VideoAmong 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."
Experience Required
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.
Moving Around
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.
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