Five Things the Audit Committee Won’t Tell Internal Audit

Most audit executives work hard to develop open relationships with their audit committee members. The effort generally pays off. Regardless of how hard we work at fostering openness and honesty, however, some audit committee members may not be comfortable telling us everything that’s on their minds. Sometimes, they simply may not know enough about internal audit to know what we are capable of, and sometimes they are simply trying to spare our feelings. But often, it’s the things they don’t or won’t say that we most need to hear.

The audit committee might be perfectly comfortable asking us hard questions about risks and controls. And they might be completely open about audit quality, fraud, and a myriad of other tough issues. But let’s face it: Most people will never be invited to join a board of directors unless they have good people skills. They try to be tactful, and most of the time that’s good. But we need to know that there also may be things that an audit committee member just won’t say to us. Their absence of complete candor can limit our ability to improve our internal audit departments.

Over the years, I have worked with quite a few audit committee members in an advisory capacity. Here are a few things that they frequently said to me, but didn’t say to their own internal auditors. All are things I think you need to know.

1. You are not as important to us as the external auditors.

I realize many of you might disagree with that statement. You know you add extraordinary value to your organization, and you can provide a lengthy list of internal audit accomplishments that would rival the impact of external auditors. Yet, look at the typical audit committee charter: The description of the audit committee’s responsibility for the external auditor often dwarfs that for the internal auditor. The New York Stock Exchange’s model audit charter, for example, includes seven paragraphs discussing responsibility for the oversight of external auditors, but only two paragraphs dealing with the oversight of internal audit.

A sample audit committee charter recently published by Deloitte, based on a review of select Fortune 1000 companies’ audit committee charters, is even more revealing. The Deloitte charter has nine paragraphs on the external auditor; nine paragraphs on oversight of financial reporting processes, accounting policies, and internal control structure; but only five paragraphs on oversight of internal audit. Many audit committees are populated with retired partners of public accounting firms, and their emphasis is often on what they know — external audit. But internal audit should be every bit as important, so it is up to each of us to recognize this and work tirelessly to change the perception of our importance.

2. You send us too much information.

Unfortunately, this one is not always a misconception. I have seen well-intentioned chief audit executives (CAEs) send as many as 40 internal audit reports a year to their overwhelmed audit committee members. Beyond that, I have seen internal audit reports running more than 200 pages that were distributed unabridged to their audit committee members. Is it any wonder that audit committees think we send them too much?

When we overwhelm them, audit committees struggle to focus on the really important issues. They may not want to admit they can’t keep up, but the reality is many have multiple responsibilities and limited time. So, we should consider synthesizing the results and signal the really critical issues. We also should consider asking how they feel about the amount of information and level of detail that we provide. Sometimes their answers may be surprising.

3. We wish you would “connect the dots.”

You might be convinced you are communicating all essential information about risks and controls. Perhaps you provide synopses of reports or results to the audit committee and don’t overburden them with information. Despite your efforts, however, audit committee members still might not know what to make of the body of your work. Is the company or its individual business units well controlled? Are risks well managed overall?

It’s easy to miss the forest for the trees: Sometimes we are so busy communicating the details that we neglect to focus on the essential “so what?” I know that it makes more work for internal auditors, and that sometimes the judgment calls might not be easy, but offering our overall assessments on the effectiveness of risk management or internal controls based on the body of our audit work can be valuable for the audit committee. They may not say it, but they really want you to connect the dots more often than you do.

If you, or your CAE, are not frequently using language such as, “Why I am telling you this is …”, “Why this is important is …”, or “The consequence of this might or will be …”, then you are not synthesizing the information to what is truly useful to the audit committee.

4. We want you to focus on more than just financial controls, but we are not sure you have the skills.

Internal auditors believe we can address the full portfolio of risks facing our organizations. Most internal audit departments are prepared to deliver assurance and insight on financial, operational, compliance, and many more critical issues that emerge during the risk-assessment process. None of us wants to believe that the audit committee doubts our abilities. Yet, recent feedback from audit committee members in global surveys indicates we may have a problem.

A new survey from KPMG’s Audit Committee Institute found that 82 percent of audit committee members believe internal audit’s role/responsibilities should extend beyond the adequacy of financial reporting and controls to include other major risks and challenges facing the company. That is good news, because many of us agree. Unfortunately, only half of these audit committee members believe internal audit currently has the skills and resources to be effective in the role they envision.

Based on results of the KPMG survey, we need to redouble our efforts as a profession to acquire and retain the skills necessary to address a broad portfolio of risks. More importantly, it is critical that we demonstrate our abilities in such a manner that audit committee members are confident that we have the skills and resources to be effective in the role they envision.

5. When you are a “mouthpiece” for management, we tune you out.

Audit committee members are, on whole, an astute group of individuals. They have a pretty good idea of when we are being genuine, and they can tell when we are just giving them the “party line.” It might seem like a good idea to consistently show a united front with management, but we need to remember that one of the primary strengths of internal auditing is that we are organizationally independent.

I’m not saying we should go out of our way to contradict management. But when we talk to the audit committee, perhaps some of us need to concentrate more on representing the results of our audit work and less on representing management’s point of view. Management is almost always capable of speaking for itself, and we best add value when we are transparent and candid about the results of our work.

Obviously, every audit committee member is different, and perhaps none of your committee members shares any of the views I’ve just outlined. But it’s important to know what’s on their minds. Feel free to share this blog post with them if you think it might help open up communications. The more we understand our audit committee members, the better we can do our jobs.