Independence and Objectivity
Internal Auditors whose work purports to comply with the Institute of Internal Auditors’ (IIA, Institute) International Standards for the Professional Practice of Internal Auditing (Standards) are also required to comply with the Institute’s Code of Ethics (Code). These documents, the Standards and the Code, require that internal auditors be independent and objective in performing their work. Independence and objectivity is required of the internal audit activity as a whole and of each individual auditor.
Independent
Standards 1100 requires auditor independence. It further interprets independence to be
“… the freedom from conditions that threaten the ability of the internal audit activity to carry out internal audit responsibilities in an unbiased manner.” (Standards 1100, Interpretation)
Practically, independence is achieved by assuring that the internal audit activity has no management responsibility for any of the organization’s non-audit functions subject to internal audit assessments, and by separating management of the internal audit activity from the functional oversight of the organization’s senior management.
What does that mean? It means that we cannot audit what we are responsible for. If we are making management decisions for a department subject to our review, then we are auditing our own work and are, by definition, not independent. It further means that internal audit activities cannot be hindered by senior management wishing to deflect attention by redirecting its efforts to other issues.
At the LCTCS, this is accomplished by what is called a dual reporting relationship. The internal audit activity report functionally to the Audit Committee of the LCTCS Board of Supervisors. This means that the work of Internal Audit is authorized, approved and overseen by the Audit Committee. The Director of Internal Audit is hired, compensated and fired by the Audit Committee. The reports issued by Internal Audit are addressed to the Board President and the Chair of the Audit Committee. Having the Board’s approval of its charter provides the internal audit activity with the authority it needs to access records and documentation without hindrance and to assure adequate audit coverage.
Administratively, Internal Audit reports to the LCTCS President facilitating the day-to-day operations of the department, including budgeting and departmental management, human resource administration and evaluations, administration of departmental policies and procedures, and internal communications and information flows.
This dual reporting arrangement also guarantees access to the appropriate levels of communications related to the work of the internal audit activity, concerns that may arise that require management’s attention and/or response and alignment of the work of internal audit with organizational goals and strategies.
Objective
Both the Standards and the Code require internal auditor objectivity. Objectivity is
“… an unbiased mental attitude that allows internal auditors to perform engagements in such a manner that they believe in their work product and that no quality compromises are made.” (Standards 1100, Interpretation)
Objectivity is achieved by avoiding, in fact and in appearance, any conflict of interest. Not only do LCTCS internal auditors have to abide by the State of Louisiana’s ethics laws, they also have to abide by the IIA’s Code of Ethics and Rules of Conduct. Internal auditors cannot be assigned to projects where they have previously been involved in the work being reviewed, unless at least one year has passed since their involvement. They may not work on a project that involves a family member. Even if no conflict in fact exists, the appearance of a conflict could be enough to impair an auditor’s impartiality and unbiased assessment of an audit area.
Objectivity requires that internal auditors do not subordinate their judgment on audit matters to others. This doesn’t mean that we are always right or that we know everything there is to know about a subject. It simply means that we are required to follow the evidence. We cannot overlook a matter just because management has an explanation. Objectivity would require us to see evidence of the explanation.
Benefits of Independence and Objectivity
What does this mean to you, the audit client? Auditor independence and objectivity means that we do not arrive on site with a predetermined outcome in view. It means that conclusions will be fair and unbiased, based on evidence and not unduly influenced by management or personal relationships. It means that recommendations will be in the best interest of the client.
Impairments to Independence and Objectivity
Independence and/or objectivity can be impaired in a number of ways and on either organizational or individual levels. At the organization level, senior management may attempt to limit the scope of a review, limit auditor access to records or not cooperate with the auditor in attempting to understand transactions or processes. An individual auditor’s independence and/or objectivity may be impaired by an undisclosed conflict of interest with the client, by reviewing an activity for which they were previously responsible or by being unduly influenced by a personal friendship.
Whenever auditor independence or objectivity is impaired, in fact or in appearance, it must be disclosed to appropriate parties. If the impairment is not severe, with client agreement, the audit project may be able to continue to completion. If, however, the impairment is deemed to be significant, to the extent that successful completion of the project may be compromised, once disclosed to the appropriate parties, it may be necessary for internal audit to withdraw from the project.
Auditor independence and objectivity is about more than just complying with the Standards. It’s about stakeholders being able to rely on the auditors work and recommendations. It’s about clients believing that the auditors have their best interests in mind. It’s about adding value.