A Broken Relationship!

Recently, I was told the story of a chief audit executive (CAE) with a problem. Unfortunately, the story is not uncommon, and I am not aware of an easy solution to the CAE's situation.

 
The CAE returned from an overseas trip involving the investigation of a potential fraud reported through the hotline. Even before he had a chance to open his e-mail, the chief executive officer (CEO) called him into his office for a briefing on the results. The CAE of course obeyed and told the CEO that there had indeed been a fraud involving the loss of a few million dollars. The fraud involved some of the local management team, and a breakdown in the financial controls had prevented discovery.
 
After the CAE left, the CEO had an angry conversation with the chief financial officer (CFO), blaming him for the poor controls and the loss. The CAE found out when the CFO called him into his office for a yelling session. The CFO told him he should not have said anything to the CEO without talking to the CFO first. More upsetting, the CFO said he thought the CAE had exaggerated the situation.
 
Although the CAE reports directly to the audit committee and thinks he has their support, he believes that his relationship with the CFO is probably beyond repair. He expects he will have to leave at some point. He knows that even if he gets the support for the investigation results from the audit committee, he still has to work day-to-day with the CFO. As the chair of the audit committee of one of my prior companies told me (yes, I have been in a situation like our friend’s), the CFO has a “bigger business card.” If there is a conflict, the CFO will always win; unless he or she is already in trouble, little will be said or done.
 
Too often, the CAE is the bearer of bad news — news that top executives don’t want to hear. There may be pressure, even if subtle, to downplay the situation. While almost all will resist the pressure, it can be intense.
 
How many of us have struggled about how to talk to the audit committee about pressure on financial and operational management to “make the numbers” without equivalent messaging not to bend the rules?
 
A large number of CAEs have told me, over the years, how they were forced to leave after an incident where they felt their professional ethics were under attack. Sometimes the departure was not for months, but it was inevitable.
 
I don't know of a solution. But I believe that The IIA can offer assistance. It can create a sort of hotline for CAEs (or other auditors) facing a professional or ethical dilemma. The IIA staff should be able to find a group of experienced CAEs who can listen and offer advice.
 
Do you agree? Is there a better solution?

 

Posted on Nov 14, 2008 by melissa

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  1. The Situation with the CFO is called Loss of Face.

    Sometimes it takes a humble apology to clear the air and restore a broken relationship. If you wager and want to keep a relationship on a win-win basis, then you will do what it takes.

    I agree that ethics is very important, however there is nuances called timing, reporting relationhips, candor and control.

    It is the same in dealing with the media. Be careful acting on rumor and rather say that you are investigating and will report back soonest.

    I guess it is in the way we do things.

  1. CAE's are often put in "no win" situations, at least that's my experience.  The circumstances described above appear to be one of them.  Sometimes there's nothing a CAE could do to avoid a no-win.  Having a hotline for CAE's would be helpful but most turn to their own network  to discuss a problem like that. 

    My own no-win situation involved an acquisition of a business my company made.  I attempted to try to audit some of the integration activities after the merger but was told by management that I needed not to interfere with integration activities and "slow down" progress.  To make a long story short, after several mishaps by management, the integration started to go south.  Eventually, when the blame was assessed, internal audit took a hit for not identifying issues with the integration and I lost my job.  Should I not have been a "team player" and claimed that my scope was being restricted or done what I did and backed off to let the integration happen?  I'm not sure the result would have been different under either scenario.

  1. Scott,

    In your case you should have not been the team player. You might have had the same result, or you might have been able to prevent a significant loss. I faced a similar situation with handling an inappropriate sale of corporate assets. The director had developed a process that while it seemed to benefit the company was underhanded and if it had been discovered could have resulted in a loss of insurance. The funny part was that the director had actually done it wrong and was benefitting the insurance company. This led to a loss of face within the company, but I could go home at night knowing I had done the right thing.

    Eventually I left that company because ethically I could not tolerate the shortcuts that management constantly used. However, in that case I knew I had stood up for the right thing.

  1. I agree with Don - always have your facts straight, and discuss any concerns with the auditee ASAP to get their side of the story. However, if you do have the facts straight, and there is nonetheless pressure from on high to look the other way, then it gets very lonely - its just you and your integrity. I always reported the facts, and sacrificed the relationship if necessary, and it cost me several jobs. However if you put the relationship above your integrity just once, even if its just a "white lie" situation, then you will be pressed to do so again and again. If the board have integrity then they will reward your courage, and if they don't appreciate your honesty then you might want to reconsider working for crooks to begin with.

     

  1. I agree with Wayne that once you compromise, you'll be expected to do so again & again.  Better take a stand the first time, and be prepared to move (you may have to, anyways, as William points out).  No win is what it is, and I guess all of us are prepared for this since the day we chose the profession.

    As for a hotline, it may not be workable in all countries (e.g. India) where IIA chapters don't have much cloud.  And here we are dealing with issues of independence of the external auditor (ref. PwC in the Satyam case), less said the better about CAE.

  1.  This thread remains very relevant until this day. Thank you for sharing your thoughts. I've just reached that "inevitable" moment and will soon handling down my resignation letter. That's the way it is. Just grateful that I have stayed alive all through out the ordeal. Life goes on. 

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