Internal Auditors Continue to Face Ethical Dilemmas

Nov 29th 2016
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A new report from the Institute of Internal Auditors (IIA) makes clear that internal audit practitioners often face ethical challenges, and how they handle them determines their own value and their organization’s value.

Ethics and Pressure: Balancing the Internal Audit Profession reveals that 23 percent of internal auditors worldwide have been asked at least once to change or suppress an important audit finding, and 11 percent “preferred not to answer” the question, according to data from the IIA’s 2015 Global Internal Audit Common Body of Knowledge Survey.

The survey of more than 14,500 practitioners in 166 countries also indicates that 20 percent of staff auditors have been pressured “occasionally or frequently” to alter audit findings, while 14 percent declined to answer, which the report suggests could be because of “intimidation.”

What’s more, 29 percent of chief audit executives (CAEs) reported being pressured at one time, and 5 percent of CAEs left that question unanswered.

That pressure is borne of a company’s culture – those unwritten rules about what’s acceptable or not. Culture can change according to who’s at the top, too. Many companies once considered highly ethical changed quickly in the face of pressure to create short-term earnings, the report states.

There’s pressure, too, between organizational codes of conduct and professional codes of ethics. Usually, organizational codes describe how employees should act within the company and how they should treat others outside of the office. Things like fair dealing, trust, confidentiality of information, respect in the workplace, and honesty are the mantra.

Codes of ethics, however, lay down what’s expected of anyone in a particular profession, such as internal auditing.

“Individuals attracted to the internal audit profession usually have high personal values and ethical standards. Similarly, many internal auditors are attracted to strong organizational cultures consistent with their own values,” the report states. “The organization’s governance and control environment should support both the internal auditor’s personal needs and values, and the organizational culture.”

That’s a fine goal in theory, of course, but it doesn’t always play out that way and it can play out differently worldwide. Though the majority (72 percent) of CAEs around the world said they report to an audit committee or board of directors, that ranged from 62 percent in East Asia and the Pacific to 87 percent in Sub-Saharan Africa, according to the IIA.

Management pressure can be mitigated by a good relationship between the CAE and audit committee chair. But that works only when the committee is truly independent. Note the word “truly” – because audit committees may not want to hear the bad stuff, or maybe the audit committee gets overrun by the chair, who may also be the company’s CEO.

What’s more, most internal auditors said their organization’s board or audit committee has the ultimate authority to appoint and retain them. Worldwide, 65 percent of CAEs are appointed by the audit or supervisory committee or the board, the report states. CEOs, company presidents, or top regulators appoint 35 percent of CAEs.

So, what happens when internal auditors don’t want to go along with unethical requests? According to the report, 33 percent said they’d be excluded from meetings, 18 percent would lose opportunities, 4 percent saw budget cuts, 1 percent were demoted, another 1 percent had their pay cut, and 13 percent said “other.”

While each situation is unique, the report states, some of the more typical “other” responses included:

  • Reduced communication from executive management.
  • Discrimination via gossip and second-guessing.
  • Job elimination.
  • Audit department outsourcing.
  • Hostile working conditions and stress, resulting in health issues.
  • Pay raises for internal audit staff frozen, while others received pay increases.
  • Denied requests for additional internal audit department staff.

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