There’s a significant difference between diplomacy and lying; not that diplomacy is necessarily a good thing but certainly it can’t be equated with lying, something managements of many entities never understand and always glorify their plain lying as diplomacy.
Diplomacy is tactfulness, lying is deception. It’s imperative for auditors to be mindful of the differences between the two and more so early on in their interactions with their managements. Its important so that the auditors could respond or even strategize accordingly.
Though with a lying management there’s hardly any strategizing involved, just being aware of the perspective in which audit reports would be gauged and responded to. We’ll come back to the auditors’ approach in a while after having a good look at what lying achieves as against diplomacy and why managements tend to lie and then sugar coat their lying as diplomacy.
| Diplomacy | Lying |
| Diplomacy intends to achieve a real outcome | Lying might achieve short term benefits at the cost of credibility and reputation |
| Diplomacy is a well thought out plan to deal with a situation | Lying usually becomes habitual such that it only leads to situations becoming graver |
| Diplomacy is used to resolve a problem | Lying results in more and bigger problems since the lying approach refuses to allow acknowledgement of problems |
| Diplomacy is a strategic approach | Lying is not an approach since it is a trait |
| Diplomacy promotes a culture of consideration and harmony | Lying decays a culture to the core through dishonesty and deceit |
So why is it that managements resort to lying? The most invaluable reasons are:
- The rotten control environment: people at the top are those who prefer lying or it’s their personality trait.
- Perceived benefits: people at the top believe that the perceived benefits of lying are greater than being truthful.
- Cowards: people at the top cannot face the truth or problems and have a habit of sweeping issues under the carpet.
- Incompetence: people at the top cannot provide solutions to the problems being faced by the entity.
- Reputation: people at the top believe that speaking the truth means acknowledging an issue with their stewardship.
- Dominance: people at the top believe that their narrative only will be the overall narrative, and no one will dare challenge it.
One would wonder, why then a lying management would need to mislabel its lying prowess as diplomacy? It’s simple. It’s because no one want’s to be called a liar or be told that they have lied; instead, it feels good to be known as being diplomatic!
A lying management believes that it has a reputation to keep so taking refuge in lying allows it to do that. Whilst any short-term shocks to its reputation are indeed averted, an incoming bigger crisis in future would mean that the management would lose its ability to earn support from those charged with governance. Actions would then not be planned, simply executed and management won’t be in control!
Now let’s look at some manifestations of this lying managements resort to and internal auditors’ response thereon:
| How | Happens When | IA Response |
| Fraudulent Financial Reporting | Misstating certain numbers like revenue, expenditure could lead to an increased performance bonus | Substantive audit approach to directly verify assertions in all cases and particularly when the control environment might allow or provide opportunities for the same. Record and report |
| Creative Accounting | A wider interpretation of Principles based accounting standards could help yield a good Earnings Per Share | Scanning for unusual items in financial statements presentation and disclosure and being knowledgeable about the reporting framework requirements. Keep a record and report when asked |
| Downplaying audit findings risk ratings | Management’s bonus and reputation, both are at stake | Objective mapping of the ratings with the Board approved criteria and keeping the criteria up-to-date and relevant |
| Downplaying audit findings | Management must inform the Board that auditors haven’t added any value since management is already aware of the issues reported | Board approved Audit Planning, comprehensive reporting of findings, improved and independent coordination with the Board |
| Taking charge of Board Meetings | Management has an opportunity to exploit Board’s lack of deep understanding of the affairs of the Company | Support board’s governance responsibilities through elaborate reporting |
| Managing Whistle Blowing mechanisms | Management must hide anything and everything that has a nuisance value | Seek Board’s approval over IA’s review of whistle blowing mechanisms |
| Hiding Code of Ethics violations | Control Environment is impaired whereby emphasis on ethics is only rhetorical and any issues pertaining to it would reflect poorly on management | Create a record of all material cases and report to those charged with governance whenever possible |
Finally, it’s imperative to understand that the health of control environment holds the key in deciding how internal audit should act in entities controlled by lying managements.
The auditors can’t be careful enough in a control environment that promotes lying; if and only if, they decide to continue providing services to such entities! All value addition aside, the least internal audit could offer in such environments would be exposing management’s lying dubbed as diplomacy!