Audit and Containment

Audit for all the benefits that it might render is in any case an “after the event” process. Therefore, its limits are well known and equally well documented. Containment therefore becomes imperative as measure to close the effects set in motion by those acts which have been objected to by audit.
The popular notion is that it is the attitude and approach which renders the motive of audit quite fruitless. Also a negative overtone is associated with audit in every field where it is expected to provide direction as a corrective measure – the one of Chor-Police.
Before I go further to share my thoughts on Audit, let me put the disclaimers in place – First, that I am engineer by qualification. Second that this is a blog and I am just giving air to my thoughts and last but not the least, that I have had no first hand experience as an auditor. Therefore, whenever I make an argument against audit, per se, it could be dismissed as the bias of the victim. However, the disclaimer to the disclaimer being that my father having spent more than a good part of thirty years auditing public and private accounts, gave me the necessary “Abhimanyu-like” education to understand the letter and spirit of this process.
The two areas where audit is quite prevalent as a process are in the domains of management of finance and of quality. In both areas, the general perception of the audittee is that of his or her being the sacrificial lamb and the auditor invariably has to struggle to hide the feeling most typified by this hindi proverb – “Bakre ki amma, kab tak Id manayegi”.
The situation turns paradoxical in the sense that the auditor in fact tends gain monetarily with the increasing magnitude of misdemeanors of the audittee and needs to provide relevant arguments against his or her own objections when challenged by a higher authority, albeit privately. Ask any article clerk or statistical quality controller and the Pandora’s Box will open. The bubble grows to the extent defined by the dictum – Irresistable force meets Immovable object – and the slightest tilt in the balance of power leaves us with the Enrons and Arthur Andersons of the world.
It is in this context, that containment has meaning. Every auditor must be required to provide a “nature and extent of (possible) damage” statement associated with all objection(s). Closures must demonstrate containment of the (possible) damage within limits acceptable to the relevant management and as provided by the above statement.
That action taken for closure has indeed been the cause for containment must be established by a test of hypothesis. Such a cycle of activities can be called a normal cycle of audit. I am sure every good auditor understands this innately and aims to have sufficient number of these cycles turning around during his/her tenure with the organization.
However, the point is missed when containment is not extended to non-recurrence. It is at such times that the effectiveness of the causal analyses resorted to by auditor and audittee come to the fore. Non-recurrence also tells us whether systemic illnesses have indeed been diagnosed and cured. This causal analysis being internal to all organizations the internal auditor, is, in my opinion, more important and effective than any external auditor.
This was the line of reasoning for my objections to the existence of three audits in a public sector undertaking, viz. the internal, CAG and the statutory or external audit. (Circa 1997-2000) However, being sufficiently misunderstood as I usually am, that organization closed the internal audit department the very next year and touted the same as cost-cutting measure.
Neither CAG nor the Chartered Accountants complained and to this day many an organization gets by without such activity. Thus, some important lessons taught by my father to me were improperly realized in life. (I realized that this practice of “Internal Audit” was conducted in case of private companies under the aegis of the audit committee. But the members of such committees, being quite “high” in the organization, leads to effects IR Force meeting IM object described earlier the system of "checks and balances" remains only in spirit)
Years later and fresh from my memories of a large corporate fraud, I was piqued to read very little about the about the role of “Internal Audit” in that curious case or for that matter in any other major corporate misdemeanor reported in the news with large economic consequences! Disclosure is easier said than done, for it is fraught with the risk of honesty.