internal auditInternal pressure is a pervasive threat to the internal audit’s objectivity.   Nothwithstanding this, the internal audit function of larger enterprises is critical for assessing the maintenance of good governance. It provides the audit committee and the board with a clear, unfettered view of internal compliance with company policies.

Few people are aware that amongst internal audit leaders:

  • more than 50% have been directed to omit or modify an important audit finding at least once,
  • almost 50% have been directed not to perform audit work in high-risk areas, and
  • more than 50% had been asked at least once, and some more than once, to omit or modify an audit finding!

These details are astounding, but not uncommon apparently.

Consequences of internal pressure

Some of the down-stream consequences of internal pressure on the internal audit teams lead to:

  • the audit committee of the board, to whom internal audit most often report, is seen to be ineffective,
  • internal audit leaders have to face off with company lawyers who want to, or have been guided by the CEO, to protect an executive, and
  • lack of communication of a finding with certain people in order that they could have plausible deniability.

Wide-awake internal audit executives have over time learnt, sometimes the hard way, that they:

  • need to know the culture of the enterprise, but
  • accept that it can change if a change in the composition of the board and/or CEO, occurs,
  • must demonstrate a sound knowledge of the business and its strategies and apply that knowledge in assessing risk,
  • should anticipate internal political pressure and know how best to deal with it, and
  • always abide by the facts of the matters audited.

The Institute of Internal Auditors (IIA) Code of Ethics states, under the topic of objectivity, that all internal auditors “shall disclose all material facts known to them that, if not disclosed, may distort the reporting of activities under review.”  A new model for governance and risk management issued recently by the IIA makes major updates to the Three Lines of Defense model that has been popular for years.

Read the full article by Neil Amato, senior editor of the CGMA Magazine, here.