Ethical guidelines for auditors

The GAO’s ethical guidelines for auditors remind us who we are and why we do what we do. And this is a very good thing, because it is easy to get balled up in the details of our day-to-day work and, forgetting the bigger picture of who we are and what we do, take the path of least resistance and end up tarnishing our reputation.

Beginning on page one of the Yellow Book, the GAO reminds us that it is the duty of the audit profession to deliver truth about public officials and their use of our shared resources. And then the GAO goes on to tell us that if we, the auditors, shun our responsibility and act unethically, we aren’t worth the paper we write our now questionable opinions and conclusions on.

OK, they didn’t say that last part. ???? But that is the consequence of auditors behaving badly. If we have the reputation of self-service instead of public service, if we can’t be believed as professionals, then our professional work products can’t be believed either and then all the work we do is for naught.

Five Ethical Guidelines for Auditors

So, in order to achieve the ideal in our work (that our readers believe our results and recommendations and ultimately take steps to pull government back on track and use our resources wisely), our reputation must be close to spotless.

Your reputation can be tarnished if, when confronted with a tough decision, you do not take the high road. Thankfully, the GAO gives us five concepts that will guide us when a tough decision must be made and you are forced to ask yourself, “What is the right thing to do here?”

1. The public interest
2. Integrity
3. Objectivity
4. Proper use of government information, resources, and position
5. Professional behavior

Let’s discuss each one in turn.

1. The Public Interest

When Johnson and Johnson found out that someone had tampered with one of their best-selling products, Tylenol, and that people were dying as a result, they immediately recalled the product. This cost Johnson and Johnson an estimated $100 million.

Johnson and Johnson could have made a lot of other less responsible and possibly less expensive choices. But because they were guided by a mission statement that put the customer first and the shareholders second, it was obvious what they should do.

In government, our first responsibility as an auditor is to the public – not to the person who hired us and who writes our checks. Not to the federal grantor or other government oversight body. We are responsible for bringing anything to light that harms the beneficiaries of government programs (like the children, elderly, and disabled) and that often means making the person who hired us look bad.

In the short-term, we may suffer when we do the right thing; we may even get fired. But in the long-term, we will be respected and trusted by clients, colleagues, and the public.

One city auditor sees a higher purpose in his work. He believes it is his job to make sure that the monies collected by the city are turned back to support those who need services and who may not have a voice in the government. This city auditor diligently works on the citizens’ behalf and doesn’t care whether he makes his auditees upset when he publishes his reports. He is often criticized by the city council and the mayor, but he tolerates the discomfort because he realized that he serves as an important counterbalance to their power and influence.

YB 2018 3.07     The public interest is defined as the collective well-being of the community of people and entities the auditors serve. Observing integrity, objectivity, and independence in discharging their professional responsibilities assists auditors in meeting the principle of serving the public interest and honoring the public trust. The principle of the public interest is fundamental to the responsibilities of auditors and critical in the government environment.

2. Integrity

Integrity is about doing the right thing even when it is hard. Even when you experience resistance.

One state auditor was threatened by the director of the state’s board of public accountancy during the audit entrance conference. The state board of public accountancy bristled when they were informed that they would be audited and informed the audit team that their CPA licenses and CPE records would be thoroughly scrutinized.

This state auditor, who was facing re-election within a few months, could have delayed or even avoided the audit of the board of public accountancy all together. That would have been a lot easier! But the state auditor instead chose to act with integrity and perform the audit regardless of the pressure and resistance of the powerful – and menacing – board.

YB 2018 3.10     Making decisions consistent with the public interest of the program or activity under audit is an important part of the principle of integrity. In discharging their professional responsibilities, auditors may encounter conflicting pressures from management of the audited entity, various levels of government, and other likely users. Auditors may also encounter pressures to inappropriately achieve personal or organizational gain. In resolving those conflicts and pressures, acting with integrity means that auditors place priority on their responsibilities to the public interest.

3. Objectivity

When I started in public accounting, the managing partner made it very clear to me that I should remove any bumper stickers on my car indicating affiliation with any political party, university, or even my favorite radio station! When talking to the client, I was not to express opinions on the events of the day or engage the clients in religious, social, or political discussions.

By remaining neutral regarding my personal preferences, the client could never question whether I had a bias as I made my audit conclusions.

The partner was wisely pointing out that what the firm sold was auditor integrity and objectivity. And if the client doubted either our integrity or our objectivity, our products – our conclusions and opinions – were useless.

