Attribute Standard 1312 issued by the IIA indicates that Internal Audit Departments purporting to follow IIA Standards must have an external assessment “conducted at least once every five years by a qualified, independent reviewer or review team from outside the organization. Two such organizations include World Com and Fannie Mae. The two organizations were in the news owing to various reporting and internal audit practices that may have resulted in their collapse, as is the case of World Com or hefty financial losses for their shareholders and other stakeholders. Consequent to such observations, the objective of this paper is to express opinions on whether the internal audit teams at World Com and Fannie Mae were in any way non-compliant with the IIA standards for the internal auditors. In meeting this objective, the paper looks into the facts surrounding the internal audit departments of the two organizations in the wake of their financial and another crisis. It seeks to indicate whether the organizations comply, or do not comply with the Code of Ethics and the Attribute and Performance Standards set forth by IIA. The assessment of the audit teams in the two engagements is based on the Extraordinary Circumstances book by Cynthia Cooper and the Report of the Special Examination of Fannie Mae, dated May 2006 by the Office of Federal Housing Enterprise Oversight (OFHEO). In presenting the case, the report is organized first based on the organization and secondly based on the IIA standards, beginning with the case of Fannie Mae.
Fannie Mae-Review of Internal Audit Department based on Attribute Standard 1312
Fannie Mae was once one of the United States rapidly growing organization with the growth being reflected in the EPS of the corporation and in the hefty perks that accrued to the senior management teams in the organization. The corporation was lauded as the best in class concerning risk management, which would make the corporation, be considered as a low-risk investment. However, the fortunes of the organization would abruptly change after the realization that the growth had the influence of human attributes whose detection would result in the organization being forced to restate its financial reports. As a result, its shares came crumbling. Such occurrences ought not to happen in the presence of the internal audit department in that the internal audit teams should be able to identify such anomalies and report them accordingly. The reporting ought to be done to the board or in the case where the board appears compromised, then it should be reported to the regulator (Office of Federal Housing Enterprise Oversight (OFHEO), 2006).
The analysis of the facts of the case reveals the lack of compliance with the attribute standard 1100, which deals with the independence and objectivity of the internal audit activity. The standard states that the internal audit activity ought to be independent and that the internal auditors must be objective in the performance of their duties. Analysis of the facts of the case indicates that the internal audit function of the organization was not objective. Executive board members headed the internal audit function and controlled its activities. These executive board members shared in the perks that resulted from the overstated profits and EPS of the organization and as a consequence, they used their power on the board to stifle the efforts of the internal audit team in the organization. In the same measure, the senior personnel in the organization and more specifically in the internal audit department were not independent. They were not objective due to heightened coercion and intimidation by central forces in the scandal and as a result, they lacked the courage to report the anomalies in the reporting activities of the organization (Office of Federal Housing Enterprise Oversight (OFHEO), 2006).
Several individual members of the internal audit department as identified in the report did not comply with the attribute standard 1120, which encompasses individual objectivity. The standard demands that internal auditors must be impartial have the unbiased attitude to their roles in the organization and avoid any conflict of interest in their engagements. Conflict of interest in this particular case existed in the sense that some members of the internal audit team who were later indicted had a personal interest in the organization as both shareholders and leaders in the organization. This impaired their objectivity and as a result resulted in them not being able to identify objectively the ills in the reporting activities of the organization. For instance, the team appears to have been changed severally over the period leading to the scandal in the organization. In the full glare of the company, the new successful teams were structured to include persons who were strategically situated to protect the interests of their seniors and not those of the shareholders. In the process, this resulted in the loss of objectivity in the team (Office of Federal Housing Enterprise Oversight (OFHEO), 2006).
The internal audit team was in contravention of the attribute standard 1220 on due professional care. The standard asserts that the internal control depart owes the duty of professional care to the shareholders and all other stakeholders of the organization. One of the stipulations under this IIA is that the audit team assesses the relative materiality of the matters to which assurance procedures are applied. The rise of the profitability and the EPS compared to the expense of the organization ought to have indicated the red flags in possible manipulation of results and considering their pervasiveness, the internal audit team ought to have identified the crisis. It may not be clear whether the internal audit team at Fannie Mae highlighted the anomalies in the rising profitability or even the adequacy of risk in the organization. However, the fact that the dollar values of these elements were materially large, the internal audit team ought to have identified them in their reports to the management yet this did not happen (Office of Federal Housing Enterprise Oversight (OFHEO), 2006).
Considering above highlighted concerns in the attribute standards, the internal audit function in the organization is considered to be non-compliant with the IIA attribute standards. Consequently, a reconstitution of the same would greatly contribute to ensuring that the internal audit function in the organization runs and operates professionally as required (Office of Federal Housing Enterprise Oversight (OFHEO), 2006).
