Facts and stories

When auditees read the first draft of an audit a common response is that we did not talk about anything good that they have done. Our response is usually that our job is to identify problems, analyze why they occurred and how the situation could be improved. We are constrained by standards that require us to be fact-based. Establishing facts takes time. To include in the report an analysis of things that were going right would require the same standards be met. Since audit work is expensive, because of the time it takes to establish facts, it would not be cost effective to also analyze the successful parts of a service or program. However, we do try to add context so that there is an appreciation of the work that is being done to provide the service.

But from the perspective of a journalist trying to find a story that includes protagonist, antagonist, and facts that will capture a reader's interest, our reports are not hard hitting enough. When I have campaigned as an auditor, the common response was always that people had no idea there were auditors doing the kind of work we do. Auditors face a quandary, work for change or work to create an audit report that will capture a journalist's eye so that it will be reported and the public will see that there is accountability. Many of our audits fall under the radar because management has agreed with our findings and our recommendations. Or the audit area is just not interesting or big dollar enough. The choice is usually to work for change and not necessarily news coverage, so many stories never get told.

Lack of confidence in media

When I read a balanced and informative news article I think many times that auditing and journalism are somewhat similar. I wonder if this trend is related to this one. It makes me remember why it is important to follow audit standards and maintain our independence and objectivity.

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.

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.

Meeting auditing standards and audit quality

In every audit report there should be a statement that the audit was conducted following standards. Few outside of the accountability community understand what that statement means. Not that it is infallible, but following standards helps ensure the quality and integrity of auditing.

Recently auditing standards have become more rigorous. With the implementation of the new government auditing standards for audits initiated after January 1, 2008 there is a new requirement for annual monitoring of the quality control system. I recently designed a monitoring process to comply with this standard. Surprisingly, I found that our own office procedures were not being followed as intended. As an audit director I had been lax in providing guidance and supervision. This was a great learning experience. It also strengthened my belief that it is not just good enough to develop standards but also just as important to check that they are being met. A message we constantly give to auditees.

Sex, Drug Use and Graft! and Tone at the Top

The importance of the auditing function has been in the news several times this week, at least at the federal level. The inspector general of the Interior Department testified before the House on September 10th. He accused high-level officials of tolerating ethical failure and allowing such things as cronyism to cover-ups of incompetence. The NY Times ran an editorial on September 11th titled "Anything goes, apparently."

One of the important things that has evolved in auditing, especially after many of the large ethical failures, is the interest in an audit to address tone at the top. Nothing is more critical to an organization than to have explicit ethical standards that are publicized, reinforced, and followed by all from the top to the bottom. Without that an organization runs the risk of having a situation where "anything goes."

Department of Defense auditors muzzled

Several weeks ago I wrote about how government auditors had been intimidated and didn't follow standards. On the same topic, the Government Accountability Office released an audit today titled "Allegations That Certain Audits at Three Locations Did Not Meet Professional Standards Were Substantiated." That doesn't sound very newsworthy - didn't meet standards - ho-hum. Note: the DCAA is the Defense Contract Audit Agency (DCAA) under the Department of Defense and provides oversight for defense contracts.

But read this "Moreover, during our investigation, DCAA managers took actions against their staff at two locations that served to intimidate auditors and create an abusive work environment."

Further, "We found that enough evidence had been collected by the original supervisory auditor and senior auditor to support this opinion. However, after the contractor objected to draft findings and conclusions presented at the audit exit conference, the DCAA resident auditor replaced the original supervisory auditor assigned to this audit and threatened the senior auditor with personnel action if he did not change the summary workpaper and draft audit opinion. The second supervisory auditor issued the final report with an “adequate” opinion without documenting adequate support for the changes."

That is why following standards is so important.

Tone at the Top

Regarding the audit by the Government Accountability Office I mentioned in an earlier post, it is disappointing to note that lawmakers are only criticizing the DOD audit agency for not following standards. Of course they should have. Audit management made many mistakes, including not assigning adequately trained staff, not providing supervision, and placing too much emphasis on meeting timelines. But what is not being discussed is the climate that exists that allows this kind of pressure to be put on auditors. When an auditor is not fully independent from the agency it audits, relationships develop and subtle, or not so subtle, pressures can occur to be "part of the team." Unfortunately, an auditor can't be part of the team. The auditor is part of the bigger team, the one that works for good government.