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Response from Senator Bob Menendez to the “Dumb Auditor” Article

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Senator Bob Menendez

Dear Mr. Font:

Thank you for contacting me to express your opinion on banking reform.  Your opinion is very important to me, and I appreciate the opportunity to respond to you on this crucial issue.

I appreciate you taking the time to provide your ideas on how we can make changes to the banking industry to improve its efficiency and transparency.  Every day New Jerseyans are working very hard to provide for their families, but current market conditions have made it difficult for families to save or access credit.  The financial collapse last year demonstrated the need for increased transparency to protect investors and consumers from fraud and irresponsibility.  Americans simply cannot afford the risks associated with widespread economic instability such as losses of jobs, savings, and benefits.  I am committed to ensuring that our financial markets are fully regulated and operate in the best interest of the American people.

As a member of the Senate Banking Committee, I have long stood for financial reforms that promote smart, healthy, and sustainable development. I rely on the important communications I receive from my constituents to guide my work in the United States Senate.  On this, as with any issue, there are many different view points, but please rest assured that I will continue to work diligently to respond to the many valuable insights I receive from New Jerseyans like you.

Finding solutions to the issues you raise is what drives me to keep standing up for New Jersey families.  Again, thank you for sharing your thoughts with me.  Please do not hesitate to contact me if I may be of more assistance.

I invite you to visit my website http://menendez.senate.gov to learn of other important issues in New Jersey.

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Auditing Career: Do “Dumb Auditors” have more Professional Longevity than “Smart” ones?

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Two days ago I attended a nice Thanksgiving party given by a CIO friend, who like in previous years, had invited several CFO‘s, corporate attorney’s and high level management people from high profile Fortune 500 companies in the New York region to his house.   After a few drinks and delicious turkey, conversations about the state of the economy, technology and the headaches of regulatory compliance ensued.   There where two auditors in the group and it felt as if we where the only ones who did not feel regulatory compliance is a headache.    My Merlot and turkey friends, perceiving that they had numerical superiority over us, went on to a typical “we hate the auditors” discussion, where we had the “pleasure” of hearing every criticism launched against auditors since the time of Heraclitus.   Thank goodness I too had access to the Merlot.   One of the discussions that has stayed in my mind is one about how “well appreciated” dumb auditors are.   And, this I’ve decided to share with you.

Most auditors learn early in their careers that auditing is not a popularity contest.  As a result they adjust to the fact that they are paid to investigate, search, test, snoop around, and in many cases confirm the existence of wrong doing and mistakes by members of the organization at all levels.    The auditor is usually the person who has ulterior motives for asking questions, and the one who usually does not bring good news.    The auditor by his/her simple presence disrupts the “normal order” of things, makes the staff feel uncomfortable and require that all evidence be double checked for accuracy and legitimacy.   Often, when those being audited most want the auditors  to “go away,” some action or words  deep in the crevices of the organization send a message to the auditors to dig deeper or further expand their questions.   In common language, auditors are a pain in the neck.

The intensity of hatred or dislike towards the auditor however varies depending on his/her ability to understand what he/she is testing or investigating.    The smart, experienced auditor tends to ask deep, relevant and timely questions, often not found in a strict audit script or checklist, which can open the doors to problems and issues hidden just below the surface.   The smart auditor is happy when he/she finds problems, because he/she sees himself as a solution or insurance policy against risk exposures to the company.  However, this feeling is not shared by those who “own” the problems and depending on company politics, the reactions can range from lukewarm admission, challenges bordering threats from some levels of management, to a long term stealth campaign against the auditor leading to his/her dismissal for supposedly  “unrelated reasons.”  Like a Whistle-blower, the good auditor walks a dangerous road.    During difficult times, the good auditor has few or no allies.