Objectivity

YB 2018 3.11      The credibility of auditing in the government sector is based on auditors’ objectivity in discharging their professional responsibilities. Objectivity includes independence of mind and appearance when providing audits, 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 impact objectivity.

4. Proper Use of Government Information, Resources, and Position

A friend of mine is a professor at University of Texas at Arlington and he teaches ethics to government leaders in former communist bloc countries. He has developed several ethics-centric case studies for the leaders-in-training to discuss and resolve.

One case study described how a mayor used city employees to landscape his backyard – clearly an improper usage of government resources. But unlike previous case studies, my friend the professor didn’t hear anything back from his leaders-in-training the next week. That was odd.

A month later, the leaders-in-training admitted that they just didn’t understand the ethical dilemma in the scenario. Using the labor of government employees for personal benefit sounded okay to them. Personal use of government information, resources and positions is one of the perks of being a government leader in a communist bloc country!

Not so under Yellow Book standards:

YB 2018 3.12     Government information, resources, and positions are to be used for official purposes and not inappropriately for the auditor’s personal gain or in a manner contrary to law or detrimental to the legitimate interests of the audited entity or the audit organization. This concept includes the proper handling of sensitive or classified information or resources.

YB 2018 3.14     Accountability to the public for the proper use and prudent management of government resources is an essential part of auditors’ responsibilities. Protecting and conserving government resources and using them appropriately for authorized activities is an important element in the public’s expectations for auditors.

YB 2018 3.15     Misusing the position of an auditor for financial gain or other benefits violates an auditor’s fundamental responsibilities. An auditor’s credibility can be damaged by actions that could be perceived by an objective third party with knowledge of the relevant information as improperly benefiting an auditor’s personal financial interests or those of an immediate or close family member; a general partner; an organization for which the auditor serves as an officer, director, trustee, or employee; or an organization with which the auditor is negotiating concerning future employment.

5. Professional Behavior

Any behavior that could cause someone to question your professionalism can detract from your credibility. And without credibility, an auditor will find it hard to convince the auditee of the veracity of their findings and recommendations.

YB 2018 3.16     High expectations for the auditing profession include compliance with all relevant legal, regulatory, and professional obligations and avoidance of any conduct that might bring discredit to auditors’ work, including actions that would cause an objective third party with knowledge of the relevant information to conclude that the auditors’ work was professionally deficient. Professional behavior includes auditors putting forth an honest effort in performanceof their duties and professional services in accordance with the relevant technical and professional standards.

Consider the following true scenario (with a few small changes to protect identities): An internal audit director of a large city hired a handsome new auditor fresh out of college and started grooming him for audit leadership. He was immediately assigned to audit the city’s police department.

Everything had been going well until the internal audit director saw a picture of him in the local newspaper at the city’s Mardi Gras celebration

The handsome new auditor was pictured on the very top of a street light without his shirt, wearing dozens of bead necklaces. The police stood below and appeared to be yelling at him to come down.

The following Monday, the director showed him the picture and asked him what he thought he was doing. The young auditor immediately became defensive and told his new boss that what he did on his own time was none of the director’s business, before revealing that he was celebrating an upcoming wedding with a few of his college buddies.

In a way, this new auditor was right; the professional behavior standard said nothing about what auditors can do with their personal time. But did this new auditor’s behavior on his days off compromise his credibility with the police force? Yes, indeed! If the auditor doesn’t respect the law on his personal time, he can’t expect the police department to respect his audit project and results during his professional time.

The director removed the auditor from the police department audit and, unfortunately, lost enthusiasm for this auditor’s future. Eventually, the auditor moved on to work elsewhere, having learned a valuable lesson about professional behavior.

These 5 ethical guidelines for auditors support an auditor’s independence

One of the results of following all five of these ethical guidelines for auditors is our community’s trust. Another is auditor independence. Consider just two last quotes from the 2018 Yellow Book:

YB 2018 3.22     Auditors and audit organizations maintain independence so that their opinions, findings, conclusions, judgments, and recommendations will be impartial and viewed as impartial by reasonable and informed third parties. 

YB 2018 3.19     Auditors and audit organizations should avoid situations that could lead reasonable and informed third parties to conclude that the auditors and audit organizations are not independent and thus are not capable of exercising objective and impartial judgment on all issues associated with conducting the engagement and reporting on the work. 

I hope you enjoyed this brief discussion of ethical guidelines for auditors as promulgated by the GAO’s Yellow Book. Keep up the good work! Audit big! Audit up!