The second phase of the analysis encompasses the performance standards. The IIA performance standards revolved around the technicalities and procedures that the internal audit department led by the chief audit executive must conform with (Office of Federal Housing Enterprise Oversight (OFHEO), 2006). From a general perspective, the internal audit function at Fannie Mae was in general compliance with the IIA standards on performance. The review of the department’s reports and minutes reveals that the department was professionally managed and that the members of the department recognized all the structures in the organization. According to the performance standard 2430, the internal audit department conducted in conformance with the international standards for the professional practice of internal audit including the preparation of reports for the board and the top management in the organization. The majority of the members in the department reported to the chief audit executive as required by the policies of the organization and that to the best of their knowledge, these members met all the provisions of the code of conduct as set by the department.
Concerning the dissemination of result of any audit engagement, the department had a chief audit executive who received all reports from the juniors and made those reports available to the leadership of Fannie Mae. To the best of the knowledge of the members of staff in this department, the reports provided to the board were acted upon and that they were presented without any alterations, omissions, or errors. The department did not report any concerns with engagement disclosure or non-conformance according to its reports, and neither were there interferences with the manner in which the department dispenses its functions. Notably, all overall opinions that the department issued were channeled to the chief executive officer of the organization through the chief audit executive. At times, the officers in the department received audit reviews from the board and leadership of the organization explaining any arising matters from the internal audit reports. Consequently, there was no reason to doubt the performance of the organization’s internal audit department from the perspective of procedural and technical requirements. Therefore, the review considers that the internal department at Fannie Mae was in compliance with the performance standards as stipulated by the IIA standards (Office of Federal Housing Enterprise Oversight (OFHEO), 2006).
Focusing on the code of ethics concerning the internal audit department at Fannie Mae, the general view is that there was compliance with the code of ethics. The code of ethics for internal audit encompasses four major codes on integrity, objectivity, confidentiality, and competency. The analysis of the internal audit department at Fannie Mae based on the evidence provided indicates that other than a few players whose objectivity was compromised, the department operated ethically. The chief audit executive, as well as the board representation of the internal audit department, appears to have been compromised and hence not objective. This resulted in concealing of material audit concerns despite audit team having raised concerns. The level of interference was at the helm of the department’s leadership, which made it difficult for other players in the department to even guess about the possibility of interference with code of ethics for any of the team. In general, therefore, the audit team was ethical. The overall view on the entire department based on the attribute, performance, and code of ethics as stipulated by IIA indicates that the team was generally compliant with the set standards (Office of Federal Housing Enterprise Oversight (OFHEO), 2006).
World Com- Review of Internal Audit Department based on Attribute Standard 1312
The presentation of this section is based on the facts as laid out in the Extraordinary Circumstances book by Cynthia Cooper. Cooper established the internal control depart at World Com. The company did not have an internal control department until it established one and when it did, it was allowed to have two members of staff both of whom did not any experience or training in the audit. Nonetheless, Cooper was determined to make the internal department work even when her boss did not want it to be referred by that name. At the time of the establishment of this department, the company was on the track of rapid growth. This was shortly after the deregulation of telecoms industry and the incoming the internet. Companies in this sector had little understanding about the risks in the industry considering that it was still new. In the pursuit for more, the World Com made suspicious allowances for wireless reserve and this resulted in the overstatement of its profitability. The internal auditor raise issues with the leadership of the company but the leadership were adamant that the allowances were proper. In fact, the leadership indicated that he allowances might be under-estimated. The internal auditor was not convinced and decided to take up the issue of the external auditor, the accounting, and the preparer of the financial reports. They insisted that the allowances were accounted for properly and at the same time warned her of looking for answers on the same issue. The facts in this led Cooper to becoming the whistleblower and from the perspective of internal audit, this paper seeks to look into the extent to which the department of internal audit at World Com complied with the attribute, performance, and code of ethics concerning the matter at hand (Cooper, 2010).
The internal department at World Com complied with the attribute standards as spelled out by IIA. The organization established an internal compliance department under the guidance of Cooper. The leadership of the organization did not expressly want the establishment of the same and even told Cooper that it should not be called internal audit and control department. Considering attribute standard 1000, the purpose, authority, and responsibility of the internal audit department was clear despite the unwillingness of the company's top leadership to have a strong department. On attribute standard 1010, the chief audit executive, Cooper communicated the definition of internal audit, code of ethics, and spelled out the standards of the internal audit charter to the two members of staff with whom the internal control department was established. The fact that the leadership of the organization supported the department meant that they recognized it (Cooper, 2010).
