Long Summer

Auditing is a lonely business. It helps to work on a team who can appreciate and congratulate you on your work, but at some point you must speak up. The information in an audit is not always welcome but it must be said . That is why we work so hard on clarity and conciseness - to communicate the results and to be prepared for that moment. Most times, the satisfaction of being a voice of accountability outweighs the loneliness.

Audit Title Understatement

I don't know how I happened upon this Inspector General's report (It's from 2007), but I couldn't believe the understated audit title "The Department of Justice's Internal Controls Over Terrorism Reporting." This was an audit of the quality of the statistics reported about terrorism. The audit found that the FBI and Department of Justice both under- and over-reported statistics. Causes were such things as poor queries of the database, inaccurate coding, and lack of documentation to support the incident to be terrorist-related or occurring in the time period reported. They found "that the collection and reporting of terrorism-related statistics within the Department is decentralized and haphazard." A more interesting title might have been appropriate.

Words

Words are very important in an audit. Auditors cannot afford to be sloppy. At the beginning of an audit when the scope is a concept and lacks specificity, words are important to help narrow the scope. Words used in the audit objectives help focus an auditor's work, keep her on track, and increase efficiency when followed. At the end of the analytical stage of an audit, words become very important in crafting the overarching message. What is it we are really trying to say? What is important and what is not?

The words we use effect the evidence that we need to support the words. If we do not have adequate evidence to support the words, for example "some" as opposed to "few," then we have to change the words. And, finally, when the auditee reads the draft, words are critical. Words that we have used to describe the condition or the effect may have a different meaning to the auditee. We have to be open to substituting words to reach agreement on the recommendations of the audit. As long as we do not change the facts, then changing the words to describe the facts, is acceptable. At the end of the day, these words express our findings to the public and the decision-makers. If we have not written clearly and exactly, our message may not be as effective.

The value of a peer review

Several years ago now auditing standards began to require peer reviews. It answers the question of "Who audits the auditor?" Over the course of my career I've had 3-4 peer reviews of my office's operation. I have found them valuable. You always learn from a peer review. It allows you to see your audit operation through different eyes. It also adds credibility to your office. The public and your elected decision-makers can gain confidence from the fact that every three years auditors, with no stake in your office, review your procedures to determine that they follow audit standards and examine audits to ensure that auditors followed procedures.

It is with interest that I've been following the largest financial fraud in history. The S.E.C. is now investigating why years of regulation did not uncover the fraud. On Freakonomics they're recommending a career option for Bernie Madoff, the perpetrator of the fraud. And it's been discovered that Mr. Madoff's auditor doesn't audit. According to this report, the auditing firm that conducted audits has been telling the AICPA for years that they don't conduct audits in order to avoid having a peer review conducted. Here's another story about why a three person auditing firm would be conducting audits of multibillion dollar operation.

So many tails

Did the watchdog lie down on the job? We rely on watchdogs, auditors among them, to remain objective and provide facts and reliable assessments of the risks involved in decision-making. As I've written before here and here, independence is key. Here is an article about Moody's, a company that ranks the credit-worthiness of borrowers using a standardized ratings scale. Moody's and other investment rating entities are supposed to help investors evaluate risk. But evidently Moody's was paid more for its evaluations of more complicated debt potentially compromising independence.

According to the report, "Moody’s current woes, former executives say, were set in motion a decade or so ago when top management started pushing the company to be more profit-oriented and friendly to issuers of debt. Along the way, the firm, whose objectivity once derived from the fact that its revenue came from investors who bought Moody’s research and analysis, ended up working closely with the companies it rated, and being paid by them." This also relates to another theme that I've written about - tone at the top. The leaders of an organization actually do lead. And if pressure exists, perceived or in reality, employees will follow.

Judgement - Can it be learned?

No matter how complete the audit plan, judgment is always needed in an audit. Can it be learned? I think so, but it requires time and patience. Judgment is developed by learning from our previous attempts. For example, perhaps not enough time was spent gathering evidence and a finding falls apart under scrutiny. (Hopefully that scrutiny occurred during the quality control process and not in management's review of the draft report.) If an auditor can take the time to reflect and receive feedback on how the work might have been stronger or more complete, then his/her ability to be more effective next time is increased. Supporting a finding does not require 100% surety. Judgment allows you to decide when the preponderance of the evidence has been reached.

Storytelling

There's a blog post that I just have to tap into. It's from one of my favorite blogs, Community Indicators. So thanks for pulling together these thoughts. The post references other bloggers and writers who are discussing how statistics do not always evoke a response as strongly as emotions might and also that a good story is more memorable than data. When I followed the link and read about the finding that when statistics were part of an appeal for donations the amount given dropped, I wondered - is an audit report not as effective as it could be because we lay out the factual, statistical evidence? But the second reference to A Case for Web Storytelling reminded me of the work that we put into a report so that it has a cogent message. Yes, we rely on statistics and fact, but we also try to put it into a story that management and the public can relate to.

Ethics in Auditing

Auditing principles almost require that an auditor maintain a permanent out-of-body experience. In order to meet the ethical standards of integrity, objectivity, serving the public interest, professionalism, and not misusing their government position, auditors constantly weigh possible actions against these standards. Not only must we in fact meet these standards, but also must guard against the perception that we are not. In order to do this, auditors first think about a course of action and then pause and reflect on the effect of that action to consider whether it meets the ethical test. It is a very high standard, but necessary. The credibility of our work, audits, depends upon it.