June 2012
 
Fly-by-Night CAE

 

A chief auditor fails to disclose that a new budget-oriented travel policy applies to everyone in the department but himself.

 

Carol is an audit manager for XYZ Pharma, a global pharmaceutical company engaged in the discovery, development, manufacture, and sale of prescription medicines and consumer care products. The firm’s corporate headquarters is located in the United States, with an international headquarters in Europe — it has more than 4,000 employees, offices in 38 countries, and two manufacturing facilities. Last year total revenue exceeded US $4 billion, and this year’s is expected to approach US $5 billion.

In her role Carol oversees project teams performing internal audits of foreign affiliate office operations. She and her staff travel frequently, with audit fieldwork lasting up to three consecutive weeks at each international location. Carol and her team make about six trips per year to the foreign affiliates, along with two visits to the international headquarters.

Company policy allows for business class air travel on international trips, though a few months ago Carol’s boss Jim, the chief audit executive, announced that he would no longer be approving such travel. While there was no formal change in company policy, flying coach class to international audit locations would be required as part of a cost-saving initiative in the chief financial officer’s (CFOs’) organization. Carol and other audit team members were upset by the decision but they understood the rationale and realized the need to support it — a subsequent incident, though, has made that support more difficult to maintain.

On a recent flight to the company’s international headquarters, Carol noticed several XYZ employees from other departments disembarking from the plane’s business class section. Likewise, on her return trip she observed company employees boarding the plane in the business class line. It seemed unfair that the internal audit team had to fly in coach while other employees were allowed to fly business class. Upon her return to the office, Carol immediately approached Jim to discuss the situation. Jim listened and agreed with her — he promised to raise the issue with the CFO at their next meeting.

About a week later Jim called Carol into his office and told her about his discussion with the CFO. He explained that the other departments had received special approval to travel in business class and that internal audit would have to continue flying in coach. Carol returned to her office disappointed and disillusioned. 

Not long thereafter, Ben, a member of Carol’s audit team, rushed into her office and closed the door behind him. Acting on a tip from a friend in accounting, Ben obtained a listing of all company air travel booked during the prior two months. Carol was not surprised to see that internal audit was the only department in the company flying in coach class. What did surprise her, however, was that Jim had flown in business class on his three recent trips. Carol was disappointed and upset at what appeared to be Jim’s hypocrisy and double standard. Had he been less than forthright with his own department? What would motivate him to act in this manner? How should Carol proceed?

Share your comments below.

 


