Maneuvering the Politics of Internal Auditing to Make Positive Change. Richard F. Chambers, CIA, QIAL, CGAP, CCSA, CRMA IIA President and CEO

Transcription

1 Maneuvering the Politics of Internal Auditing to Make Positive Change Richard F. Chambers, CIA, QIAL, CGAP, CCSA, CRMA IIA President and CEO

2 Discussion Topics Politics of Internal Auditing Approach/Research/Results Aggravating Factors for Political Pressure Maneuvering in a Political Maze Ethical Lapses: Self-Inflicted Political Vulnerability Concluding Thoughts

3 Approach: Politics of Internal Auditing Why this research? Every professional must navigate political currents Internal audit very susceptible Those targeted sometimes feel isolated Little research has been done

4 Approach: Politics of Internal Auditing Definition: The situation in which individuals in leadership positions exercise their authority to achieve a personal benefit, or to protect an organization, by attempting to manipulate the internal audit activity or internal audit reports. Such manipulation may result in actions to restrict the scope of audit activities, suppress audit findings, or undermine the credibility of the chief audit executive or the internal audit activity.

5 About the Research Research based on: Focus group interviews In-person interviews with heads of audit around the world Survey of about 500 North American chief audit executives (CAEs) The authors of Politics of Internal Auditing Larry E. Rittenberg: Professor Emeritus, University of Wisconsin with nearly four decades of experience teaching auditing, IT auditing, corporate governance, and risk management. Patricia K. Miller: Longtime internal audit practitioner, consultant, and author and former IIA Global Chairman.

6 Political Pressure or Professional Disagreement?

7 Challenges at both ends of the spectrum are easier to identify Challenge to Audit Findings Legitimate challenges or disagreements on audit findings. Pressure to suppress or change findings.

8 Legitimate Areas of Disagreement Risk associated with audit areas The amount of acceptable risk Interpretation of evidence found during an audit engagements The characteristics of the internal audit function in delivering value

9 Addressing the Gray Area Competence CAEs must consider the internal audit function s competence when distinguishing between legitimate disagreement and political pressure. The function s competence must not provide an excuse for questioning its findings. Experience CAEs must rely on previous engagements and interactions with management to gauge each disagreement. Judgement CAEs must be able to consider conflicts from all views internal audit s as well as varied stakeholders. Stand up for the right issues and distinguish between minor from major ones.

10 Research Results

11 Examples of Politically Induced Impairments CAE threatened with loss of future job opportunities if they continued audit CAE who ignored executive and reported issue to board, subsequently excluded from key executive meetings Executive who shared their version of events with CEO and board before CAE could present results, swaying ultimate conclusion CAE succession plan scuttled in favor of lesser qualified candidate CAE accused of improper activity and fired with no evidence of wrongdoing

12 Troubling Survey Findings

13 Troubling Survey Findings

14 Troubling Survey Findings

15 Aggravating Factors

16 Aggravating Factors - Functional Lack of strong, independent and supportive audit committee Weak relationship between CAE and: AC Chair Key executives CAE who lacks objectivity, integrity, courage, or sound judgment Internal audit function lacks competence The CAE or internal audit function has been compromised by ethical transgressions

17 Aggravating Factors - Cultural Lack of strong ethical culture from top down Culture that embraces risk over control Culture that wants to put positive spin on issues Defeatist Culture Employees expect and accept undesirable behavior

18 How an Organization Responds to Internal Audit Says a lot About Culture How receptive is management to an audit of their area? How open and cooperative is management during an engagement? How receptive and responsive is management to findings and recommendations?

19 Implications for Chief Audit Executives

20 Foundational Strong governance, knowledgeable board Strong reporting relationship and position Direct reporting relationship to board/audit committee CAE senior independent position

21 Foundational Clear and supportive Charter Documents internal audit s unique role Specifies authority and unrestricted scope Codifies expectations

22 CAE Attributes Integrity and courage Know your internal compass Stand ground on important issues Objective and fair Professionalism In demeanor and commitment to high standards Relationship builder with board, executives and management We are after the same objectives.

