Truly Courageous Professionals Navigate Toward The Storms

Trouble is something that most people try to avoid. With rare exception, the desire for safety and security is deep-seated. The same holds true in business, where there is often an instinct to avoid examination of controversial topics, such as executive compensation, legal compliance and corporate culture, that could well bring the wrath of those who feel targeted.

But, in my experience as a long-time internal auditor, I know that any tendency to look the other way usually compounds a problem. After all, ignoring the source of smoke may well lead to an uncontrollable fire. But the reality is that exposing risks in an organization may not resonate well with executive management.

There are many companies where transparency is not valued. But a brief examination of this avoidance game quickly reveals the fallacy that sidestepping controversy will keep management happy – or the organization out of trouble.

In a previous blog post, I described executive compensation as the "third rail" for internal auditors. Indeed, almost 70 percent of respondents to the nonprofit Internal Audit Foundation’s most recent Global Common Body of Knowledge survey indicated that they dedicate minimal to no effort looking at C-suite remuneration. Chief audit executives (CAEs), in fact, indicated that they steer clear of the topic because of the extraordinary sensitivity and perceived career risk of examining or questioning their bosses' pay.

Unfortunately, avoiding something as important as executive compensation doesn't make it any less of a risk. In fact, executive compensation programs that are never audited can become even greater risks over time.

One obvious risk is shareholder unrest over exorbitant pay and bonuses. Just this year, two notable American corporations have been pressured into rethinking or retracting pay plans for their top executives. Plans that tie pay to performance can encourage unnecessarily risky management behavior.

I've also written about the sometimes uneasy relationship between internal audit and the general counsel. Too often, CAEs express frustration with general counsels whom they believe are more concerned about reputational and legal risks than affording internal audit the opportunity to fully articulate the results of their work.

I'll concede that reputational and legal risks are important. However, general counsels too often prefer to eliminate discussion of these risks in documents that could be discoverable in the event of litigation such as internal audit reports — in effect, silencing internal audit from sharing critical information with the board or audit committee.

Fear of reputational risks is not limited to legal counsel. Often, public-sector auditors are discouraged by elected officials from reporting unflattering findings. A book published by the Foundation, The Politics of Internal Auditing, offers a case study in which one city's internal audit team found appraisal and negotiation processes had been compromised in land purchases. Based on independent appraisals, it appeared the city had overpaid on real estate by as much as 25 percent. Despite pressure from elected officials and senior staff, the CAE made public his team's findings. Unfortunately, doing the right thing cost the CAE his job when the same elected board did not renew his contract.

For more than a year, I have been raising awareness of the influence of culture on risk. This too can be an area viewed as taboo, especially in companies or regions of the world where there is a strong deference to authority. The challenge here is overcoming an assumed infallibility of high-ranking company executives, or more precisely, defeating a cultural convention that such challenges are disrespectful or improper.