The Management Participation Threat

An auditor should always think twice before helping the auditee.

I know, I know. We want to add value. We want our client to succeed. We want to do the right thing and help a brother out. I get it. I like using my expertise to help folks out, too. It feels great and it seems like we’re working for the greater good when we help move the client along.

But when it comes to auditees, helping could actually damage our professional reputation by creating a management participation threat to our independence.

Extreme, but true, example of being overly helpful

Here is a worst-case scenario of an auditor who tried to help, but ended up in trouble instead:

Year after year in her audit report, an assistant state auditor complained the state’s pension system was incorrectly calculating pension obligations. The pension system disagreed with the auditor, but the auditor wouldn’t let up. Eventually, a leader with the pension system challenged the auditor, “If you’re so smart, why don’t you calculate the pension obligation?”

The auditor gladly took on the task because she wanted the right number and it felt great to be the expert.

You can probably see where this is going…

Years later, when the smarty pants assistant auditor – who insisted that she was better at math than the pension system actuary – retired, her replacement discovered smarty-pants wasn’t so smart after all. Smarty pants had been wrong for nearly a decade and now the state owed millions of additional dollars to keep the pension funded!

This resulted in a very embarrassing moment for her boss, the State Auditor. He had to stand in front of the legislature to inform them his team had made a mistake and the legislature needed to come up with millions more to fund the pension system.

The legislature didn’t like that news at all! Soon, the top state auditor and his executive team were warned not to let the screen door hit them on their way out of state service. The credibility of the entire audit team was damaged. Convincing the legislature that the auditor’s recommendations were valid was nearly impossible for several years until a new, tough-talking, righteous state auditor promised the legislature he would get the audit team back in line.

The definition of a management participation threat

The GAO lists seven threats to auditor independence in section 3.30 of the 2021 Yellow Book.

The threat posed by the overly helpful, smarty-pants auditor is a management participation threat.

Management participation threats are defined as: 3:30 f. The threat that results from an auditor’s taking on the role of management or otherwise performing management functions on behalf of the audited entity, which will lead an auditor to take a position that is not objective.

Just giving advice can result in a management participation threat

The pension situation was obviously a management participation threat, but sometimes auditors create a management participation threat just by giving advice.

Always pause when the client asks “What do you think I should do?” Consider whether you are making decisions for them when you answer.

Management is responsible for their own internal controls and for making the organization run, not you! If the auditee takes every word you say as the gospel and doesn’t have the sophistication to weigh your advice against other inputs and temper it with their own experience, you’re now helping them manage.

You don’t want a situation where later they say, “But you told me to do that! You can’t complain about me doing that wrong now!”

Bottom line

Just be careful when you are tempted to help or advise.

We’ve been taught our entire lives to help our fellow man, but, in our profession, we could be hurting our clients more than helping them if we get involved. Since our job is to objectively judge whether the subject matter meets a criteria and report the result back to those in charge of governance, we cannot be involved in any aspect of creating or altering the subject matter.

So, in order to be the most helpful in the long-run, auditors have to actively guard our independence, objectivity and credibility.

Want to learn more about this topic?

Please check out these related blogs about helping the auditee for more on this topic:

• For auditors who both create and audit financial statements
• For internal auditors who want to collaborate with their clients

And join us for the Yellow Book Ethics webinar on January 10, 2023.