Failed Critical test for a CAE
The CAE has failed a simple but very critical test required for Internal Auditors - Integrity. He is not fit to be a CAE.
Posted By: Emmanuel Ogutu
2012-07-29 2:16 PM
Request more info and get over it
Sounds like more clarification should be requested by Carol, but how? In my experience, I find it best to casually mention it somehow, like it was just in passing. Then listen to the answer. She will need to guide the ship. Tell other associates this behavior of reasearching the CAE is inappropriate. As other posts have mentioned, life is not fair my friends! At least the CAE is not flying business class for a personal trip to Maui. Then we'd have to really talk!
Posted By: Ann
2012-07-25 4:57 PM
Lead By Example
When the new travel restriction for IA staff was announced by the CAE, the CAE should also have included himself in the restrictions or explained to the staff at the time why he would be exempted from the restrictions (frequent flyer upgrade at no cost, health restrictions, etc.) The exemption examples he gave should also be available to staff. Sure, the CAE could justify what he did. However, I think morale of staff is a very vital function in internal audit operations...even more important than executive privilege. Keys here: Lead by example and be honest and open with your staff.
Posted By: Doug Kopp
2012-06-14 2:30 PM
Fly-by-Night CAE
I won’t second guess or question his motivation. He does need to explain himself and that should be done immediately. I trust his staff can professionally share what they know and that should motivate his honestly and transparency. He has a serious credibility issue that if he cares about he should start to improve. For some of his staff it may be too late and an exodus from his group would be expected. Walking is a vote of no confidence that should be noted by other management.
Posted By: Mark Trojanowski
2012-06-13 10:31 AM
Crossing the Line
In what world are most of you living in??? The CAE reserves the right to direct his/her team in the class of travel as long as he/she does not discriminate amongst the team (i.e. Letting the guys fly business and the gals fly coach, or letting his only his buddies fly business). The most concerning part in the scenario is that a member of the IA team took it upon himself to obtain listings of travel to satisfy a hunch. This is absolutely wrong. Members of the audit team do not go rogue and perform their own audits. I would terminate him immediately. If they dont like the travel arrangements, then it is employment at will. Go get another job.
Posted By: Hal L.
2012-06-12 3:17 PM
Fly-by-Night CAE
Let's stop justifying this type of behavior by top management. Companies have policies for everyone - that's how they keep out of legal trouble. Carol is very lucky that she has been shown the moral character of her boss (remember "Tone at the Top", folks). Violating company policy and lying to your employees about it to try to justify it is just plain wrong. Not acceptable any way you cut it.
Posted By: Maria
2012-06-08 5:21 PM
Fly-by-Night CAE
Comments of an experienced Internal Auditor: 1. IA will never be independent as long as it reports administratively to management, and IA's performance review and compensation is also determined by management (CFO). 2. Take it or leave it, equality is not required and does not exist in the real world; only in priciples (classroom materials). 3. Play along and you might get promoted to CAE. As the CEO once reminded me, there is no difference in opinion as I am the boss; and I will decide what to do. A sad but true state of IA for many years and will likely stay the same for many more years.
Posted By: William T
2012-06-07 7:16 PM
Seek first to understand
Ask Jim why he flew business class, but also provide an explanation for why she obtained a listing of all company air travel booked during the prior two months. This may be uncomfortable.
Posted By: Jason Green
2012-06-07 6:50 PM
Fly By Night CAE
This is a unique situation. The CAE flying business class could be legitimate, but you have to look at the facts. One way to find out is to include his expense reports in an audit sample? Look it doesn't seem fair and there appears to be a double standard. But isn't that how Internal Audit is treated anyway? From my audit experience, no one likes Internal Audit... they don't add revenue and their primary cost is salaries/wages. There's too much politics and bureaucracy. This is an example. As for the tip that Ben received, he did go to his manager. You can't tell from the article if he was curiously looking into it or not. Getting an understanding vs. abusing internal audit authority are two different things, in my opinion.
Posted By: Bill
2012-06-07 2:11 PM
Fly-by-night CAE
Although an unpleasant reality for Carol, it is nonetheless typical that Executives fly business class and staff go to the back of the bus. Changing employers is an option but the issue could easily reoccur elsewhere. If she is otherwise content with her situation, she (and the rest of the staff) should cool down and let it go. If this type of issue is enough to cause major morale issues, I would question the level of maturity in the team. I recently was turned down on a request to fly business class for a cross country trip by my boss who has the authority to approve it and who flies business class himself. Life goes on boys and girls.
Posted By: Roy
2012-06-07 1:54 PM
political beliefs
If you believe that executives are 'special' people, divinely worthy of perks and entitlements, then you'll look for 'more facts' before you pass judgement. And you'll blame the lowly auditor for looking at the booked flights (never mind that a good auditor should be curious by nature). If you believe that people are generally equally worthy and being an executive simply means that you have a different job, then the CAE is a liar and a cowardly one to boot. You are also likely to believe that in todays corporate world, this is the kind of 'skill' required to enter the executive ranks.
Posted By: Fisnik Preniqi
2012-06-07 1:51 PM
Fly By Night CAE
This is a unique situation. The CAE flying business class could be legitimate, but you have to look at the facts. One way to find out is to include his expense reports in an audit sample? Look it doesn't seem fair and there appears to be a double standard. But isn't that how Internal Audit is treated anyway? From my audit experience, no one likes Internal Audit... they don't add revenue and their primary cost is salaries/wages. There's too much politics and bureaucracy. This is an example. As for the tip that Ben received, he did go to his manager. You can't tell from the article if he was curiously looking into it or not. Getting an understanding vs. abusing internal audit authority are two different things, in my opinion.
Posted By: Bill
2012-06-07 1:49 PM
Fly by Night-Policy
