To be a trusted advisor, internal auditors need to have strong relationships with executives and audit clients. Building those relationships is about accumulating "social capital." Social capital is a complex subject with many definitions, but the Social Capital Research & Training website notes that "the commonalities of most definitions of social capital are that they focus on social relations that have productive benefits." In practical terms, social capital refers to the power people are willing to use on another person's behalf because of the strength of their relationship with that person.
In internal auditing, building and using social capital can mean the difference between successfully igniting change within an organization and just filing another report. Some audit clients perceive that internal audit is at odds with other parts of the organization. They may not think internal audit recommendations are useful and may only make minimal efforts to address them. In addition, clients may use their own social capital to block audit recommendations, support their own positions, or resist meaningful change. Consequently, although internal audit may be in the right, it may not succeed in recommending needed change. This is especially the case when internal audit has not accumulated its own social capital.
However, internal auditors cannot abandon objectivity in pursuit of building relationships. Auditors' ability to balance objectivity and social capital can impact not only what they are able to accomplish, but their career trajectory.
Consider this example: The chief audit executive (CAE) has been asked to join other executives in a luxury box to watch a basketball game. If the CAE participates, is internal audit's independence and objectivity compromised? On the other hand, would choosing to not take part damage the CAE's social capital and compromise internal audit's ability to successfully navigate through challenging issues within the organization?
Attending the basketball game is just one piece of a larger puzzle of interactions between management and internal auditing. If the auditor has already built social capital by demonstrating commitment, being collegial, and proving his or her capabilities, participating in such social events can further the work of internal audit, not cloud it.
While a sense of commitment to an internal auditor's own work is critical, it also is important to consider commitment as viewed through the eyes of audit clients. Successfully initiating change is not just about working hard and delivering an audit report; it is about convincing clients that internal audit has the organization's and the clients' interests in mind. When an internal auditor seeks to establish common ground, such as the mutual overall goal of improving the organization, the truth can motivate clients instead of frustrate them. For clients, this can mean the difference between feeling chastised and feeling like their efforts to change will be meaningful and worthwhile.
Interviews with experienced internal auditors reveal how they apply social capital principles to improve audit outcomes. "Everybody involved in an audit has the same goal typically — to make the organization better," says Hollie Andrus, financial audit director for the Office of the State Auditor of Utah. "I am lucky to work with people inside my office and with people I audit who care about their organizations and want to do the best job possible. This certainly makes it easier to create a symbiotic environment."
Building social capital "helps promote change more quickly," she says. "There is a level of respect and trust from both sides of the table, whether that be with co-workers or clients." Andrus' experience shows how emphasizing shared commitment to the organization builds social capital.
However, part of an internal auditor's job is to tackle challenges. Sometimes that means Andrus must write tough findings or recommendations for an audit client. "Organizations receiving these tough findings are more open to our concerns and suggestions if our relationship is one of respect rather than of hostility," she says.
This relationship is built on the premise that everyone in the organization — which includes all state departments, agencies, and public universities in Utah — shares a similar commitment. This presumption may not hold true in all cases across such a large organization, but Andrus' attitude and approach invite others to respond in kind.
Establishing shared commitment can be accomplished in many other ways outside of work. One avenue is volunteering for the charitable causes the organization supports. The workplace by necessity has deadlines, pressures, discussions about differences, and sometimes unpleasant interactions. Sometimes volunteering with co-workers, participating on an athletic team, or attending a training conference together builds relationships of trust faster than simply going through everyday business activities.
While such involvement needs to be genuine to build social capital, it is helpful when such involvement is also strategic. For example, Andrus serves on an advisory board of Utah Valley University (UVU), where many of her employees and audit clients received their degrees. Choosing to demonstrate commitment to a university is particularly effective in building social capital because alumni have strong social and emotional ties to their schools. UVU, with Utah's largest student enrollment, supports students in pursuing jobs in the state government, so Andrus encounters many graduates in her work. Sharing this common commitment makes building positive work relationships and developing social capital easier than if the shared commitment did not exist.
A willingness to cooperate and be considerate of colleagues builds social capital. If internal audit reports are delivered unexpectedly like knives in the back, objectivity may prevail, but social capital is lost. On the other hand, if there are 10 valid findings and the two most important are watered down after an excellent dinner, objectivity is lost. The better approach is to tackle the big issues, but to do so with collegiality.
J. Michael McGuire, the CEO of Grant Thornton, commented on this issue when fielding questions at an accounting research conference earlier this year. McGuire indicated that the grit and social skills to ask hard questions while maintaining relationships is crucial. He explained that such abilities, or early progress in developing those skills, are among the top characteristics Grant Thornton looks for in new hires and are part of what makes those employees successful.
How do those on the other side of the audit feel about the importance of collegiality? An insurance industry chief financial officer (CFO) explains her perspective on the difference between being audited by a good auditor and a bad auditor. The CFO, who prefers her name not be mentioned, describes a situation in a previous job as a controller that illustrates poor collegiality on the part of an internal auditor.
An internal auditor asked someone in another part of the organization a question and received an uncertain answer, "I am not sure, but I think. …" Rather than verify the employee's story with the controller, the auditor took the issue up the audit ranks, and his supervisor then approached the organization's executive team with the issue. When the controller was finally called back into the conversation, she was blindsided with the problem. It turned out there was no problem at all — just misunderstood information.