23 Relationship Building Meet outside of scheduled, formal meetings Learn about person objectives, accomplishments, interests Lead outside of Internal Audit role be visible Educate on emerging topics Build your credibility through consistency

24 Internal Audit Function: Communications Shared understanding of scope, objectives, rationale Clear reporting lines when communicating issues Fact-based conclusions with clear business implications

25 Internal Audit Function: Staffing Rigorous selection and training Recruit and train business savvy critical/analytical thinkers Competence Must possess skills to address changing demands on internal audit. Credibility Consistency in performance and transparency builds credibility for the internal audit function. Poise Consistency in performance and transparency under pressure is crucial during challenging engagements.

26 Internal Audit Function: Value Think strategically Know the business Present alternatives Jointly find solutions

27 Maneuvering in the Political Maze

28 Keys Attributes: Relationships Role of internal audit is clear and its independence and objectivity is valued. Leverage positive relationships with management and board to discourage, deter and if necessary expose political pressure.

29 Keys Attributes: Audit Committee Support Must maintain oversight of CAE s hiring, firing, compensation and review. Must recognize/acknowledge the potential for political pressure. Must champion independent and properly resourced internal audit function.

30 Keys Attributes: Adding Value Internal audit must: Demonstrate its understanding of business and strategies. Convey findings from the organization s view, not internal audit s. Embrace new demands especially when taking on advisory roles while being vigilant for potential future conflicts of interest.

31 Keys Attributes: Impeccable Reputation Objectivity Competence Confidentiality Emotional Maturity Integrity

32 Ethical Lapses: Self-Inflicted Political Vulnerability

33 We Are Vulnerable to Ethical Lapses Too 32% of CAE s acknowledge that they have discovered or witnessed unethical actions within their internal audit functions! Source: Survey of 70 CAE s attending AEC Roundtable

34 The Media Often Connects the Dots Infernal Audit: When Internal Auditors Go Bad How is a company supposed to avoid corrupt payments when the individual tasked with finding out about corrupt payments (the CAE) and reporting them to the Board of Directors is himself complicit in the bribery scheme? Source: Forbes.com, Infernal Audit: When Infernal Auditors Go Bad, Howard Sklar, February 24, 2012

35 Ethical Lapses Are Resulting From: Loyalties to other senior executives Desire to protect the organization Protection of career opportunities Conflicts of Interest Lack of courage and integrity Disregard of The IIA Code of Ethics

36 7 Traits of Ethical Internal Audit Leaders Honest Courageous Accountable Empathetic Trustworthy Respected Proactive

37 Beyond Our Traditional Roles The Ethics Continuum

38 Maybe We Are On to Something 94% of CAE s think internal audit has a role to play in being part of the conscience of the organization! Source: Survey of 70 CAE s attending AEC Roundtable March 17, 2013

39 Recognizing And Addressing Our Blind Spots Recognize that we are all prone to behave in ways that serve our own interests Challenge your own thought/decision processes Watch and challenge those around you Slow down and deliberate (with yourself and others) Implement controls that force contemplation of ethical decisions Disclose potential ethical conflicts Remember that we are only as strong as our weakest link

40 Finally I found myself standing at a crossroads. Looking back, I would take the same path again. But doing the right thing doesn t mean there will be no cost to others, your family, or yourself.

41 Concluding Thoughts

42 Ongoing Challenges Political pressure can be managed and partially mitigated, but it is always present. Good corporate governance is critical, but it can be transient. Professional competence it required but not sufficient. Effective communication is more than report writing. Continuously work to align internal audit with organization.

43 CAE: Politics is Part of the Job Judgment to know what IS an important issue and when to take a stand Think strategically Anticipate and proactively address issues Discuss protocols in advance Know key parties and motivations Decision framework when to take a stand Identify alternatives, consequences, best action

44 CAE: Politics is Part of the Job If you can t stand the heat... Don t accept a CAE position if you can t stand up to the pressure.

45 Thank You! The Institute of Internal Auditors Richard Chambers, CIA, QIAL, CGAP, CCSA, CRMA President & Chief Executive