Blog by Richard Chambers
It has become my habit to make the final blog of the year a look back at the top five stories that will likely have a lasting effect on the profession. In my mind, 2015 will be remembered primarily as the year of the corporate culture-induced scandals. Unlike prior years, the corporate scandals this year had a truly global feel. There was the Hertz scandal in North America, Toshiba in Asia, and Volkswagen in Europe. Then to drive home the point, there was the FIFA scandal that was truly global.
These and other headline-grabbing events will have a long-term effect on internal auditing, either directly or indirectly. With such scandals eroding public confidence in corporate culture, it is more important than ever for internal audit to do all it can to foster good governance.
Here is my list of 2015 headlines that have big implications for internal auditing:
1. Plague of Corporate Scandals Erodes Public Trust
In the past year, I blogged more than a half-dozen times on corporate scandals. These high-profile failures in corporate culture engulfed globally recognized brands, including Hertz, Toshiba, and VW. The public is growing weary of such indignities. Indeed, the 2015 Trust Barometer produced by global public relations giant Edelman reflects that trust levels in businesses decreased in 16 of 27 countries, with businesses having approval ratings under 50 percent in a majority of countries surveyed.
Implications: Internal audit has long contemplated the idea of auditing culture. Whether we called it auditing culture, tone at the top, or auditing soft culture, the challenges have always been in identifying the process that internal audit would undertake to accomplish such a review. But that should not deter us.
As I wrote in my Aug. 24 blog:
We must begin the conversation in earnest about how the profession can move forward on this issue. The fundamental first step is defining what auditing culture means. I think it must include a deep understanding of both the stated and unstated elements of the organization's culture, identifying situations — and individuals — where behavior and/or actions may be inconsistent with a desired culture, and reporting on those circumstances at the earliest indication of a possible disconnect.
2. The IIA Calls for Mandatory Internal Audit for Publicly Traded Companies
In September, The IIA submitted a letter to the U.S. Securities and Exchange Commission calling for mandatory internal audit for all publicly traded companies. The letter makes the case that an organization's commitment to a well-resourced and independent internal audit function reflects its commitment to good governance practices that support the company and protect investors.
"The presence of an effective internal audit function makes an unequivocal statement about the way a company's leadership views strong and effective risk management, internal control, and governance," according to the letter.
Implications: Going forward, the profession must not just make the case for internal audit's value, but we must take on the additional responsibility of expounding on the need for a mandate. We must be cognizant that critics may simply see the mandate as a self-serving move by The IIA. After all, why wouldn't the profession's biggest promoter and advocate want to mandate its expansion? However, The IIA is committed to promoting the importance of internal audit in the public interest. Members of the profession should expect us to continue our quest in 2016.
3. Regulators Increasingly See Internal Audit as Their "Boots on the Ground"
Increasingly, the SEC and other regulatory agencies view internal audit functions as their windows into the corporate world. Indeed, an independent and well-finance internal audit function brings transparency to the corporation for boards, stakeholders, and investors. However, as I noted in an October blog, there is a fine line between helping to provide clarity to an organization and serving as a regulator's "boots on the ground."
Implications: Internal audit must operate with extreme caution in taking on additional roles that would encourage regulators to see it as a resource on the inside. We must be ever vigilant to this possibility and remember that we serve our stakeholders – boards, audit committees, investors – and not regulators.
4. Toshiba's Failure: Internal Audit Tried to Run Before It Could Walk
The high-profile scandal at Toshiba provides a rare opportunity to delve into a scenario in which a perfect storm of circumstances allowed pressure to meet corporate profit goals to trump good governance. Toshiba's internal report generated by a special investigatory committee pointed to shortcomings in internal audit as a contributor to the venerable company overstating earnings by $1.2 billion over a six-year period ending in 2014. As I discussed in July, Toshiba's report disclosed that its internal audit function relied excessively on rotational staffing that at times left it vulnerable in terms of resources and competency. It also found that internal audit served more of a consulting role than an assurance role.
Implications: As internal audit's scope of work has evolved and expanded, so has the risk of overwhelming the internal audit function. Heads of internal audit must have a keen understanding of their organizations' risk tolerance, what their organizations expect of the internal audit function, and whether they have the resources and skill levels on staff to meet those expectations. We must keep this in mind as we consider our role in auditing corporate culture, as well. We also must resist the temptation to focus exclusively on roles such as consulting, at the expense of more fundamental assurances roles.
5. Cybersecurity Risks Are Still Enormous
The proliferation of cyberattacks continued unabated through 2015, despite greater awareness of cybersecurity best practices. Hacks on medical records at Anthem Health Insurance, Premera Blue Cross, and UCLA Health Systems alone impacted nearly 100 million customers. The hack of the U.S. Office of Personnel Management exposed records of 22.2 million others, including fingerprint records of 5.6 million.
Implications: Internal audit must play a significant role in cybersecurity, one that should never be surrendered to the IT department. IT and internal audit must work in tandem to prepare and protect the organization against cyberattack, with IT playing a second-line-of-defense role of risk management and compliance, and internal audit assuming the third line as the assurance provider. A white paper published earlier this year by The IIA tells how internal audit can play an integral role in cyberpreparedness. It also is imperative to keep IT audit reporting lines in alignment with the full internal audit function, ideally reporting directly to the audit committee.
Honorable Mention: Internal Audit Labor Shortage Looming
There is mounting evidence of a shortage of qualified internal auditors, even as internal audit functions are increasingly being asked to do more by the organizations they serve. Data from The IIA's Jobs Bank, recently cited in the Wall Street Journal, tells of a doubling of job posts with a commensurate 42 percent drop in job seekers. Driven by growing compliance needs, cybersecurity concerns, and expanding scope of work for internal audit functions, poaching internal audit talent is increasingly common. Not surprisingly, this has prompted a renewed focus on talent management best practices.
Implications: The profession faces a crisis of sorts in recruiting, training, and deploying young internal auditors with the right mix of skills and tenacity to take on the profession's growing portfolio of tasks. From balancing use of new technology with cybersecurity risks to data analytics and building the profession's reputation as agents of change, next-generation internal auditors will have to be flexible and nimble. But they must maintain a solid grounding in the standards, ethics, and core principles that have brought the profession steadily forward.