This story demonstrates that it pays for internal auditors to be collegial with others and show them the respect internal auditors would like to receive, themselves. By neglecting principles of collegiality and failing to confirm the employee's story with the
controller, the auditor destroyed his social capital in all directions. The controller lost interest in collegially responding to the auditor's requests and facilitating a smooth audit. The auditor's supervisors were frustrated because they had wasted time and frustrated the organization's executives.
The CFO also describes what it is like to have a collegial internal auditor. This kind of auditor treats audit clients as friends. Everyone knows the auditor's job still must be done, but being collegial makes the experience less painful. She recommends that auditors think of what it would be like to audit a friend. The auditor would need to inform a friend of mistakes he or she made and of the need to be prompt with information, but the auditor would do so with decency. This kind of auditor, she says, would be candid, and it would feel as if the auditor is rooting for the client instead of waiting for an opportunity to criticize. Moreover, this auditor would be transparent about where things stand instead of making the client wonder what is happening. This is what a person would do for a friend, because he or she would want to maintain the relationship.
In the CFO's experience, most internal audit clients respond well to collegial treatment. Those who do not may require other approaches. The challenge is to not let the unpleasant experiences keep internal auditors from building social capital with those who are more amenable.
Joni Lusty, an assistant director at EY, has experience recruiting and developing employees in all areas of the business. Her simple and practical recommendations for building social capital center around collegiality. First, it is best to be oneself, and to be honest and straightforward. Second, she recommends listening carefully to avoid jumping to conclusions and making assumptions about what people are saying. When clients feel that internal auditors are doing this, they are more likely to do the same with the auditor.
In internal auditing, capability does not mean that the auditor knows everything, but that he or she prepares as well as possible and admits his or her shortcomings. Otherwise, auditors unnecessarily waste more of the client's time and cause frustration. Paying attention to capabilities can build mutual respect and social capital.
As the organization's employees are impressed with internal auditors' capabilities, they may be more willing to work with them. For instance, the IT function may not want to expose a problem to an internal auditor, but the department may decide to involve internal audit if it has worked with the auditor before and seen how he or she solves problems.
Although it is challenging to be all things to all parts of an organization, internal audit's usefulness can increase when the team comprises people with strong but different skills. If auditors are then encouraged to come to each other's aid and share their strengths with each other, the individual social capital of each auditor and the collective social capital can grow. This can enhance the group's overall ability to work together and help the organization improve.
Often, CAEs and internal audit partners in audit firms are respected for the skills they have developed over time. Those capabilities include a mixture of analytical and soft skills. These people are usually well-connected to many other professionals because of their adherence to principles of relationship building.
An interesting characteristic of many internal auditors is that even in the midst of their heavy workloads, these practitioners make time and find ways to maintain their social capital. In talking to these professionals, one message becomes clear: They care about people. That caring results in social capital.
The Social Capital Approach
Mark Gotberg, assistant director of internal auditing at Brigham Young University, left his previous job at a CPA firm, in part, because he wanted to feel committed to something more important than building others' wealth. This commitment is clear in the contributions he has made to the university. One example has less to do with the results of his audits and more to do with those who work with him. He goes out of his way to hire and train student auditors, and he spends time mentoring students.
In his internal audit position, Gotberg leverages capabilities learned from consulting. When working with his clients, he listens to all levels of employees. He says the people closest to a problem often have the solution to it, but they may not have the ability to put their ideas together, present their ideas, or convince management to apply the solution. "Developing relationships with people at the lowest levels and getting them to trust me has provided me with the best tips for organizational and process improvement," he explains.
Gotberg builds social capital with audit clients as he helps them orchestrate the change they want. His collegiality comes out in this process, as well as in reporting. He makes sure the wording of his reports is as fair and helpful to the client as possible, while always providing the audit service the organization needs. He explores solutions to problems and manages clients' expectations. By using these skills, he builds social capital instead of just finishing audits and producing reports.
Andrus also comments on this social capital-focused approach to internal auditing. "Adversarial relationships only breed dislike and hostility — nothing is accomplished and nothing is improved upon," she says. "An audit client once told me that he would make corrections I proposed because of my attitude toward the audit and the client. He also said that if another auditor — one who was more hostile — requested or proposed the same changes, he would 'dig his heels in' and would not make the change because of the other auditor's attitude." Giving credence to social capital in the right ways can enhance an internal auditor's effectiveness rather than subtract from it.
A Social Investment
In the balancing act between objectivity and developing relationships, it is not always possible to build social capital with audit clients. For instance, sometimes internal auditors prepare cases and assist in prosecutions. As difficult as this type of situation may be, it also can highlight internal auditors' capabilities and make clear their commitment and efforts to accomplish the organization's goals. This, in turn, can impress the right kind of people in the organization and build social capital with them.
Reconsider the question of whether the CAE should accept the invitation to attend the basketball game with the other executives. The answer is "yes," if the CAE has carefully built the right kinds of relationships through demonstrating commitment, being collegial, and leveraging internal audit's capabilities to deliver worthwhile results. The social capital created at the event may be helpful when a future daunting issue requires cooperation from audit clients. Social capital, then, is like money in the bank — develop it now because internal auditors eventually will need it.