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Accountable Action

1. Systems are only as good as the managers who enforce them. If the work environment is lax and employees are not held accountable for their actions, invariably they will create their own processes and workflows, which may not be aligned with company procedures.

The sentiment around our office is "that's the way we've always done it." Yet, if you ask for documentation, no one can produce it. Because of this, employees who have the greatest conviction and can convince others that their viewpoint is the way to go, or those who have been with the company the longest, are considered subject-matter experts. Although their opinion counts, they may not always have the "right" answer.

As auditors, how can we maintain a positive environment yet ensure employees adhere to company standards?

2. What types of unethical behavior should we expect to see from our clients? Also, how do we interpret "honest" mistakes from intentional fraud?

3. We have an aggressive cycle count program to manage inventory shrink. Each day, managers are given a schedule of products to count, reconcile, and adjust, as needed. On the back end, my team reviews all adjustment activity and emails managers if an adjustment exceeds our tolerance level (+/- 50 units, and/or +/- $100).

If we publish these limits, unethical managers will always find a combination to stay below the radar (i.e., adjust 49 pieces in one transaction, and the 3 other pieces in another). To avoid this, no one besides my team knows what these limits are.

How would you coach a client/employee to stick to the "straight and narrow" and do things by the book? Is coaching employees an auditor's responsibility?

4. Internal audits are conducted quarterly, or when there is the scent of fraudulent activity. Internal audits transcend financial records. They are at the core of the operation.

As we like to call it, Operational Audits serve a couple of valuable purposes: first, it helps identify areas of improvement for the manager. Too often, managers develop tired eyes syndrome that prevents them from seeing even the most obvious signs of a breakdown in controls. Opportunities such as stains on walls, out-of-uniform employees, or burnt exterior lights may be missed by our management team, but seldom by our customers. Secondly, Operational Audits are great platforms to share best practices. Internal auditors are exposed to an array of management styles and philosophies. When they come across struggling managers, they can pull out their "playbook" and make recommendations for change during the visit.

What are some red flags that would require an immediate internal audit?

5. Listening is an art form that is seldom used by auditors. In time, auditors settle into a rhythm that often leads to tunnel vision. An effective way to break the monotony of the job is to interact with employees on a regular basis. Over time, employees become allies, and tend to divulge information without you having to ask.

Similar to inexperienced managers who rely on their own understanding to get them through difficult situations, choosing not to listen to employees is irresponsible.

However, just because we listen to the voice of employees, does that necessarily mean we have to investigate every fraud claim? After all, we have limited time to complete the audit, as outlined in the Engagement Checklist. How do we avoid being sidetracked and going off on tangents?

6. Just as quarterly bonuses provide a surge of motivation until the next confrontational moment, so too does the interaction between auditors and employees. In other words, although you may curry favor your way to an employee's good side, the first time they feel cornered all of the drinks and food you brought in will have lost its effectiveness.

What are some sustainable tactics auditors should practice to maintain employee respect?

7. The longer an auditor is on assignment, the stronger the relationships with employees. On one hand, you want to have good rapport with those whom you work with, but getting too close poses a set of problems. Consider the following examples:
- It is difficult to provide constructive feedback to someone whose birthday party you attended the previous week
- The flow of information may stop if you challenge a workflow, especially if it is a long-term employee's processes
- Feelings will get hurt and employees may see you as an obstacle to getting work done. As a result, their productivity declines and the client blames you.

Given that auditors are well versed in audit processes, what's to say that they will make the right decisions on the fly? Should there be a mentorship period prior to being fully empowered?

Solution Preview

1. As auditors, how can we maintain a positive environment yet ensure employees adhere to company standards?

Organizational culture and the tone at the top are really the key elements to a positive environment and adhering to standards. It really does start at the top. Management needs to ensure that a culture is provided where the tolerance level is basically zero for inappropriate behavior, which includes deviating from set standards. The "this is the way its been done" attitude is so prevalent, and it continues for one reason - because it is allowed to continue without direct intervention from management. Once there is direct intervention and a tone at the top that is structured based on a professional, stringent, ethical framework, a positive environment is maintained and all employees know to adhere to standards and that anything less isn't acceptable.

2. What types of unethical behavior should we expect to see from our clients? Also, how do we interpret "honest" mistakes from intentional fraud?

The most common unacceptable behavior from a client always involves the request to manipulate financial information for the client's needs. If the client is trying to obtain financing, they need to show a high net income to show the business is profitable, even if this really isn't the case. The majority of clients, when trying to meet their own needs, will ask an accountant or auditor to manipulate numbers or will try to hide doing so themselves in order to create a more stable financial statement. It is always wrong because it creates deceit and is never acceptable. There are honest mistakes, but we have to do legwork on honest mistakes to determine their legitimacy. ...

Solution Summary

This solution provides detailed answers to the following auditing questions:

As auditors, how can we maintain a positive environment yet ensure employees adhere to company standards?
What types of unethical behavior should we expect to see from our clients? Also, how do we interpret "honest" mistakes from intentional fraud?
How would you coach a client/employee to stick to the "straight and narrow" and do things by the book? Is coaching employees an auditor's responsibility?
What are some red flags that would require an immediate internal audit?
What are some sustainable tactics auditors should practice to maintain employee respect?
Given that auditors are well versed in audit processes, what's to say that they will make the right decisions on the fly? Should there be a mentorship period prior to being fully empowered?

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