Internal Audit: To Yield Value, We Must Collaborate
While internal auditors must remain independent to provide objective assurance, to add value they must also deliver expert advice to improve an organization’s operations. Consulting activity, by its very nature, is collaborative, and internal auditing is no exception. By fostering collaboration, internal auditors can expect to receive desired behavior, quality information/support and expanded explanations for select business transactions from their auditees. To establish the rapport necessary to enable collaboration throughout the company, it is recommended to start with “why,” offer a value proposition to auditees and encourage inclusive real-time information sharing.
Start with “Why”
Most people within an organization need to motivate others to act for some reason or another, this is particularly true for internal auditors. Although auditees are required to provide information, fulfill requests and answer questions, the way in which auditors communicate can determine how promptly the information will be provided as well as the quality and depth of said information.
One way that auditors can communicate with their auditees is by using the concept of The Golden Circle. Introduced by author and motivational speaker Simon Sinek, The Golden Circle essentially states that individuals and companies are inclined to achieve more if they start with “why” before stating “how” and “what.” For instance, instead of sending a request to “provide off-balance-sheet commitments by xx date” one could instead say, “In order to properly assess the company’s cash flow, we are in need of the off-balance-sheet commitments as of xx date.” This may sound simple, but it is highly effective in conveying purpose and inciting action. This is very important when people have competing priorities and operating constraints due to the ongoing pandemic.
Offer a Value Proposition
Internal auditors must highlight the value that can be achieved by contributing to business activities such as being involved in a core system conversion, consulting when acquiring a company or participating in corporate training. By welcoming internal auditors as active participants when these business activities take place, auditees benefit from having a person who is independent from the activity, has a bird’s eye view of the event and is risk-minded ready to opine and consult. Internal auditors benefit from having a seat at the table by receiving material information in real time, thereby enabling them to plan the audits of the impacted business lines accordingly, adjust risk assessments and aid with continuous auditing efforts.
On a personal note, I’m very proud of the collaboration between my organization’s finance department and internal audit as we adopted the new measurement of credit losses on financial instruments. In a joint effort, we engaged a firm to validate the bank’s current expected credit loss (CECL) model. Internal audit interviewed several competing firms, gathered recommendations from existing clients and ultimately provided the finance department with a recommendation as to which firm to select. Management agreed with the recommendation. This coordinated effort allowed management to focus their time on an acquisition and the ongoing adaptation of CECL. Meanwhile, internal audit benefited from being involved in the engagement as we received valuable information that will explain and document management’s assumptions with regard to the qualitative factors of the bank’s allowance for credit losses under CECL. It was a win-win for all.
Real-Time Information Sharing
As the profession continues to strive for a more proactive audit methodology in continuous auditing, auditors either need to have access to the source of the data or be the recipients of the same data that is provided to management. Examples include having read-only access to the accounting system to review general ledger and accounts payable activity, the company’s data warehouse and other pertinent systems such as loan origination systems for banks. Having read-only access rights to critical systems will facilitate the gathering of audit evidence while preventing any possible disruptions to management’s day-to-day operations.
The importance of collaboration cannot be overstated, and its benefits cannot be overlooked. At the same time, internal auditors must be mindful not to compromise their independence. As with many aspects of the accounting profession, exercising professional judgment at all times is key.
Jose M. Borbon
Jose Borbon, CPA, CRC, is an assistant vice president and senior auditor at Kearny Bank. He is a member of the NJCPA Emerging Leaders, Federal Taxation and Accounting & Auditing Standards interest groups.
This article appeared in the Spring 2021 issue of New Jersey CPA magazine. Read the full issue.