Five Things the Audit Committee Won't Tell Internal Audit

Richard Chambers, CIA, CGAP, CCSA, CRMA, shares his personal reflections and insights on the internal audit profession. 

 

Most audit executives work hard to develop open relationships with their audit committee members. The effort generally pays off. Regardless of how hard we work at fostering openness and honesty, however, some audit committee members may not be comfortable telling us everything that’s on their minds. Sometimes, they simply may not know enough about internal audit to know what we are capable of, and sometimes they are simply trying to spare our feelings. But often, it’s the things they don’t or won’t say that we most need to hear.

The audit committee might be perfectly comfortable asking us hard questions about risks and controls. And they might be completely open about audit quality, fraud, and a myriad of other tough issues. But let’s face it: Most people will never be invited to join a board of directors unless they have good people skills. They try to be tactful, and most of the time that’s good. But we need to know that there also may be things that an audit committee member just won’t say to us. Their absence of complete candor can limit our ability to improve our internal audit departments.

Over the years, I have worked with quite a few audit committee members in an advisory capacity. Here are a few things that they frequently said to me, but didn’t say to their own internal auditors. All are things I think you need to know.

1. You are not as important to us as the external auditors.

I realize many of you might disagree with that statement. You know you add extraordinary value to your organization, and you can provide a lengthy list of internal audit accomplishments that would rival the impact of external auditors. Yet, look at the typical audit committee charter: The description of the audit committee’s responsibility for the external auditor often dwarfs that for the internal auditor. The New York Stock Exchange’s model audit charter, for example, includes seven paragraphs discussing responsibility for the oversight of external auditors, but only two paragraphs dealing with the oversight of internal audit.

A sample audit committee charter recently published by Deloitte, based on a review of select Fortune 1000 companies’ audit committee charters, is even more revealing. The Deloitte charter has nine paragraphs on the external auditor; nine paragraphs on oversight of financial reporting processes, accounting policies, and internal control structure; but only five paragraphs on oversight of internal audit. Many audit committees are populated with retired partners of public accounting firms, and their emphasis is often on what they know — external audit. But internal audit should be every bit as important, so it is up to each of us to recognize this and work tirelessly to change the perception of our importance.

2. You send us too much information.

Unfortunately, this one is not always a misconception. I have seen well-intentioned chief audit executives (CAEs) send as many as 40 internal audit reports a year to their overwhelmed audit committee members. Beyond that, I have seen internal audit reports running more than 200 pages that were distributed unabridged to their audit committee members. Is it any wonder that audit committees think we send them too much?

When we overwhelm them, audit committees struggle to focus on the really important issues. They may not want to admit they can’t keep up, but the reality is many have multiple responsibilities and limited time. So, we should consider synthesizing the results and signal the really critical issues. We also should consider asking how they feel about the amount of information and level of detail that we provide. Sometimes their answers may be surprising.

3. We wish you would “connect the dots.”

You might be convinced you are communicating all essential information about risks and controls. Perhaps you provide synopses of reports or results to the audit committee and don’t overburden them with information. Despite your efforts, however, audit committee members still might not know what to make of the body of your work. Is the company or its individual business units well controlled? Are risks well managed overall?

It’s easy to miss the forest for the trees: Sometimes we are so busy communicating the details that we neglect to focus on the essential “so what?” I know that it makes more work for internal auditors, and that sometimes the judgment calls might not be easy, but offering our overall assessments on the effectiveness of risk management or internal controls based on the body of our audit work can be valuable for the audit committee. They may not say it, but they really want you to connect the dots more often than you do.

If you, or your CAE, are not frequently using language such as, “Why I am telling you this is …”, “Why this is important is …”, or “The consequence of this might or will be …”, then you are not synthesizing the information to what is truly useful to the audit committee.

4. We want you to focus on more than just financial controls, but we are not sure you have the skills.

Internal auditors believe we can address the full portfolio of risks facing our organizations. Most internal audit departments are prepared to deliver assurance and insight on financial, operational, compliance, and many more critical issues that emerge during the risk-assessment process. None of us wants to believe that the audit committee doubts our abilities. Yet, recent feedback from audit committee members in global surveys indicates we may have a problem.

A new survey from KPMG’s Audit Committee Institute found that 82 percent of audit committee members believe internal audit’s role/responsibilities should extend beyond the adequacy of financial reporting and controls to include other major risks and challenges facing the company. That is good news, because many of us agree. Unfortunately, only half of these audit committee members believe internal audit currently has the skills and resources to be effective in the role they envision.

Based on results of the KPMG survey, we need to redouble our efforts as a profession to acquire and retain the skills necessary to address a broad portfolio of risks. More importantly, it is critical that we demonstrate our abilities in such a manner that audit committee members are confident that we have the skills and resources to be effective in the role they envision.

5. When you are a “mouthpiece” for management, we tune you out.

Audit committee members are, on whole, an astute group of individuals. They have a pretty good idea of when we are being genuine, and they can tell when we are just giving them the “party line.” It might seem like a good idea to consistently show a united front with management, but we need to remember that one of the primary strengths of internal auditing is that we are organizationally independent.

I’m not saying we should go out of our way to contradict management. But when we talk to the audit committee, perhaps some of us need to concentrate more on representing the results of our audit work and less on representing management’s point of view. Management is almost always capable of speaking for itself, and we best add value when we are transparent and candid about the results of our work.