The dumb auditor on the other hand, usually sticks to a rigid script or checklist, and is not likely to expand his questions beyond the “scope” of the audit, preassigned or created with the approval of management.  The audit process of the dumb auditor tends to be quick, rarely discovering problems and always neatly on time.   His reports usually sound like this:  “We tested A, B, and C and found no exceptions.  Managements’ controls are working according to established policies and guidelines and” (here is the mandatory recommendation for improvement – so it looks like some work was done),  “we believe the Segregation of Duties process in AP can be tightened by implementing the following…..  Otherwise all is well.”   This cookie cutter report, used by both Internal and External auditors, is the type that makes its way to most audit committees today.    This is also the type of report, according to my friends at the Thanksgiving party, that management wants and pays handsomely for.   I found myself looking at the other auditor and realized that we where both nodding in agreement.    My friends in the party, all experienced dealing with auditors, pointed out that “Smart” auditors, or auditors with independent minds can not last long in a typical organization, because the very act of following their ethical, inquisitive and legalistic mentalities gets them into serious conflicts with management and they end up fired after short tenures. Also, good auditors have few champions in the organization who see value or gain in “protecting” someone who is serious in his/her responsibility to investigate or test anyone (including them) in the future if they have to.   This is simple human nature.    A “Dumb” auditor on the other hand, creates few waves, does not offend or criticize too much, uses neutral and complimentary language in reports, and keeps to his/her “scripts” as planned by management.   By playing dumb, this type of auditor is indirectly “winning friends and influencing people.”   His/her back is covered because he/she is needed by those who need coverage.  The dumb auditor has allies.

In light of current scandals, like the Bernie Madoff case, and the mortgage meltdown, it has become common for many to ask:  “And, where were the auditors while all this was happening?”  My answer has to be that most of the auditors involved where diligently doing their jobs as good “dumb” auditors do, so they can stay employed.   That is, they where auditing every nick and cranny that was within scope and within the “Risk Appetites’ of their organizations, as set by “management.”   But, what about the codes of conduct, the audit charters, the PCAOB, the SEC, the GAAS‘s, ISACA and the IIA‘s.   Don’t these organizations have some level of control over how auditors should conduct themselves and how they should investigate and follow up on questionable activities?   Are all of these structures useless? My answer is no.  These are not useless organizations, and without them, the problems cited by my friends in the Thanksgiving party would be much worse.   The codes of ethics, guidance documents, audit frameworks and standards created by these organizations are the only line of defense we auditors and audit committees have against the many Barbarians who dwell in the halls of corporate America today.    But, are these standards  and frameworks sufficient?  My feeling is that they are not, and here is why.   Money corrupts as every auditor knows.  When you follow the money you find the power.   Organizationally, there is an imbalance between the auditor and those he/she audits.  On the one hand you have a well meaning, ethical person who wants to do the right thing, making an average mid-level management salary, tasked with uncovering wrong doing among those at levels that can crush him/her with ease, and whose interests are the maintenance of the status-quo, a low profile and making sure the company’s stock value is not disrupted by doubtful auditor reports.   In most companies, those in the Director, V.P. and “C” levels (usually persons with net worth’s in the millions of dollars and stock holders in the company) can easily muster the resources of the organization whenever they raise a red flag regarding a “trouble maker.”   The controlling factor here is not bribery, but the threat of dismissal.   So, in my opinion things boil down to a primal level for the auditor.   Ethics, integrity, morality, legality and professionalism on one side,  versus no job on the other. Unemployment, inability to pay the mortgage, damaged credit rating, children without college tuition’s, etc.   How many good auditors can consistently afford to be martyrs, and when it happens, who shows up at their door to help them pay the mortgage?   The fact that the majority of auditors are good, ethical, law abiding and take their oath’s of conduct and ethics seriously is a reflection of the social, religious and cultural values they share with the greater society, and less so on other types of controls  promoted by various groups.   As these cultural, religious and social values erode,  resulting from poor education, dysfunctional families, media aggrandizement of thieves, the belief that the  “bad guys” win and little understanding of civics, I suspect we will see more problems relating to poor auditor ethics and values.   In general, auditors are still good because they perceive that the society provides more positive reinforcements for good behaviors than bad ones.

