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​​​​​​Avoiding the Void​

Having a succession pl​an can prepare internal audit for the potential departure of its CAE.​​

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Strong leaders can help build strong companies, but when they unexpectedly walk away from the table, even the most solid organization can experience anxiety. In recent years American Airlines, Apple, Google, Hewlett Packard, IBM, Reuters, and Yahoo all saw notable departures of their top executives. Most recently, in late August, Microsoft CEO Steve Ballmer made a sudden announcement that he would be retiring within the next 12 months.

Executive succession planning is considered an important part of risk mitigation, but not all companies plan as they should. While large, multinational corporations may plan for executive departures, a relatively low percentage of small companies have a plan in place. And although they may have succession plans for CEOs or chief financial officers (CFOs), replacing a chief audit executive (CAE) isn’t always a priority. A CAE may not steer the company, but he or she still leads a critical component of providing a third level of control in an organization.

Within a relatively short period, a new CAE needs to define the role of audit in the organization, master the business, and lead the audit function. Experts say continuous employee development, transparency, strong communication and, crucially, audit committee leadership can go a long way toward ensuring a smooth transition.

Companies Unprepared 

In a recent survey by global executive search firm InterSearch Worldwide, only 45 percent of executives say their company has a processor plan for conducting CEO succession planning. The survey found the larger the company, the more likely it was to have a plan. Of companies with more than US $500 million in revenues, 73 percent had a CEO succession plan, but for companies with revenues under US $50 million, only 17 percent had a plan. Moreover, executive turnover rates are near record highs. According to a study of 669 large companies by search firm Crist|Kolder Associates, the CEO turnover rate is almost 13 percent.

The situation may not be better when it comes to replacing CAEs; there hasn’t been research on CAE turnover and succession planning. For many organizations, there simply is no plan and the unexpected rapid departure of an audit executive can cause big problems. Robert Hirth, global managing director of internal audit services for Protiviti Inc., says succession plans are critical for all at the executive level, including the CAE. “You need to ask yourself how you’ll keep going if the CAE quickly departs for some reason of their own or gets involuntarily terminated,” he explains. “There needs to be a planned transition.”

Succession plans can range from detailed documents to simple verbal agreements, but they all address the issue of how to replace a CAE and how to make the transition. Marianne Evashenk, president of Sacramento, Calif.-based management consulting firm Sjoberg Evashenk Consulting Inc., says succession planning plays a big part in the company’s risk management exercises and that firms can face serious consequences if they fail to plan. She says large organizations should have a pool of people in place who are cross-trained in multiple fields to take over roles and responsibilities when needed.

Because every departure is different, succession plans need to be tailored to the organization and cover the basics of a transition. They should include a designated replacement or a means of finding one as well as a time frame and manner in which the executive is to be replaced. Moreover, the best replacement may come from outside the internal audit function.

Evashenk advises executives to leave “trails” and documentation on the actions they perform and the things they do while on the job. Even in the case of an unexpected departure, a paper trail can go a long way toward helping a new person assume the position. She says many executives who have been in their positions for a long time have “extensive institutional knowledge” that can only come with years of experience on the job. “It helps to have executives be more methodical about documenting and leaving a trail, so that we know the procedures and why they did things,” she points out.

Smooth Transitions

In the optimal situation, there’s a face-to-face handoff of the position with an overlap between the outgoing and incoming CAEs. The current executive gives notice months in advance, a new candidate is selected carefully, and the two can work side-by-side for a few weeks before the transition.

5 Tips for CAE Succession Planning

  1. Have a written plan for how to respond in the event of the CAE’s departure.
  2. Identify two or more internal candidates who could fill the role on an interim basis.
  3. Identify external sources of candidates such as recruiting or search firms.
  4. Consider a time line for an automatic interim CAE approach.
  5. Benchmark your plan against peer and best-in-class organizations.