"While there was no formal change in company policy, ...in the chief financial officer’s (CFOs’) organization." So a Departmental Directive should be in writing. This is a policy for that department and to avoid issues with auditing the controls for travel related issues needs to be documented. As well as any 'exceptions' allowed such as the CAE. This is given as a cost savings matter for the CFO area, then the question becomes is this poor budgeting leading to a need to control costs? Or are there other matters at play causing the need to shift dollars to cover higher costs and why? This is a terrible morale issue but like a poor step child IA is often seen as a nuisance than an asset. A discussion needs to be had with the CFO and CAE regarding this poor perception of IA staff and addressed up to the CEO if no satisfactory solution is found.
Posted By: Mike Donley
2012-06-07 12:45 PM
Crucial conversation
The first step seems painfully obvious: Carol should have a conversation with her CAE ans ask whether the same standard applies to all employees in the department, including its leader. If he answers truthfully, she could suggest that the policy could be amended to reflect that; if he does not it might be time to find another leader to work for.
Posted By: Fabrice Christen
2012-06-07 12:40 PM
Fly-by-Night CAE
There are several questions to be posed here: Does the CAE report to the CFO or the board? If CFO, then the cost cutting initiative is justifed and all other units outside of the CFO would most likely not be affected. This leads to another question, how can internal audit be truly independant if the CFO has the reins. That is another story altogether. If the CAE does not report to the CFO and reports to the Board, is there a board requirement that the CAE reduce his travel expense line item in the budget? If so, then he needs to communicate this effectively to his staff through a policy amendment. Understandably, staff should also recognize that he is an executive and can and most likely will use business class as a perk. This is his right as he is in control of the budget. But this goes back completely to the organizational policy, international travel is allowed to be in business class. All exceptions to policy must be noted within said policy, or they are not exceptions. These are the rules that we audit by and therefore the rules that we should uphold. Unless an official policy amendment for the Audit department was produced and distributed to the employees, I would continue to follow the organizational policy of international travel is in business class. The company would have a hard time letting me go for failure to follow policy as I was following it to the letter. Carol and her department have some interesting hurdles ahead, but I also question getting the accounting information. Was it directly related to an audit of the intenational/foreign offices? Then again, does the charter allow for any information, anytime, anywhere, any reason? All questions that are not specifically stated in the article. It is a good thought provoking article, but there are too many questions to pose a solution. Only many scenarios with multiple outcomes.
Posted By: Mario Martinez
2012-06-07 11:09 AM
Fly-by-Night CAE
Before recommending that anyone quit or ignore the problem, I'd want to have more information. This story doesn't tell me whether other departments flying business class were headed by the CFO. It's not uncommon for a CFO and a Chief Marketing Executive, for example, to have different ideas about appropriate spending. Given that one discussion with the CAE already occurred, if it's uncomfortable to have a skip-level conversation with the CFO, it's time to use the ethics hotline. If this CAE is not honest and/or does not lead by example, the company may want to address that. If, on the other hand, ethics/leading by example aren't valued at this company, or the CFO is singling-out IA (indicating they are not valued), then the audit staff may want to consider other employment options.
Posted By: Amy
2012-06-07 10:58 AM
Fly-by-Night CAE
While I agree with a lot of what is being said, my biggest concern is the lack of credibility that this department is showing. 1. A CAE has every right to manage his budget the way he/she sees fit and if he feels that flying coach is more reasonable given the amount of flying they do, then that is his right. However, the fact that he himself is not abiding by his own rules shows a complete lack of integrity on his part. One could therefore assume that this CAE is technically in violation of the Code of Ethics, Section 1.4. 2. Ben I believe misused his authority as an internal auditor. If the department's charter is written that they have complete access to records, Ben "acting on a tip" from someone went and accessed records without discussing the situation with individuals first, is again, in my opinion a violation of the Code of Ethics, sections 1 and 4. 3. Carol herself my not have violated any portions of the Code of Ethics; however, the fact that she continues to push the issue shows a complete lack of maturity on her part. What should she do? She could resign, she could fight this, she could just continue to work as if she didn't know what was going on, since technically, the CAE is not violating any company regulations or laws. However, the bigger issue is that this entire department, based on the facts of this one situation, may be a detriment to the company and is not providing value added services. They are worrying more about the fact that they are being treated unfairly than remembering that they are the internal audit department and should be there to provide a service to the organization.
Posted By: Kim Hock
2012-06-07 10:46 AM
Budgeting
A meeting should be held before it affects staff morale, though it may be too late. If it’s a new policy that all staff are to travel coach, it should be included in the risk assessment and possibly audited for compliance. But, it appears the CAE may not have communicated his real reasons for cutting back on air travel expenses, possibly related to having to budget travel expenses in order to maintain their ability to audit and conduct 6 three week travel trips per year to international countries for Carol and her staff. It’s part of budgeting/controlling expenses. I do agree with Cochrane’s concerns, did Ben misuse his authority in obtaining and reviewing air travel expense reports to simply detect a perk that is not being extended to IA staff?
Posted By: Eleazar Garcia
2012-06-07 9:28 AM
Compliance & Ethics Line
This might be a question the audit manager could raise with their ethics line anonymously. While not exposing herself, she would expose the situation which might receive some review.
Posted By: Joe
2012-06-07 9:07 AM
Just Quit
Just find another job ASAP! The bottom line is: you boss is a liar. Why would you want to continue working for someone like that?
Posted By: Roberto
2012-06-07 8:47 AM


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