Among the many profound changes wrought by the Sarbanes-Oxley Act, one that has yet to win due recognition is the elevated status of internal auditors.
Historically, internal audit was hardly considered a launch pad for executive careers in finance. Rather, it was often a stagnant pool in which financial types got stuck. In recent years, though, after the spate of corporate scandals that led to Sarbox and its heightened financial-reporting mandates, internal audit has found itself in the corporate spotlight.
At many companies, in fact, the post is now a valuable rung on the leadership ladder — offering its practitioners thorough immersion in all aspects of a business, and frequent exposure to the board. Chief auditors are now considered senior finance executives, rather than being a half-step below that status.
In fact, the function is so important that a fair number of companies are bringing in seasoned executives from other areas (or companies) to run internal audit, rather than promoting lower-level people from the function. For those who move into the lead audit role, the experience and exposure gained may well help shape the remainder of their careers.
For Michael Fung, CFO of Wal-Mart’s North American stores division, a four-year seeming sidestep from head of global procurement into internal audit in 2003 proved just what he needed to graduate to a chief finance role. “You have a chance to really learn and help improve the business,” he said. “You build relationships with the board and the major business leaders. You can move internal audit to more value-added processes. And it builds your ability to manage people and work with cross-functional teams.”
Ken Hannah, who heads finance for wafer-maker MEMC, started his career in internal audit at McDonnell Douglas, and later worked for a series of companies — Boeing, General Electric, Home Depot — that were ahead of the curve in using internal audit to develop future leaders.
Hannah said his corporate audit experience “allowed me to see up-close a number of different businesses and processes that led to the development and implementation of best practices in various jobs I’ve had. The exposure to the many different ways businesses do things was enlightening.”
Ralph Nicoletti was at Kraft Foods in assorted finance roles for 26 years before taking on the CAE role. He did that for a year, from early 2006 to early 2007, before hitting pay dirt with an offer from Alberto-Culver to be CFO for the first time. His year in audit was especially significant because Kraft was setting up a new global audit department in conjunction with its spinoff from Altria Group.
“It was a great opportunity, because it brought a lot of global exposure to our operations in a fast, efficient way — in audit you see a lot quickly,” he said. “Virtually all of my experience had been on the North American side of the business.” He added, “If you want to move up to CFO, getting more rounded corporate governance exposure and regular interaction with the board is invaluable.”
In a recent webcast presented by the editorial team of CFO.com, executive recruiter Chuck Eldridge of Korn/Ferry International outlined the essential experiences companies are looking for when hiring chief audit executives (CAEs):
• Extreme leadership skills.
• The ability to manage, mentor, develop, and retain top talent. “Companies want their internal audit executive to be a talent magnet for the organization,” Eldridge said. After thorough training in the audit department, individuals can rotate out to other areas.
• A history of best-practices innovation.
• Experience in managing and operating in complex, global environments. Two or three years of working and living overseas is very important.
• A variety of industry experiences.
• Success in overcoming difficult situations and challenges.
• Finance experiences outside of internal audit.
Korn/Ferry’s ongoing analysis of senior executive positions at Fortune 1000 companies reveals both the increased status of the audit function and the new predilection for the rotation approach.
In a study done shortly before the passage of Sarbanes-Oxley, only 28 percent of the companies identified their most senior audit position as “chief auditor” or “VP, audit.” In a recent study, that number had vaulted to 64 percent.
The percentage of companies that described their typical internal-audit career path as “career audit” declined from 51 percent pre-Sarbox to 27 percent. The preference for a “structured rotation” approach jumped from 7 percent to 22 percent, and for “informal rotation” from 42 percent to 51 percent.
Eldridge noted that with a structured rotation, such as practiced by General Electric, internal auditors are moved into specific pre-selected positions, whereas with an informal rotation it is a given that auditors will rotate at some point, though when and where are left open.
At the Fortune 1000 companies, at least 486 audit executives have moved into other roles within the past three years, according to Paula Park, another Korn/Ferry recruiter who heads the firm’s internal audit and compliance practice. Their new titles, she said, span the gamut: chief accounting officer, chief compliance officer, chief risk officer, controller, treasurer, VP finance, divisional CFO, and CFO.
A three-year stint as CAE before moving on may be optimal, Park observed. “It takes the first year to understand the business and get credible, the second year to become really effective, and the third year to work on a transition plan and look for your successor,” she said.
For those who have been in internal audit for some time and see moving to another company as the best course for landing a CAE job, Park advised negotiating up front that they will be in the role for a maximum of three years before transferring to another area of the organization.
Today, staying in audit too long can have a negative career effect, according to Eldridge. “For that 10-year person in internal audit, goal No. 1 should be to get out and into the finance organization — they obviously know the company very well and have relationships.”
Not everyone is focused on career climbing, though, and according to Nicoletti, that is for the best. “You have to have some people in the department who want their career to be in audit,” he said. “It’s beneficial to have that balance with people on the staff who have been in other areas and are cycling through.”
Success in a CAE role requires two sets of skills that have little to do with one another: technical accounting skills and leadership skills. But all things being equal, which is more important?
“I would say we’re in a slight move away from the demand for [technical] credentials,” said Eldridge. Some employers are taking the position that a proven leader who is not a certified public accountant is preferable to the opposite.
Nicholetti of Alberto-Culver agreed. A chief auditor is best served by having solid business management and risk management experience, he said. “It’s better to have a leadership role on the operating side before going into audit. If you came up only through the audit function you could do a good job, but you would be more effective if you had been through a more broad base of experiences.”
Wal-Mart’s Fung took the opposite side of the issue. “You have to have the auditing and technical skills,” he said, “so you can satisfy the risk issues for the audit committee and your outside auditors. Hopefully you can pick up the leadership skills.”
But Eldridge counseled that anyone who has focused purely on the technical side should “do anything and everything possible” to get experience running projects and committees, if they hope to be promoted to CAE or any other senior finance position.
The Bottom Line
Along with the inflated status of audit chiefs has come higher pay, though variability in the level of compensation is extreme — Eldridge called it a “scatter-gram.”
“Pre-Sarbanes-Oxley, compensation for internal audit lagged finance pretty significantly,” he said. “Now many of our clients are asking: how do we retain our people? I tell them very simply to catch up on compensation. There is still a lot of catching up to be done.”
The best compensation opportunities are likely to be at companies where the internal audit, risk, and compliance functions have been placed under an umbrella, which Eldridge characterized as a recent trend.
That change reflects the increasingly popular view of the diverse roles these functions can play, a view MEMC’s Hannah has had for years. They are especially critical if they can “move from the basic internal control and compliance work to more value-added activities like operational reviews, process-effectiveness reviews, special projects, and development of future leaders,” he said.
If internal auditors spend all their time just auditing to satisfy Sarbanes-Oxley requirements, Fung said, “it will hurt the auditing profession and the development of people. I think my success, both in internal auditing and my career generally, is trying to really understand what drives the value for the business, whether that’s in sales, in margins, our competitive edge with customers, or how we compete in our markets. So I prefer the operational auditing approach. Ultimately, you have to be a business person.”