The internal control department exhibited independence and objectivity with the inquiry into the suspicious allowances indicating the extent to which the members or of this department sought to go ensuring that there is objectivity and independence. In essence, Cooper who was the chief audit executive indicated that she was independent by daring to question the CEO of the organization and even taking up the issue with Arthur Anderson to unravel the truth. As a matter of fact, the fact that she was among the very first people to raise the alarm on the overstated incomes of the corporation indicates how independent she was in her engagement with the organization (Cooper, 2010).
The internal audit department may have been judged by attribute standard 1210, which touches on proficiency, especially based on the fact that the department had two members of staff who did not have any training or experience in audit. However, the fact that the chief audit executive was well conversant, skilled, and experienced in audit indicates the reason as to why the department ought to be considered as knowledgeable, skilled, and competent to handle the functions of the internal audit department. Notably, Cooper indicated that she trained the members of staff before other personnel to hold the same department with her, and this ended up creating a highly competent internal audit and control department as it was known at World Com (Cooper, 2010).
On due professional care as stipulated under attribute standard 1220, the internal audit department members applied the care and skill expected of a reasonably prudent and competent internal auditor. The team tested the relative materiality of the allowances, and as Cooper put it, the department sought to understand allowancing testing as employed by Arthur Anderson. It also wanted to know why the organization got defensive when questions were raised on the issue of allowance for the wireless communication. By looking into this issue, the department demonstrated professionalism and duty of care hence the consideration that it was compliant (Cooper, 2010).
On the attribute standard 1322, the internal audit was compliant considering that it reported when nonconformance was identified in the organization. The push for the establishment of the internal control department was by itself an indicator of the department’s resolve to stem out nonconformance in the organization. The explanation of the implications of the activities of the organization to the senior management in the organization and the board also indicates the department’s compliance with this standard despite the opposition form the organization (Cooper, 2010).
One of the areas where compliance was at fault though for a short time was in the issue of organizational independence (attribute standard 1110) and on the concerns of individual objectivity under attribute standard 1120. According to the facts of the case, independence of the department from the organization was semiautonomous considering the level of interference in the organization. The department was not a fully fledge and independent department of the organizations activities, and this created room for discrepancies in the provision of the services that the department engaged in. Similarly, there were concerns of individual interference with the CEO of World Com following Cooper after work and warn her of the continued pursuit of matters that the CEO thought should be buried. The interference was also evident with the accounting team with many of the employees unwilling to comment on what was happening at World Com. The interference, however, did not influence the resolve of Cooper and the internal audit team at World Com (Cooper, 2010).
Focusing on the performance standards, evidence from the case indicates full compliance with the IIA standards. This is based on the fact that the integrity of the department was not in question. Cooper was the chief audit executive. She handled all matters in the department concerning reporting to the senior executive and considering that she helped in the establishment of the department, there was no doubt to the fact that the internal audit department fully complied with the procedures set in place to guide the performance of the department. Therefore, the report rules in favor of full compliance with the IIA standards and in no way was there found to be evidence of noncompliance concerning this matter (Cooper, 2010).
The last concern relates to the issue of compliance with the code of conduct. The code of conduct encompasses four major requirements which include integrity, objectivity, confidentiality, and competence. There may be questions about the competence of the members of the internal audit considering that all members of this department ought to have training on audit yet the two members of staff that were under the command of Cooper had no training or experience in audit. However, Cooper handled all matters in the department with the members of staff playing the auxiliary role and for that reason, there is no doubt that the issue of competence ought not to arise. On all other facets that include integrity, objectivity, and confidence, there is no reason to believe that Cooper and her team breached these codes. This can be translated to mean that the members of this very important department were fully compliant with the code of conduct. Considering the findings on the attributes, performance, and code of ethics standards, it would be prudent to conclude that the internal audit department at World Com was compliant (Cooper, 2010).
In conclusion, this paper presents a review of the internal audit departments at World Com and Fannie Mae. The review is anchored on attribute standard 1312 issued by the IIA and which indicates that Internal Audit Departments purporting to follow IIA Standards must have an external assessment "conducted at least once every five years by a qualified, independent reviewer or review team from outside the organization. The analysis concludes that Fannie Mae complies with the performance standards and code of ethics, but it does not comply with the attribute standards. On the other hand, World Com complies with all the standards except organizational independence.
References
Cooper, C. (2010). Extraordinary circumstances: The journey of a corporate whistleblower. John Wiley & Sons.
Office of Federal Housing Enterprise Oversight (OFHEO). (2006). Fannie Mae: Report of the Special Examination of Fannie Mae. Retrieved from http://online.wsj.com/public/resources/documents/ofheo20060523.pdf