Obviously, every audit committee member is different, and perhaps none of your committee members shares any of the views I’ve just outlined. But it’s important to know what’s on their minds. Feel free to share this blog post with them if you think it might help open up communications. The more we understand our audit committee members, the better we can do our jobs.

Posted on Mar 10, 2014 by Richard Chambers

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  1. Thanks, Richard for this interesting perspective. I have personally contemplated these exact issues over the past year.
  1. It's very real and true, I do feel that sometimes as CAE we overlooked these important points.

  1. thanks Richard,

    this is quite interesting for internal auditors

    we as auditors provide the board commitees with what we expect to focus on in the next comming audit through our audit plans that are unfortunately approved by the board audit committees  without any objections.

    the planned audit activities at this stage should be seived to void costly and immaterial audit activities that make audit reports voluminous for the committee.

    its therefore important that both internal auditors and the BAC members deliberate on what a report should look like? this provides ayardstick for the internal audit function

    i believe that the mebers of the BAC are distinguised members who act objectively and will be able to use this to highlight to the auditors what counts to them save for the situations where possible conflict of interest where there's need to remove such observations that pinpoint to this fact.

     auditors must remain objective and try to understand their board compositions and skills, to professionally deal with them.

    thanks

     

     

  1. Richard, I fully agree and endorse your comments point for point.  Some of the issues IA can and should address, such as the volume of information provided to a very busy group.  To address some of the other issues as in #4, there are companies that have tried to engage staff with non traditonal audit background from the operational side of the business. However, the perceived importance of IA will never change in a stock driven environment for the reasons provided in point #1 of your article.

    Very good article Richard, and one that should be read by every internal audit group.

    Thanks.

     

  1.  Sarbanes Oxley Act emphasized the importance of financial reporting regulations. Audit Committee members do not seem to have problem in recognizing the work of external audit and expect internal auditor's role go beyong financial reporting controls, risk and mitigation of those risks. There is much talke about how Wall Street bonuses have crossed the line including Lehman brothers scandal here. Yet, Audit Committee members find it difficult to appreciate the role of internal audit and its contribution to the overall safety & soundness of systemic risks in this financial turmoil is really bothersome for many aspiring audit professionals in the internal audit.

  1. Richard,

    You make some great points quantifying and supporting what has been my personal experience in the past 30 years.  If you look at the agenda for most Audit Committee Meetings, a two hour meeting generally has perhaps 15 minutes devoted to Internal Audit.  Thanks for sharing this.

    Joe

  1. There is common theme among all participants in the Audit Committee viz., over worked and underpaid. Internal Auditor's help is sought by different groups within the organization and outside the organization. It is good internal audit profession is recognized for the value it brings across the table. Many times internal auditors are brought in to take minutes of the meeting either due to the fact "staff layoff" occurred and no one else available for that task. Worse, that nobody wants to do that job since it was political job to begin with at the first place. This is not exactly what Sarbanes Oxley Act had in mind considering internal auditor's whistle blowing & ramifcation surrounding Enron or any other fraud scandals out there including Lehman.

  1. Quite interesting article. It is important that we understand the Audit committee. On the contrary, i have found out that, it lacl of relationship building with the audit committee which leads to all this. Many CAEs are not good at relationship building to an extent that, the only time they talk to audit committee members is when there is a meeting.  I have also find out from experience that many CAE are too bookish, to extent that they miss the point. How you relate determines what you get. Its all to do with the law of connection as alluded to by J.C Maxwell.

  1. Audit plan execution is as important as planning the audit in itself. It is important that audit process is understood by the auditees also in certain types of audit. Audit committee's understanding of the audit process is not enough in this instance. It is important for auditor to know beforehand that there is a possibility that auditee will front run the audit issue in order to defuse the audit issue & distract auditor's attention or just play it out to appease to political individuals within an organization so that audit is undermined on its own without any serious audit findings reflecting that auditee's hide behind the process adequacy controls. In that instance also, auditor is running the risk of not bringing out the audit issues at the appropriate level of authority where gulty party or culprit would otherwise been caught earlier than late.

  1. Besides all the other criticisms against internal audit for an organization of any size viz., small or medium or large, the internal audit has the same common issue viz., "do more with less budget dollars", "coordinate more with external audit & save some budget dollars for the company" & "both groups (internal audit & external audit) are fighting the same issue viz., fill the right staff need at the right time. Not to say the least, staffing rotation is high in the midst of busy time period and no one has time to sit with auditors & answer their queries. Audit committee is on top telling the internal auditor to have more audits done since you have the staff to do the audit now.  Audit committee does not like internal audit and external audit work on the same topic or audit subject utilizing each others' leverage on audit work papers since audit risk may not necessarily go away at the end of the day for audit committee iether. This type of coordination may lead to dispute and legal problems where one group will drag the other group for their own problems in their own organization. That is really chaos. Not a great situation to be in for internal auditors to begin with at the first place.

  1.  Thanks Richard, good points.

    As auditors we do expect the needs, and based on those expectations we build our report methodlogy, even without testing those expections or getting any feedback.

    all needs are changeable,  we have to review our report methodlogy and keep close relation to our stakeholders.

    thanks

  1. In this world of digital mobility, most of the reports are read on the go. Therefore, reports need to be concise, delivering only critical information on positive or negative exposure faced by the company.

    Auditors should also consider the structure of info - graphics introduced in the report as some may not display properly across mobile platforms.

    A member of the audit committe of a company I know complained that reports received from the CAE suffers from wrong formating and alignment which distorted the contents of the report.

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