By Richard Chambers | November 10, 2014
There are times when internal audit clients and others have unrealistic expectations about our profession. It’s not surprising then that there may be confusion about our role — after all, internal auditors wear many hats. We are analysts, controls experts, consultants, teachers, business partners, watchdogs, financial advisers, compliance experts, and more. We truly can audit almost anything. While some risks clearly require additional expertise to audit, as I said in an earlier blog “you don’t have to be a clown to audit the circus.” However, it’s important to remember that, while we might be able to audit anything, we can’t audit everything.
Each time a major control breakdown makes headlines, someone inevitably asks, “Where were the internal auditors?” Often, the internal auditors were engaged and, in fact, did raise red flags in advance of the crisis. But the warnings were not addressed satisfactorily. Given the size and complexity of many organizations today, it would require an incredibly large internal audit function to address all of the risks. Sometimes, there simply aren’t enough internal audit resources to cover all significant risks and, yes, there also are times when internal audit overlooks a key risk that proves catastrophic.
At best, the internal audit function can only be as effective as the resources, training, and talent that are available. Internal auditors are not infallible, and given the realities of budgets and cost-justifications, we also cannot be omnipresent.
This can lead to expectations gaps and misunderstandings about what internal auditors can do or what is being addressed. A PricewaterhouseCoopers (PwC) study in 2012, for example, found a large gap between the perceptions of internal auditors, audit committee chairs, board members, and senior management regarding how their companies manage fraud and ethical risks. The study, Aligning Internal Audit: Are You on the Right Floor?, showed that 53 percent of audit committee chairs, board members, and senior management thought fraud and ethics risks were well managed, while only 35 percent of CAEs shared that sentiment.
In PwC’s Boardroom Direct monthly newsletter, Peter Tickner, a U.K. consultant on corporate governance and fraud issues, cites differences of opinion over who is responsible for fraud deterrence and for setting and assessing ethical culture. Tickner’s quote: “Top management was convinced that one of the key roles of the chief audit executive was to deal proactively with the risks around fraud and corruption, whereas generally the CAEs saw it as senior management’s problem and responsibility.”
If Tickner is right, we need to hold a few more conversations regarding roles and responsibilities within the “Three Lines of Defense.”
Unfortunately, our stakeholders sometimes want more assurance than we may be able to provide. A good example is in the area of information security. Another PwC study, the recently released 2015 Global State of Information Security Survey, found a 48 percent increase (to 42.8 million) in the number of detected security breaches worldwide. That’s huge, and obviously internal auditors at those organizations could not have given absolute assurance about their organizations’ cybersecurity controls. When it comes to risks and controls, we provide important assurances, but we cannot give unlimited assurance. And while providing assurance is an essential role of internal auditors, we must guard against giving false assurance.
Our clients’ expectations are not developed in a vacuum. They may have unrealistic expectations simply because they have “selective hearing,” but part of the problem also may be us. Expectations gaps can develop because of something we say or do, or the way we say it. Or they can result from our silence.
We all regularly explain what we can do for our organizations and how we can add value. It’s important for stakeholders to understand the benefits of internal auditing, so we build such messages into our charters, our announcement memos, our opening meetings at the outset of engagements, and other communications. But while we may be good at explaining how internal auditing can help, perhaps we should spend just a little more time explaining the potential limitations in our capabilities, keeping in mind the old customer service mantra that we should “under-promise, then over-deliver.”
There will always be risks, no matter what internal audit does. Certain disasters are bound to happen, regardless of the number or quality of internal auditors protecting our organizations. When crises hit, all eyes in the organization may turn to internal audit to assess causes and consequences. The Lady Antebellum song “I Run to You” says it well: “This world keeps spinning faster into a new disaster, so I run to you.” It is natural that management and the board turn to us following a risk or control failure. As much as we can try to assess key risks in advance of failures, we can’t audit everything. That’s a message that bears emphasis in setting key stakeholder expectations.
What are your thoughts on minding and monitoring stakeholder expectations?