rainer Lenz says:
    October 19, 2022 at 7:57 am

    Thank you, Richard Chambers, for this insightful blog. Internal Audit – when it matters – operates in the political zone. There are “moments of truth” in the professional life of an internal auditor. Internal auditors face dilemma, worth studying more in-depth, I believe.

    In her book, Cynthia Cooper, the former Vice President of Internal Audit at WorldCom, makes clear “that the tone set at the top is critical to fostering an ethical environment in the workplace.” She summarizes: “The World-Com fraud, as well as other high-profile frauds, involved collusion by executives at the highest levels” (Coopers, 2008, 297). Further studies confirm that in the case of boundary violations, top management is usually involved (Wells 2007, 328): ”either the CEO or the CFO was involved in 83 percent of the cases“.

    What can internal audit contribute? What should internal audit focus on? I recommend the internal audit profession to focus on Corporate Governance, possibly become a “Gardener of Governance”; you heard me saying that before, I believe 🙂 With the words of Huse (2007, 15): “Corporate governance is seen as the interactions between various internal and external actors and the board members in directing a firm for value creation“. I recommend the professional standard setter, the The Institute of Internal Auditors Inc., to help strengthening the contribution of internal auditors in that arena, and to focus on what truly matters, thereby acknowledging the limits of internal control systems.

    CEOs and top management of forward-looking organizations are trying to turn the so-called “soft” success factors that are particularly important to them into “hard” competitive advantages. Healthy corporate culture and good corporate governance can become a competitive advantage. The more successful companies will increasingly seek to harmonize result orientation (EBIT, Net Income, Cash Flow), employee orientation, and orientation to values and goals. On that journey, externalities matter, environmental and societal aspects become part of the success formula. Internal Audit can support as a “trusted governance advisor.” My 2 cents.

    Cooper, C. (2008), Extraordinary Circumstances, The Journey of a Corporate Whistleblower, John Wiley & Sons, Inc., Hoboken, New Jersey
    Huse, M. (2007), Boards, Governance and Value Creation, The Human Side of Corporate Governance, Cambridge University Press, Cambridge
    Wells, J. T. (2007), Corporate Fraud Handbook, Prevention and Detection, John Wiley & Sons, Inc., Hoboken, New Jersey

    Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

What’s Trending

03-20-23

New Report Reveals Surprising Insights from Internal Audit Executives


03-13-23

New IIA Report Is a Timely Benchmarking Resource for Internal Auditors


03-02-23

6 Things Audit Committee Members Often Won’t Say to Internal Audit


Read More

Archive

  • March 2023
  • February 2023
  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • October 2010
  • September 2010
  • August 2010
  • July 2010
  • June 2010
  • May 2010
  • April 2010
  • March 2010
  • February 2010
  • January 2010
  • December 2009
  • November 2009
  • October 2009
  • September 2009
  • August 2009
  • July 2009
  • June 2009
  • May 2009
  • April 2009
  • March 2009
  • February 2009

Contact Us

PO Box 1441
New Smyrna Beach, FL 32170

+1-407-463-9389
rchambers@richardchambers.com

About AuditBeacon.com

AuditBeacon.com is a resource center for internal auditors and risk professionals from around the world. In addition to more than 500 blogs authored by Richard Chambers, the site includes links to news and insights on internal audit and other information that illuminates the value of this important profession. AuditBeacon.com is provided as a service by Richard F. Chambers and Associates, LLC.

Copyright © 2023 Richard F. Chambers & Associates. All Rights Reserved.
  • Home
  • Blog
  • Audit Trail Academy
  • Advisory Services
  • Books