(First published on Nov. 16, 2015)
This summer, I have been taking the opportunity to share blogs from my archives that generated a lot of interest at the time they were published. This week, I reexamine how the internal audit function can be manipulated when its resources are compromised.
In a recent conversation, a seasoned chief audit executive (CAE) recruiter shared his frustration that a number of high-profile companies are offering below-market salaries for their CAE positions. I responded to him that I wasn’t surprised. In fact, I shared my long-held view that some companies don’t want a strong CAE, so they price the role accordingly. After all, “You get what you pay for.”
On the surface these look like companies simply being shortsighted in trying to save money at the price of maintaining a well-run internal audit function. At worse, we’re talking about benign neglect, right? Wrong. The truth is there is a much more treacherous side to this equation.
I believe it is no accident when some companies low-ball CAE salaries. When it happens, I believe it is frequently a disguised attempt to recruit weaker talent. Bluntly, in these instances management seeks to weaken internal audit in order to avoid accountability. It brings to mind another saying that is as relevant as it is colloquial: “Good work ain’t cheap. Cheap work ain’t good.”
When this underhanded manipulation goes on, I blame boards and their audit committees who are asleep at the wheel and allow it to happen.
This is certainly not the only deceitful attempt to limit internal audit’s reach by manipulating the purse strings. In early 2014, I wrote about a battle over funding of the Delaware state audit function. A scheduled pay raise for state auditors — money that would help keep pay scales competitive with the private sector — was held up by partisan politics. Starving the government watchdogs is an effective way of keeping them from biting.
To be clear, I believe most corporate boards and executives and government officials appreciate a strong and effective internal audit function and the oversight it brings. They recognize internal audit is vital to healthy risk management and internal controls. They also understand that to get the most out of the internal audit function, it must be well-resourced and independent.
Despite this, I have witnessed many cases over my 40 years in the profession where a strong internal audit function is not welcomed by corporate and government executives who would rather keep internal audit as window dressing and not as a window to corporate or government accountability.
Regrettably, this latest example of starving the function to keep it under control is not the only evidence that internal audit is battling to maintain its independence at many organizations. In March, The IIA Research Foundation published “The Politics of Internal Auditing,” a research report that found management pressure is a pervasive threat to internal audit’s objectivity.
More than half of North American CAEs surveyed reported being directed to omit or modify important audit findings at least once in their careers, and nearly as many — 49 percent — said they were directed not to perform work in high-risk areas, according to the report.
These data suggest widespread efforts by management to unduly influence internal audit. By bringing in weaker talent at the CAE level, management improves its chances of succeeding. And success in this instance is a breeding ground for future failure.
It is not a stretch to conclude that executives who would shy away from objective scrutiny may have something to hide. I’m not suggesting there is criminality in all such instances, but there likely is a whiff of inefficiency, ineffectiveness, incompetence, or unethical behavior. Once again, it speaks to a weak organizational culture — which as we have seen repeatedly in 2015, can be lethal to corporate credibility.
A number of other expressions come to mind when trying to characterize the consequences — inevitably negative — of dumbing down the internal audit function. But I’d like to end on a positive note by quoting the guru of smart business and investing, Warren Buffett.
“Price is what you pay. Value is what you get.”
All managers and boards should take this to heart.