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Objectivity: Hold on to it as Long as You Can
By Mike Taylor

From the first Yellow Book in 1972, independence has been a standard for government auditors. Known originally as “Standards for Audit of Governmental Organizations, Programs, Activities & Functions,” the 1972 Yellow Book included an independence standard that stated:
 
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“In all matters relating to the audit work, the audit organization and the individual auditors shall maintain an independent attitude.”

With a few words, the 1972 Yellow Book tells us we need to have an independent attitude in our work. It does go on for a whopping three and half pages to provide some additional information to consider. When you take a few minutes to read those pages, and I recommend you do, you will find many similarities to the current Yellow Book.

By the 2018 revision, the independence standard has been through several revisions. The requirements, noted with “must” or “should” in the boxes, take up approximately 10 pages, and the supplemental guidance covers an additional 18 pages. It is far more than our independent attitude. It is independence in fact and appearance. It describes a wide variety of reporting structures for the audit function. It discusses all sorts of threats to independence and safeguards that may help mitigate threats. It covers audits, nonaudit services, and work that is neither an audit nor a nonaudit service. In those 28 pages, it tells us not just to have an independent attitude, but to look, act, and be independent.

As auditors, independence is critical. Without independence, we are accountants and analysts. Those are important roles in government organizations, but they are not the role of auditor. However, all the attention on independence is diminishing what really is important. GAO had it right in 1972 when they told us to “maintain an independent attitude.” In other words, auditors need to be objective.

Objectivity appears in the 2018 revision:

3.11 Auditors’ objectivity in discharging their professional responsibilities is the basis for the credibility of auditing in the government sector. Objectivity includes independence of mind and appearance when conducting engagements, maintaining an attitude of impartiality, having intellectual honesty, and being free of conflicts of interest. Maintaining objectivity includes a continuing assessment of relationships with audited entities and other stakeholders in the context of the auditors’ responsibility to the public. The concepts of objectivity and independence are closely related. Independence impairments affect auditors’ objectivity.

Read that section one more time and count the number of times that you see the words must and should. Perhaps they are missing from the objectivity paragraph because it would be difficult for a peer review team to assess compliance with the requirement. Whether or not peer reviewers assess objectivity during a peer review, we should all treat it as though it reads, “Auditors must be objective in discharging their professional responsibilities for the credibility of auditing…”

Is it easy to maintain objectivity in our audit work? Based on my experience, I know that it is not. Whether by the little pieces that are chipped away on a daily basis or the big chunks that are occasionally torn off, our objectivity is under constant attack. Once lost, objectivity is not easily retrieved, if it can be retrieved at all.


EXPERIENCE

Experience is a blessing and a curse. Knowledge of an organization and its people is a huge asset. You know where to look for things that outsiders would not. You know about working relationships that can mean the difference between success and failure of recommendations. Experience can also be a liability when it causes you simply to go through the motions in areas where you have repeatedly found little to recommend improving. When done properly, even the most basic compliance test can turn up an issue that needs attention. Experience is also a drawback when you avoid programs, activities or functions where the department, executive management, and those charged with governance continually ignore significant issues and do not hold anyone accountable.

Some local governments require periodic external firm turnover, but do not have term limits on their city or county auditor. They are concerned that independence and objectivity may diminish over time for external auditors who may spend only a few weeks a year on the audit and derive a small fraction of their revenue from the contract. In some cases, full time city or county auditors who do not have term limits administer external audit contracts that do have term limits. If time presents a risk, or perceived risk, to the external auditor’s objectivity, a city or county auditor faces a similar risk.


ANNUAL PLANNING

The Yellow Book is engagement-based. We cannot look to the standards for some mathematical formula for identifying what programs, activities, or functions we audit. Whatever methodology we use to determine upcoming audits likely is a mixture of art and science. What we choose not to audit is also a mixture of art and science, but might be more influenced by art than science. Either way, no matter how objective we try to make the audit selection process, there will be some auditor bias in the process. Hopefully, it is as much science as possible, but the door is open to criticism that we favored some areas over others.


OVER-RELIANCE ON FIXED MEASURES

Some jurisdictions establish fixed time periods between working in an area and being able to audit that area. Two years is a common length of time. That sounds good, but in reality, the actual measure will be found inside the auditor. If the auditor was heavily involved in developing or administering a program, they may never feel sufficiently objective to audit the program. Others can make that transition overnight.


SELECTION OF AUDIT OBJECTIVES

Performance auditors choose their audit objectives. Those objectives may rightly be influenced by the needs of the governing body, the locality, and stakeholders, but ultimately the auditors own the objectives. That helps with independence, but at the same time opens up potential challenges to objectivity. The objectives could lead others to question objectivity if they see auditors as pushing a particular agenda or avoiding important but sensitive issues.


