Final answer:
An internal auditor who finds senior management participating in illegal activities should disclose the information to the board of directors, ensuring an unbiased and proper governance response to the misconduct, aligning with the auditor's ethical obligations.
Step-by-step explanation:
If an internal auditor has uncovered illegal acts committed by a member of senior management, the most appropriate course of action is to disclose the information in a separate communication and distribute it to the board of directors. The board of directors is the primary governing body elected by shareholders responsible for corporate governance and oversight. Given that senior management is involved in the illegal acts, reporting orally to the senior manager in question or to all of senior management might not be effective and could potentially be complicit in a cover-up. Additionally, without fully evaluating the legal implications and context, reporting immediately to the appropriate government authorities could be premature or in some cases legally incorrect, as certain protocols within the organization might dictate specific internal reporting mechanisms before escalating the matter externally.
Recognizing that bureaucracies tend to protect their reputations and can be resistant to criticism, the board serves as a buffer that ensures shareholders and other stakeholders are represented in addressing and rectifying such misconduct. A parallel can be drawn from the mishaps in corporate governance, such as the case of Lehman Brothers, where failure in corporate governance led to misinformation being provided to investors. Thus, addressing the matter directly with those tasked with oversight, the board of directors, aligns with auditing standards, corporate governance practices, and the internal auditor's ethical obligations.