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Boards Must Do Better – The Undermining of Internal Audit5 min read

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I want you to think back to that one friend who was always honest with you. You know the one. While you were prancing around showing off that new dress or suit, they quietly told you it was too little. When you said something mean in a meeting and everyone else was afraid to speak up, they told you that you were being mean. We’ve all had that friend who cared enough to tell us what we needed to hear. Even if it conflicted with what we wanted to hear.

A mature individual listens to and values a friends’ opinions, whether you agree with them or not. Getting other people’s objective perspective can help make us better. But who among us is mature all the time? Often, we get upset when people do not agree with our actions and beliefs. Then we lash out, instead of learning from them.

But most of us have that one friend. You know the one. The one who

  • constructively challenges us to think differently
  • is objectively honest
  • operates in our best interest

The Business Friend You Can Count On

Wouldn’t it be great if businesses had something similar. You know, a group of people who could take a look at operations and provide objective opinions about business processes. If only there was such a group. This group could have helped World Acceptance Corporation (WAC) avoid Securities and Exchange Commission (SEC) sanctions totaling over $21 million dollars. Here’s the deal.

World Acceptance Corporation Rejected its Friend

World Acceptance Corporation (WAC) is a US based corporation that offers  consumers installment loans. In August the SEC concluded the following about WAC:

  • They paid approximately $4.1 million dollars in bribes to Mexican government officials and union officials between 2010 and 2017.
  • It “failed to implement sufficient internal accounting controls over vendor management and accounts payable.” 
  • The organization was unjustly enriched by 18 million dollars.

This is bad. But the worst part is that it could have all been avoided. World Acceptance Corporation failed to listen to it’s friend that provided a word of warning. The SEC says that “WAC management lacked the appropriate tone at the top regarding internal audit and compliance, thereby undermining the effectiveness of those functions.” 

It sounds like WAC had a friend that warned them of what was happening, but when told the dress they were wearing was too little, they did not heed the warning. 

SEC documents go on to say that, “in October 2015 the then-CEO terminated the Vice President of Internal Audit after he raised compliance concerns.” 

This is bad, but it gets worse.

“The then-CEO then combined the internal audit function and the compliance function into one department under one VP, had the VP report to her, and pressured the VP to eliminate staffing and become more ‘bare-bones’” 

You’re probably wondering if it can get any worse. Well it can.

Prior to this change, audit and compliance both reported directly to the Board of Directors and the Audit Committee.

The new VP of Audit and Compliance raised concerns about the quality of the internal audit and compliance functions. The then CEO terminated her and shifted oversight of audit and compliance to the General Counsel. The SEC notes that “the general counsel had no prior audit or accounting experience.”

Have you heard the old saying Actions speak louder than words?

The CEOs actions showed a lack of respect for the audit and compliance functions. Up to this point she has, 

1) Fired the Vice Presidents for audit and compliance. Twice

2) Moved oversight of audit and compliance from the Board to report only to her

3) Grew tired of audit and compliance reporting to her and moved them under the Legal Counsel’s Office

I think we can all agree these actions are terrible. Essentially the Board is blind to what’s happening in the organization and audit & compliance is not adequately supported. But to put the proverbial nail in the coffin, the SEC reports the “then-CEO also told the then-general counsel and an internal audit director that she did not care whether WAC had a “world class [internal] audit function.”

After all of her actions, this was obvious and did not need to be said.

What About the Board?

The Board was not (or should not have been) blindsided by this. They missed several warning signs.

Board members, pay attention here!

1) Audit and compliance professionals are like that friend who will honestly tell you what you need to know. Get to know them.

2) You should be responsible for hiring and firing the Chief Audit Executive and the Chief Compliance Officer. The CEO should not be able to terminate these people. This could allow a CEO to cover up wrongdoing.

3) You must also support audit and compliance functions. Similar to the way you would support that good friend who is looking out for your best interest.

4) In most environments, there is not a contentious relationship between auditors and organization management. The two get along like friends who are honest with one another. If the relationship is bad, you need to determine why.

5) Because of Sarbanes Oxley, you are now required to have a financial expert on most Boards. I’m sure this helps. Now you need at least one risk, audit and/or compliance professional to help with the oversight responsibilities. Most internal auditors understand operations and know how to ask tough questions. Their experience is a natural fit with the Board oversight role.

Boards members must beware. The undermining of internal auditing can be detrimental to organizations you serve.


My name is Robert Berry. I help improve people, processes and profits. I specialize in communicating through questions.

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Reference(s)
https://www.sec.gov/litigation/admin/2020/34-89489.pdf

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Robert Berry (101)

Robert (That Audit Guy) Berry is a risk, compliance and auditing advocate, educator and innovator. He helps good professionals become better by creating articles, web services and training that allow them to expand their knowledge network.

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