SELECTION OF CRITERIA IN PERFORMANCE AUDITS

In the early stages of an audit, we search for criteria against which we measure the performance of a program, activity, or function. When things go well, we find solid criteria that management has adopted, or at least agrees is a fair measurement tool. Sometimes, which really means often, the criteria is not so clear-cut. There may be a regulation, but the regulation has 200 different requirements. We do not have enough time to audit all the requirements, so we select 10 or 15 for our testing. Relevant criteria may not be precise. Instead of a requirement that a step be completed within 48 hours, it should be done “within a reasonable amount of time.” There are times when we find a condition, but there is no management agreed criteria. So, we use phrases like “logic dictates” or “good business practice.” This was frequently the case in Stockton, California when I was the City Auditor. While I was there, I did a search of city charter, city code, citywide policies and procedures, and city council policies. Neither the phrase “internal control” nor any other language that related to internal control existed. When we find ourselves in these situations, our judgment influences what is used as criteria. That opens the door for management and others to view the audit process as somewhat subjective, particularly if the results demonstrate that improvement is needed.


PERCEPTIONS OF OTHERS

Be on guard for situations that potentially look bad, even if they do not affect your ability to be objective. Just because you and a department head occasionally talk about your common interest in classic Volkswagens, needlepoint, or wines from Paso Robles does not mean you will be biased in your audit work. However, others may think you do, especially if audits in that department do not seem to have significant findings.

The opposite situation can also be true. Stockton had a manager or two that would go out of their way to be uncooperative, and sometimes combative with the City Auditor’s office. Those conditions set up the office for appearing to go after those managers, even though the findings were supported by sufficient, appropriate evidence.


THE AUDITOR'S ENVIRONMENT

There can be great variation in what the governing body considers appropriate contact between the auditor and management. I interviewed for an audit director position and asked about the culture regarding interaction with the rest of the organization. The audit committee chair encouraged interaction. Regular lunches and after-hours contact was expected. He even suggesting that being in a regular Saturday morning golf foursome with the Public Works Director would be completely acceptable. He did suggest that when doing audits in public works, I might want to step out of the group for a few weeks. At the other end of the spectrum, I had a colleague that was told in his interview for a position as city auditor that if he were seen in the same restaurant as a member of management, it would be his last day with the city. I find both of those conditions somewhat uncomfortable and wonder how they would affect perceptions of objectivity and independence. Habits formed in each of those cases could create challenges for an auditor if carried over to a different organization.

As someone who has been involved with performance auditing in jurisdictions with populations ranging from under 100,000 to over 8,500,000, size matters. It is far easier to minimize personal interactions in a larger organization. In small jurisdictions, you are more likely to interact with clients in social settings (e.g. church, children’s school and sports activities).

There was also the environment we faced in Stockton when the fiscal crisis led to a bankruptcy filing. Staff reductions left departments unable to provide services. At the same time, staff was needed to do lots of work necessitated by bankruptcy. Given those conditions, there was no one to work with our office on planned audits. We could either sit around and do nothing, or we could pitch in and help. We made a conscious decision to take off our auditor hats and help in a variety of ways. Collectively, the work that we did compromised our independence and objectivity. It was a difficult decision to make at the time, but seven years later, I still think it was the right decision under the circumstances, even though I found it necessary to leave as a result.


FINAL THOUGHTS

There are internal and external forces that are constantly pulling and pushing us. Some are pulling in the same direction, some are pushing in opposite directions, while others are pulling and pushing in ways that can send our heads spinning. We are in a position to control some of the forces, but others are beyond our reach and even beyond our awareness. There is no way to be and be viewed as 100 percent objective 100 percent of the time.

So, what can we do? Be constantly on the lookout for diminished objectivity and perceptions that others may have about you and your office. Talk about it among the staff. If you are a small shop, engage colleagues from other shops to talk through it. When you catch wind of negative perceptions, analyze and reach out. Educate while avoiding the appearance of defensiveness. Even more important in your communications, listen. Those perceptions likely mean you need to make some adjustment on your part. Finally, avoid situations and behaviors that could lead a reasonable person to question your objectivity.


ABOUT THE AUTHOR

Mike Taylor conducted performance, compliance and financial audits for 29 years at the local level in Virginia and California. He now serves as Deputy Inspector General – Audit for the Commonwealth of Virginia’s Office of the State Inspector General. Taylor is a past-President of the Association of Local Government Auditors. He received the ALGA Lifetime Achievement Award in 2017.