logo-newlogo-newlogo-newlogo-new
  • Home
  • Blog
  • Audit Trail Academy
  • Advisory Services
  • Books
✕
  • Home
  • Chambers on Internal Audit
  • Uncategorized
  • Exposing Internal Audit’s Work: Too Much of a Good Thing?

Exposing Internal Audit’s Work: Too Much of a Good Thing?

7 Characteristics of the Virtuous Internal Auditor
June 27, 2019
​California’s Earthquakes and Europe’s Heat Wave: The Latest Gray Swans
July 9, 2019
July 1, 2019

Exposing-Internal-Audits-Work-Too-Much-of-a-Good-Thing

The CPA Journal recently published a provocative article, “The Benefits of Internal Audit Disclosures,” which examined research into what investors know about internal audit functions, how they might view disclosure of internal audit work, and how such disclosures might improve corporate governance transparency.

The initial research by Deborah S. Archambeault, F. Todd DeZoort, and Travis P. Holt presents a positive picture of the value of such disclosures. Indeed, according to the article, the researchers identified three benefits of public exposure of internal audit’s workings based on a review of internal audit research and a series of interviews with financial analysts, audit committee members, internal auditors, and policymakers. The benefits:

  • Increased investor understanding of the function of internal audit and its governance role.
  • The potential for increased internal auditor diligence stemming from greater transparency.
  • Increased company investment in internal audit. 

To its credit, the research team also concluded the potential costs of such disclosures:

  • The potential for increased legal exposure.
  • Concerns related to whether investors would understand how to use the information.
  • Additional reporting costs.

Finally, the research team proposed a model for an internal audit report that would make public the composition, responsibilities, reporting structure, activities, and resource allocations related to internal audit. That model mirrors closely The IIA’s efforts to persuade federal legislators and regulators in the United States to broaden reporting requirements about internal audit functions for publicly traded companies.

The article examined additional research by DeZoort, Holt, and others into investor perceptions based on their knowledge of reporting relationships, internal and external auditor assurance, and internal auditor risk judgments. Each additional research effort probed different aspects of internal audit’s relationship and role in governance and pushed the envelope on public disclosure.

This is where I began getting uncomfortable, and the expression, “too much of a good thing,” popped into my mind.

Good governance is a delicate balancing act. The working relationship among the board of directors, executive management, and internal audit is complex, multilayered, and influenced by myriad factors, including the strength of the internal audit function within the organization. I strongly agree that detailing the strength of internal audit functions in publicly traded organizations would be a positive move that could go a long way toward improving investor confidence in the markets.

However, internal audit practitioners must always be cognizant of the first word in our job title — internal. No matter how we or others might find value in boosting the transparency of internal audit’s work, the internal audit function’s first responsibility is to the organization. This allegiance to the organization, the confidentiality of our work, and any related exceptions are addressed in multiple ways in the International Professional Practices Framework.

One might argue that investors are part of the organization. That is true. Nonetheless, there is great peril in throwing open the work of internal audit to public inspection. The list of negative ramifications is significantly longer than what Archambeault, DeZoort, and Holt outlined in their research.

Internal audit reports may expose weaknesses in cybersecurity, competitive disadvantages or expansion strategies, trade secrets, and other internal considerations that could place the organization’s success in jeopardy, if made public. Indeed, such revelations could lead to reputational or financial damage, which could hurt investors.

The relationship between internal audit and management also could be negatively impacted if internal audit’s results are made public. As a former U.S. inspector general, audit results of my federal agency were routinely made public. The negative publicity often had a chilling effect on the willingness of management to be open and transparent with me. A senior agency official once told me: “Richard, there are several areas where I suspect we have problems. But I would never ask you to look at them. Your reports are public.”

Pulling the curtain back to reveal the inner workings of an organization’s financial health is what gave birth to modern internal auditing. But any effort to pull the curtain back further is fraught with danger and must be approached cautiously.

As always, I look forward to your comments.

Share

Related posts

January 31, 2023

Recent Advice on Hiring Internal Auditor’s You Can ‘Trust’ Is Misdirected


Read more
January 24, 2023

Do Performance Bonuses Impair Internal Auditors’ Independence and Objectivity?


Read more
January 16, 2023

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


Read more

Leave a Reply Cancel reply

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

What’s Trending

01-31-23

Recent Advice on Hiring Internal Auditor’s You Can ‘Trust’ Is Misdirected


01-24-23

Do Performance Bonuses Impair Internal Auditors’ Independence and Objectivity?


01-16-23

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


Read More

Archive

  • 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