“Pervasive” pressure challenges internal audit’s objectivity

Written by promotiondept

November 13, 2018

“Pervasive” pressure challenges internal audit’s objectivity

Internal pressure is a pervasive threat to the objectivity inherent
in internal audit, according to new research.

More than half of North chief audit executives (CAEs)
survey said they had been direct to omit or modify an important
audit finding at least once, and 49% said they had been direct not
to perform audit work in high-risk areas. That data comes from a
report by The Institute of Internal Auditors (IIA) Research Foundation
and is bas on a survey of 494 CAEs and some follow-up interviews.

Sometimes, the threats are clear and easy to understand; some CAEs
were told they would be fir. Other times, the pressure was more
subtle; some CAEs report budget cuts or a decline in internal audit
staffing that they perceiv as tacit pressure.

Many times, the follow-up interviews yield positive lessons (see
“Lessons ” below). For instance, sometimes the instruction to
modify an audit finding could be work out with a discussion between
the CAE and the executive who ask for the modification. That’s an
easier discussion for auditors to have when they have built a
relationship with the C-suite in advance and can explain it
matters to the organization as a whole to report the finding accurately.

Several codes of ethics address what finance professionals should do
when ask to do something that they ider unethical. For instance,
The IIA’s Code of Ethics states, under the topic of objectivity, that
all internal auditors “[s]hall disclose all material facts known to
them that, if not disclos, may distort the reporting of activities
under review.”

The AICPA Code of Professional Conduct has a section for how
business members should behave when facing a threat. The Conceptual
Framework for Members in Business—part of both the AICPA’s code and
that of the Code of Ethics for Charter Global Management
Accountants—addresses threat categories that may be encounter. One
section mentions the undue influence threat, which could include the
following: “A member is pressur to change a conclusion regarding an
or a tax position.”

The AICPA Code of Professional Conduct says members should take a
three- process in addressing threats: identify the threat,
evaluate the threat’s significance, and identify and apply safeguards.

Nearly one-third ask to audit low-risk area

Larry Rittenberg, CPA, a professor emeritus at the University of
Wisin, said he and report co-author Patricia K. Miller, CPA,

found that 55% of survey respondents had been ask at least once, and
some more than once, to omit or modify an audit finding.

Richard Chambers, president and CEO of The IIA, said, “I wouldn’t
want to suggest that it is commonplace, but I think, as [Miller and
Rittenberg] have done an outstanding job of documenting, this is not
that uncommon, either.”

The survey found that 32% of respondents were ask to audit
low-risk areas so that an executive could investigate or retaliate
against another individual.

Sometimes, the blame for issues fell to ineffective audit
committees, Rittenberg said. Other times, audit executives fac off
with company yers who want to protect an executive. Rittenberg
said there was a sense of pressure not to communicate a finding with
certain people so that those people could have plausible deniability.


Some survey participants took part in follow-up case studies. Among
the lessons for how to handle political pressure while
performing internal audit duties:

Know the culture of the organization, but understand that it can
“One of the things that surpris us was how quickly an
organizational climate can change,” Rittenberg said. He said these
changes caught CAEs off-guard as well. A new CEO or set of executives
might be focus more on short-term, market-relat goals than on
long-term organizational objectives. “We see changes, maybe some
investor-type pushes to change the organization to perform better,”
Rittenberg said. “There are changes in the board, changes in the CEO.
The internal auditor has to be aware of those changes and build
relationships, particularly with the audit committee.” These changes,
some respondents report, also l to instances where “previously
unacceptable behaviors became acceptable.”

Business acumen is requir. To demonstrate value and build
cribility, internal audit must demonstrate a sound knowlge of the
business and its strategies and apply that knowledge in assessing risk, the
report said. “We would like to see internal auditors communicate more
effectively from a business point of view,” Rittenberg said. “We
want to see communication (such as), ‘These are the risks we
address, these were the findings, this is the root cause, this is
how we might go forward in mitigating those risks.’ ” The most
effective CAEs, the report said, have the ability to convey audit
findings from management’s perspective, rather than the more narrow
perspective of internal audit.

Anticipate political pressure. Some CAEs, according to the
report, describ decision s they develop to help them judge
the significance of an issue. They also report that it was vital to
build relationships ahead of time to better understand other
stakeholders’ rationale and incentives. Getting clarity in advance
from the audit committee about support that might be ne was also important.

Facts are your friend. CAEs hasiz the importance of
objective, accurate, and complete data, thorough audit work and
analysis, and an understanding of the effect of the audit finding on
the organization. In one case study example in the report, the CAE at
a major U.S. retailer fac a challenge from the company’s IT
director, who did not want a report that identifi “significant
technical control issues” releas without deleting some key findings.
The CAE crit confidence in the quality of the audit work for
helping to resolve the dispute and report the findings.

Neil Amato
is a
JofA senior itor.



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