Isabel Berrigan served as the interim director of internal audit for East Jefferson General Hospital in Metairie, La., for 18 months. She made a smooth transition into the top audit position at the hospital because she already had been sharing some of the functions of the director by the time her predecessor announced he was leaving. Berrigan says they involved the entire five-person audit team in the meetings and process as they prepared for her to assume the position of interim director. She credits the success to the openness and collaboration of the department. “The previous director was very good about everything he did and pretty much shared everything with the audit department,” Berrigan says.

Last February, Eric Palmer stepped into Berrigan’s role as the hospital’s permanent internal audit director. He says one of the first steps in assuming the role was to gain acceptance. Changes in leadership can result in turnover in any organization, so it was important to ease into the position. A leader who comes in barking orders and making drastic changes carries a high risk of losing staff.

Palmer stepped in to work with Berrigan for a while before she left the organization and got to know the existing staff. He took time to carefully learn the processes, the projects that were in place, and the interpersonal working relationships in the office. He also relied on collaboration and feedback from the staff on ideas about new processes and projects. “It was helpful to have some face-to-face time, to get a sense for the office,” Palmer says. “I relied on the staff to be able to help me with things like that.”

Randy Tripp, CAE at TD Ameritrade in Omaha, Neb., had been a CAE for another firm for seven years when an opportunity became available to manage an international business unit. He says the handoff was made easier because he had been grooming his successor for several years by giving that person exposure to his own job responsibilities as well as contact with the audit committee. Tripp even brought him to quarterly audit committee meetings and involved him in the presentations. By the time the opportunity presented itself, Tripp’s successor already was familiar with every aspect of the CAE’s job. “It was a smooth transition. He just slotted in, and they continued on without any hiccups,” Tripp says. “It’s very helpful when you can have a clear No. 2 designated well beforehand.”

Hirth says the replacement time frame can vary widely depending on the organization. Typically, the more complicated the business model and the stronger the role of audit, the more pressing it will be to find a replacement. He explains that most organizations may be able to find an interim with transferable skills that can guide the role for a couple of months until a permanent successor is found. “Not to say that internal audit isn’t important, but it doesn’t always need to be done quickly,” Hirth says. “You may need to find a new CEO in hours or days, but with a CAE, it could be weeks or even longer.”

Employee Development

Thomas Meyer, director of audit for the Chitimacha Tribe of Louisiana in Charenton, was a previous CAE at East Jefferson General Hospital. He says many boards or managers fail to consider succession planning because they are unwilling to face the fact of position mortality or may be fearful for their own jobs. In many instances, the audit executive may be reluctant to train a backup successor for fear that he or she may someday be pushed out and replaced. CAEs might be motivated to train a subordinate for assistance but not to the point where the individual’s skills, credentials, or experience could possibly threaten and exceed their own capabilities. “A lot of people are terrified that if they have a succession plan and designate a replacement, that person is going to replace them,” says Meyer, who now heads a single-person audit department. “So they prefer not to even address it or think about it.”

At East Jefferson General Hospital, Palmer takes a strong interest in developing the skills of his auditors by giving them projects that stretch beyond the scope of their normal duties. He also encourages them to work toward more certifications such as the Certified Internal Auditor or Certified Public Accountant and increases transparency by keeping a shared drive where everyone from Palmer himself to the newest auditor can access all information. Palmer says stronger individual skills and growth create a better audit department.

“I would like to be in a position where it is difficult to keep people because they keep getting hired as CAEs, themselves,” he says. “I want to develop them as much as I can and give them insight and responsibility beyond their current jobs.” He notes that transparency is critical not just because it can help cultivate a successor, but also because it is a primary value of audit.

Such transparency and communication during transition periods can ease anxiety among the staff, Tripp observes. Auditors may worry about being laid off, fired, or having duties outside of their comfort zones. When an auditor settles in with a department and gets comfortable, there can be apprehension when a new leader steps in. He says it’s important to communicate the situation to staff members and to give regular updates on the change in leadership. Moreover, appropriate succession planning and cultivating the right people means there won’t be many surprises when a successor is picked from the audit department. “If you have been doing performance evaluations and coaching correctly, they should have realistic expectations,” he asserts. “So no one will have their sights set on the job and be disappointed.”