In addition to the money and power challenges I noted above, there are issues dealing with the “Culture of Auditing,” which most of us are familiar with.    In my opinion, many of these favor the “Dumb Auditor.”   Some of these also help explain why many Madoff type schemes go “Undetected.”  Here are the top fifteen that come to mind.  I am sure there are others:

  1. Auditors are taught to find ways to give bad news in a positive manner.  Avoid bad news as much as possible.
  2. Auditors should avoid using the words “Failure,” “Problems,” or naming specific individuals who fail or pose problems.  Instead they should call these things “Exceptions,” or “Positive findings Needing Improvement.”
  3. Even when management has repeatedly ignored auditor recommendations and warnings, auditors are expected to be “flexible” and at best point out the issues as “still needing some levels of improvement.”
  4. Auditors are bound by extreme discretion and confidentiality.  They are to be like flies on the walls.  Rarely seen and not too vocal on any subject or occasion.
  5. Management has the last say in terms of what is possible by way of solutions to issues raised by audit.   The “Business” is the key determinant in whether a risk gets addressed as recommended by audit.
  6. Auditors work on behalf of management, and are not to be seen as impediments or obstacles to managements’ decision making.   Aggressive auditors can inhibit management’s entrepreneurial spirit.
  7. The auditor is there to protect the business from outside risks.
  8. Management sets the “Risk Appetite” for the company.  Auditors work within those parameters.   Even when the parameters are not well defined (on purpose).
  9. Auditors are supposed to uphold the utmost ethical standards, but often their superiors lie, cheat and have no scruples.   Some times the code of Ethics, zero tolerance statements, and even the Audit Charter are disregarded at higher levels, while zealously enforced at the lower levels.
  10. Auditors are supposed to remain positive and un-moved, even when those audited usually assassinate their character, create rumors and gossip about their professionalism, plant fake or doctored evidence against them, and call for their dismissal.
  11. Auditors are supposed to maintain meticulous notes and documentation, while many of their superiors rarely answer  email requests for clarifications, or document an opinion.
  12. Auditors are supposed to advocate for and practice “meritocracy” being on a constant race to obtain and maintain professional certifications.   While it is not unusual to see many of their superiors having reached positions of authority because they have either slept, drank, bought or strong armed their way up the ladder.
  13. When the Chief Audit Officer is weak, unstable and/or indecisive, audit work is reactive and there is unusual turn over in Internal Audit.   Expertise, maturity and professionalism has little time to take root.   “Dumb Auditors” flourish in these environments.
  14. In a recession and during cost cutting, some Audit departments let go of their “expensive” talent, keeping lower paid less experienced staff on hand until better times (and budgets) return.    “Dumb Auditors” flourish in these environments also.
  15. When the “C” level executives have been around for 10, 15 or 20 years and their “old boy” culture does not care about “irritants” such as “compliance,” or “industry best practices,” or “well designed controls,” and the head of compliance and legal counsel are never in the mood to “disturb” the old boys, smart auditors often become dumb by way of necessity.

As I prepared to finish this article, I discussed it with my friend, the other auditor at the Thanksgiving party, and he felt many of the issues tackled here are highly controversial and uncomfortable.   He said I make many generalizations  like what constitutes “Dumb” or “Smart.”   He said that what I call here the “Dumb Auditor” may really be the “Smart” one.  Every person faced with the sorts of challenges I mention has a huge reservoir of personal, professional and family reasons for taking one or another path, and those are known only to that person.   Passing judgment as I appear to do in this article may be too insensitive and simplistic.   The issues are just too complicated to put them in simple moral boxes.

I admit that my friend makes good points here, and I can only say that in this article my intent is to shed light on what is clearly a serious challenge with ramifications that go far above those of individuals.   This is a serious systematic problem  in the business world and many good minds in government and in professional organizations worldwide are working hard to find the right solutions.   In an ideal world, the typical auditor should not have to spend sleepless nights wondering whether he/she should play “Dumb” or “Smart.”

