Right or wrong, many companies have a policy where a manager's performance assessment and perhaps compensation are affected by the results of an internal audit of their area.
In some cases, an unsatisfactory audit report rating can lead to counseling and even termination.
Internal auditors should not let this influence them to the extent that they change their assessment out of sympathy.
But it makes it even more important that the internal audit assessment be balanced and fair.
Let's review a situation.
An audit finds that account reconciliations, flux reviews, and bank reconciliations are frequently delayed for weeks. As a result, financial reports to management are issued before these critical controls are completed. At quarter-end, the division submits numbers to corporate (which are then included in the corporate financials filed with the regulators) before the controls are completed, in violation of company policy.
The audit assessment is that there is a high level of risk, greater than acceptable to senior management, that the financials used to manage the business and as a basis for regulatory filings contain material errors or omissions.
The manager of the area does not dispute the findings or assessment, and the audit report indicates that the issue merits the attention of the chief financial officer.
Is such an audit report fair and balanced?
Let's get more information from the audit team.
In response to our questions, the team leader says that the manager of the area seems swamped with work and highly stressed. He is frequently still at the office when the team leaves at 7pm, and is always there when they arrive at 7:30am. The accounting staff also seems stressed, although their work days are only, on average, 10 hours long.
Everybody seems capable and concerned about the delays in performing the reviews and reconciliations, but they say they are so busy they can't get to them promptly. They are fighting fires with customer billing, disputes over delayed payments to vendors, and so on.
Should this affect the audit assessment? Perhaps not. But there is more we need to know.
Additional inquiry helps us learn that the accounting staff has had three open positions for several months. The manager tells us that he has been unable to hire replacement staff because the HR department has established pay ranges for the positions he needs to fill that are substantially below market levels. In addition, his manager won't let him hire temporary staff because "there's no money for it in the budget."
Should this affect the audit assessment?
We are starting to discern the reason the critical controls are not being performed. It's not the manager's fault that he doesn't have the resources to get the job done. Is it fair to issue an audit report that leads management to blame him, counsel him, and cut or eliminate his bonus?
While management and the board need to know there is an unacceptable level of risk that the financials are materially incorrect, they need to know why and what action is needed to get everything back on track.
Flogging the manager and insisting that he get the reconciliations and reviews done without the necessary staff is futile.
But finding out why HR has set salary ranges below market can help us detect the root cause and start discussions on how to correct the situation so the manager can hire replacements and get the job done.
It is also necessary to find out why there are so many fires in payables and so on. This may be an indication of another serious operational and/or controls issue.
Our audit report should be balanced and fair. It should explain that the manager does not have the resources to get the critical controls performed on a timely basis, with the result that there is an unacceptable level of risk of material errors in management and external financial statements. It should discuss the root cause and the actions that management is and will be taking to correct that deficiency. In addition, the audit report should indicate, as appropriate, where issues related to salary ranges being below market are causing other departments difficulties in hiring staff with the required experience and training.
I also think it is necessary to talk to the manager's managers. We need to make sure they understand what has happened and if they want to blame people, assign blame where it is deserved. The manager may even merit praise for getting so much done with so few people.
I welcome your views.