Leadership Skills

Kurt Sjoberg, partner at Sjoberg Evashenk Consulting, says a comprehensive succession strategy includes making it part of an overall drive toward career development at all levels of the department. It requires an ongoing commitment of high-level management to develop leadership skills and define the skills and values those leaders need. He says organizations also should create assessment centers, tests, interviews, and performance appraisals to identify those with leadership qualities.

At TD Ameritrade, Tripp says succession planning also starts at the lowest levels of the audit staff through continuous education, training, and development. He notes it’s critical for auditors to serve rotations in other departments and for other people in the organization to do a rotation in audit. It allows auditors to earn a greater appreciation for other departments and make decisions that are best for the business, not just the audit department. This can help build skills and experience required of a CAE and perhaps create a greater pool of potential candidates. He says continuous evaluation and coaching should be used to discover potential leaders and help expand their skills. “They learn how to better approach their audit work and how to better work with management of the organization,” Tripp observes.

In the absence of a clear-cut choice, Tripp recommends that the audit committee look outward across the organization for a temporary replacement, starting in accounting and finance. A controller, assistant controller, or CFO may have closely related skills and experience to assume the position in the interim.

Essential Components

In small organizations with one-person audit departments, there simply is not a pool of candidates from which to choose. At the Chitimacha Tribe, Meyer works alone and has no one to assume his role should he depart unexpectedly. Further compounding the challenge is that the tribe is located 30 miles from a major city, meaning if the tribe found a replacement, it might be difficult to entice that person.

Meyer’s current succession plan is simply to automate as much as he can, organize his files, and document his activities. Eventually, he would like to add staff, but should he depart in the meantime, the organization would have to rely on an outside audit firm to step in and cover his job. “In previous positions, I made sure everyone knew who would step in if I had a traffic accident or heart attack,” Meyer says. “It didn’t mean they would be my full-time replacement, but we knew who the interim person would be.”

Meyer learned the importance of succession planning during his time in the U.S. Navy and says it’s critical to have a clear chain of command. In every branch of the Armed Forces, there are strong plans for succession with an organizational hierarchy and chart that stretches from top to bottom throughout the organization. If a soldier in any position were to be injured, perish in battle, or disappear from the ranks, everyone knows exactly who will step into that role. And in most cases, that replacement already will have a moderate level of skills and experience to assume that position.

In other positions where Meyer had built an audit department to two or three staff members, he relied on his military experience to implement a strong, visible chain of command. Some audit executives may quietly designate a successor behind closed doors without even informing the person, but Meyer says it’s important to publicly designate that individual so he or she can receive the appropriate training. If a CAE leaves abruptly and the candidate is immediately thrown in as interim successor without any preparation or knowledge, it could backfire. Some candidates may not even want the job.

In previous positions, Meyer says he not only named but often tested candidates when he went on vacation, allowing them to fully immerse themselves in his job while he was gone. He also spelled out the chain of command and succession policy in a document that outlined authorities and responsibilities. “I usually make it like an organizational chart that says who is in charge and under what circumstances,” he says. “It doesn’t have to be anything extensive, just something that everyone understands.”

Audit Committee Support

Palmer says many organizations have subpar CAE succession plans because they don’t have the audit committee’s support. Instead, the audit committee should play an active role by helping to vet potential CAE candidates and ensure their philosophies are in line with the committee’s mission.

In his current role, Palmer encourages his staff and the audit committee to interact so the board can have a closer view into the department’s front-line personnel. “I try to make sure my staff has visibility with them — to get to know them and ask questions,” he says.

In the time of a transition, Palmer says it should be managed jointly by the existing CAE and the audit committee. While the CAE can help the successor prepare for the day-to-day duties of the role, the audit committee should communicate its expectations. “The committee ultimately is responsible for finding the right CAE to give it feedback on risk and controls,” he observes. “The committee needs to make sure succession planning is in place.”



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