I  personally do not have a clear answer on how to solve these dilemmas for others.  I only know what my ethical, moral and social values are and I have first hand experience on the high costs and frustrations of being a “Smart” auditor.

If you are a new auditor, I hope I’ve alerted you to issues that may come your way sooner or later.   If you are an experienced auditor, I hope that by reading this you realize that you are not the only one who has seen these things.

To all readers.  I will appreciate it very much if  you left  your comments on this subject, so we can make this a more diverse  exchange.  Do you believe that “Dumb Auditors” indeed have a longer professional longevity than “Smart” ones?

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Small Public Companies Have Six More Months to Meet SOX Internal Controls Requirement

New York Stock Exchange, New York City.
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If you work for or consult with small public companies with floats under $75 million dollars, then this article from the Journal of Accountancy is important.   Below is an excerpt.  You can read the entire article by following the link at the bottom of the post:

“The SEC on Friday announced that the smallest public companies have six more months to provide audited assessments on the effectiveness of their internal control over financial reporting.

Under section 404 of the Sarbanes-Oxley Act, public companies and their independent auditors are each required to report to the public on the effectiveness of a company’s internal controls. The smallest public companies with a public float below $75 million have been given extra time to design, implement and document these internal controls before their auditors are required to attest to the effectiveness of these controls.

The extension will expire beginning with the annual reports of companies with fiscal years ending on or after June 15, 2010. The expiration date previously had been for fiscal years ending on or after Dec. 15, 2009.”

To read the entire article, from the Journal of Accountancy, please click the link below:

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SCCE Survey Shows Companies Lag On Social Networking Policies

Preserved GWR locomotive Bradley Manor, until ...
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Based on my experience as an auditor, it will be a long time before most companies catch up and publish relevant and realistic social media policies.  Most are still struggling with simple email policies, and the meaning of Segregation of Duties!  The excerpt below from an article published by SCCE discuses this problem:

“On September 23, 2009, SCCE reported, “Apparently Social Media has caught many employers by surprise.” According to a recent survey conducted by the Society of Corporate Compliance and Ethics (SCCE) and the Health Care Compliance Association (HCCA), company policies have not yet caught up with the explosion of Social Media usage by their employees.”

To read the full article click the link below:

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The train in the photo is carrying all the policies, guidelines and procedures missing from American public companies.   Look at it carefully, because if you are like me, you’ve heard the CFO and CIO constantly say that the dammed policies are coming soon.   When I ask, “but where are they now,” the answer is  always that they are on the train.   So here is the train, but where the heck is that station, and who is the woman with the bag?

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GovTrack: H.R. 2152: Text of Legislation, Introduced in House

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From time to time Today’s Audit Journal will post information on legislation passed or under consideration, of relevance to our professions.   This post provides information on a bill that may change the FCPA into a more aggressive and enforceable law.

Foreign Business Bribery Prohibition Act of 2009.

This bill under consideration in Congress can change the way the FCPA is enforced.  If your work includes reviews / investigations relating to the FCPA, read the full text of the bill by following the link from GovTrack.us below:

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Governance, Risk, and Compliance | www.brighttalk.com

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A well trained GRC Professional is always in demand.

If you are not familiar with the Brighttalk service, you are missing out on a great source of video and multimedia materials on the web.  It is a good training tool and visual information site for staying on top of industry changes.  Go to the link listed below and open up an account, then subscribe to the “Channel” of your choice. Mine of course, is the Governance, Risk and Compliance channel.

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SEC Proposes New Rules For Executive Compensation And Corporate Governance Disclosure

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More work for auditors.  And, I suspect this is only the beginning of a new compliance “framework” that will unfold during the next 12 to 24 months from Washington.

To read a Mondaq legal article you need to click the link below then create a free account:

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