Making the right assessment: an inexperienced audit manager is faced with resolving a dispute between his senior auditor and a key customer - Ask The Experts

Internal Auditor, Oct, 2003 by Norman Marks

KURT FELT A LITTLE UNCOMFORTABLE in his new position as director of internal auditing. Only a month before, he had been transferred from treasury to the audit department. The company felt that internal auditing was a great way to season fast-track managers, even at the director level. Kurt had been told that serving as audit director for two years would give him a broad view of the company and its business, preparing him for an upward move into financial or operational management.

Kurt does not feel he is ready to handle technical auditing issues; however, he is being asked to resolve a dispute between his most experienced auditor, Jack, and one of his key customers, Jill. Jack has been in the internal audit department as a senior auditor for eight years. He is leading an audit of contracting practices at the company's largest division, contract administration. Jill, the manager of the contracts department, transferred out of the internal audit department--where she had been a senior auditor for three years--only six months before. Jack believes Jill is trying to tell him how to do his job. Tempers flare as Jack and Jill argue in Kurt's office.

"Jill, we followed our standard practice of sampling a large number of transactions to test the functioning of controls," Jack argued. "One of the tests sought to determine whether the law department had reviewed each contract. We examined 45 contracts that were signed in the last year and found that the lawyers had not reviewed 15 of them. Therefore, it is clear that the controls were not functioning correctly during the period under review, and that is why I have made my assessment of "unsatisfactory." This is right out of the department's standards manual. You're a certified internal auditor, Jill, so you must understand!"

"Jack, why do you always have to quote from the standards manual?" Jill replied, rising in her chair. "What you're failing to understand is that all of the 15 exceptions are old. They happened at least four months ago, and I have tightened up the controls since then. The controls today are just fine, and it is not fair to me or my people to rate the area unsatisfactory. Kurt, can you help me out? You were in line management until recently. Can you tell Jack that, regardless of what the standards manual says, giving me this rating is not right?"

At that moment, Kurt is relieved to get a phone call from his assistant calling him to an urgent meeting. He arranges to meet with Jack and Jill the next day.

Three experts weigh in on how Kurt should resolve the issue.

PARVEEN P. GUPTA

Frank L. Magee Distinguished Professor of

Accounting

Lehigh University

Kurt has been presented with an interesting dilemma: Should he remain objective and simply go by the facts, or should he be persuaded by his customer's arguments and direct his audit manager to change his assessment?

In my opinion, Jack is right on the mark. I would give a similar assessment; however, I would not use the audit manual to support my position. When sharing findings with Jill, the argument should be that, at the time of internal control evaluation, certain deficiencies were noted, and it is only fair that those deficiencies be brought to the attention of senior management, as well as to the audit committee. However, while reporting on the breakdown of internal controls, it is also important for Jack to let Jill know that if the control deficiencies have been corrected, he will be more than willing to include Jill's response to his findings.

Interestingly, it appears there are other dynamics at play in this simple, yet politically charged, situation. First, Jill's resistance to accept the unsatisfactory rating appears to indicate that she fears some penalty for this break down in controls. If that is true, internal auditors are perceived more as policemen than as partners with management at this organization. This is a serious cultural issue that must be resolved if the organization wants to capitalize on the objectivity and competency of its internal audit employees.

Second, although the practice of rotating the internal audit director every couple years is a good concept, it must be implemented diligently if it is to add value to both the organization and the employees.

The overall solution to this dilemma is for Jack to stick by his assessment of unsatisfactory. However, when communicating his findings to the audit committee, Jack should include a response from Jill stating that the identified control deficiencies have now been corrected.

S. JEAN MOYER

Director of Internal Audit

National Geographic Society

I would first advise Kurt to find out the age of the other 30 contracts. It is important to determine if a trend exists that would indicate whether the review control has been continually ineffective or if it has improved since Jill became manager. If the sample did not contain recently signed contracts, Jack should expand his scope and determine if Jill's assertions are supported. Although it is good practice to have guidelines for handling audit-testing results, it is also important to consider other circumstances over operational activity.