You Don’t Have to Be a Clown to Audit the Circus

My friend and fellow blogger Norman Marks reminded us recently of an enduring challenge that many internal auditors face. In a blog post titled “You Can’t Audit This!”, Norman explores the all-too-frequent standoff between internal auditors and management about whether we have the skills and expertise to audit their areas of responsibility. There may be times when that is a legitimate concern, but it is often used more to delay or thwart an audit. Norman’s writings brought a smile to my face as I recalled instances in my career when I had to deal with “you can’t audit this.”

When push-back occurs about our ability to conduct an audit, it is usually rooted in the perception that we lack knowledge of “the business,” and that we should stick to “bean counting.” Earlier in my career, I joined the U.S. Postal Service (USPS) Office of Inspector General as it was being created. The USPS had existed for almost 200 years without an independent audit function and, frankly, agency officials were not happy when Congress decided to create an Inspector General of this state-owned behemoth.

We hired many of the best and brightest auditors we could assemble. Still, we were often met with the refrain, “you can’t audit this because your team simply doesn’t understand Postal operations.” Where there were legitimate concerns, we secured contract expertise, but most of the time we plowed ahead with the scheduled audit(s). Over time, the naysayers came to appreciate that things might not have been as over our heads as they thought.

Later, I would go on to serve as Inspector General of the Tennessee Valley Authority (TVA), another giant government-owned corporation. And, though many on my team had been in their audit roles for decades, I would hear the occasional “you can’t audit this.”

One time, we were scheduled to audit accountability over weapons in the agency’s security force. One of the highest executives in the TVA called me and declared that my auditors didn’t have the expertise to inventory the agency’s weapons. My patience escaped me for a moment, and I responded sarcastically: “We’re just counting guns. Most of my auditors learned to count in grade school.” Granted, I could have been more diplomatic, but that official was notorious for trying to impede our audits.

Don’t get me wrong, I have long championed the idea that internal auditors must know their company’s business. In fact, I address this topic in all three of my books, and business acumen is the No. 1 skill I explore in my most recent book, Agents of Change: Internal Auditors in an Era of Disruption.

If we expect to be credible and effective, and to protect and enhance value, we must know the business. However, we also must stand our ground when we are challenged as not being smart or skilled enough to audit some of the more complex areas of the business. As I mentioned, we must bring in expertise when needed, but throwing in the towel at the first suggestion that we may not be qualified is a slippery slope that will leave us ineffective and the company exposed.

When told we “can’t audit this,” we must understand and evaluate management’s concerns, so that we can appropriately address them. At a minimum, I recommend that internal auditors explore the following points with skeptical managers:

• Review the preliminary audit objectives. There may be an assumption that we are simply planning to substitute our professional judgement for management’s. We need to emphasize that we are not there because we are smarter than they are about their operations. But we are expert at assessing risks and want to ensure they have designed and implemented an effective control system to address those risks.
• Make sure they understand the expertise we plan to leverage. If you have the collective expertise to tackle complex technical risks/issues, state your case. Many internal audit departments in the medical industry have nurses and medical technicians on their audit team. Some internal audit departments that have an extensive construction contract audit mission hire engineers. But those are not practical solutions in every instance. That is why co-sourcing with outside service providers is such a valuable strategy. For example, I engaged highly respected economists to help with one of our audits at USPS.
• Stand your ground. Don’t capitulate without seeking appropriate resolution for disputes. If necessary, elevate any push-back to the CEO or audit committee of the board. It is often true that the only risk greater than undertaking an audit is the risk of not undertaking one.

It is important to remember (and I can’t emphasize this enough) that there may be times when we do not have the collective skills on our team to undertake an audit. If you are unable to augment those skills, do not undertake the audit. Don’t risk your credibility just to prove a point. But, if you are unable to undertake such audits, make sure that executive management and the audit committee are aware of your limitations. Audit committees are better able to support your resource needs if they understand where limitations lie.

During my career, I debated more than a few disgruntled managers who wanted to keep my staff out of their business, saying we lacked expertise. But with very few exceptions, I successfully refuted their assertions. However, when there was some validity to their concerns, I typically secured the necessary expertise by co-sourcing with a third party. As one of my colleagues cleverly responded to a business unit that doubted internal auditing’s ability to assess his operations: “You don’t have to be a clown to audit the circus.”

I first shared that story in a blog post back in 2011. It generated a tremendous response. One day, a few months later, I received a framed, hand-embroidered wall hanging with the words, “You don’t have to be a clown to audit the circus” in big, bold letters. It’s a reminder that we must have each other’s back in this profession.

I welcome your thoughts.