Chief Audit Executives
Audit International are privileged to share some recent insights from Dr Rainer Lenz- Head of Corporate Audit at Villeroy & Boch on his thoughts about internal audit and its Independence.
“Recently, I was invited to share some thoughts about independence of internal auditors. I am basically challenging that concept:
The IIA definition positions internal auditing as an …
“ independent , objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.”
To be blunt, in my view, independence is largely theory. It is overrated, I think. So is objectivity. But let’s stay with the subject matter of independence. There is nothing wrong with aspiring independence. But, who cuts the hand feeding him? There are inconsistencies among talk and action. Consequently, academic authors refer to the internal auditor’s “role dilemma” and “role confusion”, acknowledging for example the difficulties of internal auditors to strike the balance between being independent from operations and, at the same time, providing added value and benefit to operations. Being both watchdog and consultant is challenging.
Some authors view internal audit as a schizophrenic management function. On one hand, it needs to be completely integrated and knowledgeable. On the other hand, it needs a measure of independence required of all auditors. Thus, internal audit may have a built in cognitive disconnect. Organizations and Chief Audit Executives (CAEs) may cope at different levels of proficiency with such inconsistent demands. Those who can do that well may live longer. Thus, “organizational hypocrisy” may serve a useful purpose.
When you ask non-executive directors and audit committee chairmen what they think, how independent internal auditors are, what will they say? I recall surveys where those members of oversight bodies state that (some) heads of internal audit are not up to the job, internal audit lacks adequate independence, and internal audit has not properly defined the role that they wish internal audit to fulfill.
That points to the “who’s your boss” question. There is no congruence between what the board wants, what the audit committee wants, and what senior management wants. Aiming at satisfying all customer groups is likely to disappoint one or the other customer in some dimension, as all may expect something different from internal audit, such that no one is fully satisfied. In other words, internal audit may face tension from its attempt to serve – let’s say – its two prime customers: managers and the audit committee. The IIA acknowledges that there may be conflicts when internal audit tries to “serve two masters”. Thus, the “who’s your boss?” issue can present problems in terms of allegiances, independence, and effectiveness.
Academic studies confirm that role ambiguity and role conflict can negatively affect the independence of internal auditors. At the same time, CEOs (often) want the CAE to have no fear or favor. It is crucial that the CAE is able to work with other stakeholders in the organization and is not afraid to voice his or her opinion even in controversial situations. That draws particular attention to the importance of the CAE’s characteristics, possibly more important than the debate around independence.
There are authors who suggest that internal auditors must be independent of senior management, so that the board is to rely on internal audit to provide the assurance it needs; otherwise, the risk is that internal audit’s reports to the board/audit committee will be filtered by senior management in such a way that only what is palatable to senior management is communicated. Investing in these relationships and having a steady and robust dialogue is critical to the internal audit function’s success, given its organizational context.
My 2 cents about independence of internal auditors in a nutshell.”
Guest Article Writer- Dr. Rainer Lenz-Head of Corporate Audit at Villeroy & Boch
Source: Lenz, R. (2016), Insights into the effectiveness of internal audit: a multi-method and multi-perspective study, LAP LAMBERT Academic Publishing, Saarbrücken, ISBN 978-3-659-85241-1