The Impact of Sub-Prime Lending on Audit Shops

As we move into 2008, the speculation is that the economy will slip into recession fueled by the decline in the housing market. A closely related issue has been the collapse of the sub-prime mortgage market, increasing foreclosures, and tightening credit. An excellent article in the upcoming February 2008 issue of The Internal Auditor discusses the reaction of internal auditors in the banking/mortgage industries and their roles in identifying risks around declining credit standards, introduction of new products, and credit monitoring. Fortunately, for most of the auditors interviewed for the article, it appears that they either worked for very conservative organizations or were pro-active in bringing these issues to management’s attention before they became problems.

Although the article indicates that internal auditors generally have avoided “the blame game” I wonder how many audit groups have suffered in one way or another as a result of the mortgage industry meltdown. In my view, for every audit department that has an impact on their organization helping them to avoid a potentially disastrous situation like this one, there are two or three others that lack the expertise, the resources, the focus, or the status to help their organizations avoid potentially serious problems.  

Usually, this is not the auditors fault. Many audit departments, despite their best efforts, are denied access to information that they need to be able to effectively and efficiently do their jobs. This isn’t a blatant denial of information on management’s part, it’s a game where the auditors do not have the status within the organization to be part of the inner workings of the management group and they are told only what management wants them to know. This situation forces internal auditors into a reactive mode rather than being able to identify and head off problems before they occur. Also, Sarbanes-Oxley has caused some groups to lose their focus since management sees the value of internal audit as control testers rather than risk managers and risk consultants.

How many of you have experienced this and what have you done to overcome lack of access to information or redirection of your focus to other less significant areas?  How do you position yourself to avoid the “blame game” under these circumstances?

Scott White
FSA Board Chairman