By Richard Chambers | August 28, 2017
Relationships between audit committees and chief audit executives (CAEs) have become increasingly more complex as the risks facing organizations have become more diverse and dynamic. Indeed, surveys of audit committees suggest they are turning to internal audit more often for an expanding scope of assurance and advisory services.
But the relationship between the audit committee and the CAE is often complicated by personal dynamics and the awkwardness that comes with “constructive feedback.” As a result, I often find that audit committees are uncomfortable pointing out to the CAE what internal audit could do better. Instead, they leave it to management to deliver the news, and the translation isn’t always pure. I wrote a blog post in 2014 that looked at Five Things the Audit Committee Won’t Tell Internal Audit. The blog gained a lot of attention, and I was even invited by the National Association of Corporate Directors to discuss the list at an Audit Committee Forum.
Although a bit blunt, my original list still resonates. However, with the passage of time, there is even more evidence to indicate that some feedback goes unspoken. So, I believe it is time to update the list of things that audit committees are often reluctant to tell the CAE.
In the earlier blog post, I described how audit committee charters often spend much more time articulating the audit committee’s responsibility over external auditors. This is driven largely by compliance and regulatory considerations related to the accuracy of financial reporting and the external auditor’s associated assurance role. It also is influenced by the makeup of audit committees, which often include retired partners of public accounting firms.
The key to changing this is for internal audit to better demonstrate and articulate its value to the organization. The growing array of nonfinancial risks threatening organizations is helping to heighten awareness of what internal audit has to offer. However, the challenge is for the profession to step up and meet those new demands. This will require mastering a wider portfolio of competencies, updating our processes, and becoming agile while maintaining our independence.
Audit committees are feeling overwhelmed today more than ever. The growing demands placed on them by regulators, shareholders, and the breakneck speed at which risks can develop and mature can quickly overwhelm even experienced audit committee members. Consider then the dangers of further overwhelming audit committee members with dozens of lengthy written audit reports each year. This is a recipe for having crucial information overlooked or, worse yet, ignored.
The IIA’s recent Common Body of Knowledge (CBOK) stakeholder study provides clear direction from audit committees that communication must be more than written reports. We must consider the quality, frequency, and method of communications. According to CBOK respondents, internal audit is best served by building relationships and communicating in person. The clear message — sit down and talk to us to explain what you are seeing.
This is closely related to the previous point, and it is one whose importance I can’t stress enough. Internal auditors take pride in bringing an enterprisewide perspective to their work. Over time, our work should provide our stakeholders a complete picture of the organization’s risk and controls. But busy audit committee members tell a different story. Their message: “We don’t have time to make sense of seemingly random detail. Give us a simple, clear, big picture.”
I call this connecting the dots. As I wrote previously, we need to provide the context that answers the essential “so what” question. Get into the habit of using language such as, “Why I tell you this is . . .”, “Why this is important is . . .”, or “The consequences of this might or will be. . . .”
We must also be prepared to offer opinions and ratings if the audit committee seeks them. Opinions on the overall effectiveness of internal controls or risk management are tricky. If we do not perform enough work to warrant positive assurance, we must be clear about what we are saying.
The single biggest way to maximize internal audit’s value to the organization is to expand the audit plan in key areas outside of finance and compliance, according to KPMG’s 2017 Global Audit Committee Pulse Survey. This is an invitation for internal audit to step up and a clear sign that recognition of its value is growing. However, lingering doubts about the internal audit function’s ability to deliver threatens to derail this progress.
Many CAEs bristle at the idea that their functions don’t have the skills in house to take on their organizations’ full portfolio of risks. But CAEs must check their egos at the door and make a clear-eyed assessment of strengths and weaknesses. They must be willing to take all necessary steps to raise staff competencies to meet the level of service desired by the audit committee, whether through new hires, expanded training, cosourcing, or outsourcing.
According to 2016–2017 NACD Public Company Governance Survey, boards receive much information from management but express concerns about the quality of that information. Indeed, about half of respondents “noted a glaring need for improvement in the quality of information provided by management.” Often, internal audit is in such lock-step with management when communicating with the board that it is tarnished by the aforementioned concerns.
Internal audit must step up and provide an informed and independent assessment not just on the myriad of risks organizations face today, but also on the quality and completeness of information they receive from management. Boards and audit committees are desperately seeking someone who can help them drill down to what is most important, and internal audit can serve that role.
In some companies, management is uncomfortable with an independent internal audit function that provides a different perspective on the effectiveness of the organization’s risk management and internal controls. That is where courageous CAEs really earn their pay, but that is a story for another blog.
As always, I look forward to your comments.