How Far Should We Go to Ensure Independence and Objectivity?

I am not sure if it is my imagination, but the topic of internal auditor independence seems to be picking up steam — especially outside of North America. In the past week, I have commented on the topic twice​ in my blog (“Don’t Confuse I​ndependence With Objectivity,” and “What Would It Take to M​ake You More Assertive?“).

Lately each time I think I’ve heard a pretty radical idea put forward for enhancing internal audit independence, someone comes along and tops it. I am still attending the Asian Confederation of Institutes of Internal Auditors (ACIIA) Conference in Sydney, Australia. Yesterday, a straw poll revealed a substantial majority of those attendees responding felt they would be more assertive if they were not hired or funded by management of their companies. I thought that was a pretty alarming message for those of us who are advocating that internal auditors can be objective in carrying out their responsibilities in an “independent” internal audit function.

In one of today’s sessions, a noted panelist was asked by the moderator if he felt that internal auditors should be prohibited from owning shares in the company for which they work and audit. To my utter amazement, the panelist quickly expressed the view that such prohibitions should be imposed. In his view, internal auditors should be subject to the same limitations of ownership as the external auditors.

Given that a substantial portion of my career was in the public sector or a “Big Four” ​accounting firm, I have never owned shares of stock of an enterprise for which I had internal audit responsibilities. However, I would staunchly defend the propriety of corporate internal auditors to do so. As I commented in my earlier blog posts, internal auditors are not independent of their companies. Until they are hired, evaluated, and compensated by someone completely outside of their company, they will never be totally independent. However, they have an obligation to maintain their objectivity, and that objectivity must be fostered by organizational reporting relationships that enhance the independence of the internal audit activity.

I fear that precluding internal auditors from owning stock in their companies would not foster objectivity — it would foster ambivalence. As a federal Inspector General in the U.S. government, I possessed legislated independence that most internal auditors could only dream of. It would have been easy to become totally disassociated from my agency. Yet, I worked tirelessly to ensure that I did not lose sight of the fact that the agency’s success was an important outcome of the work of my organization.​​

If internal auditors were forced to divest themselves of their shares of stock in their companies, I shudder to think of the perception it would create among members of their board and management. It would create an extra burden as they sought to overcome the perception that they no longer care about the company’s performance. It would also remove an important connection that internal auditors have with their organizations. In the final analysis, I believe that precluding internal auditors from holding an ownership interest in their organizations is not a prudent solution to perceived objectivity impairments.

I would be interested in your views.​​