A recent blog I read raised serious questions about the health of a well-known online enterprise. The thrust of the article was that the enterprise had seen significant turnover in its internal audit function twice in little more than two years. The auditor cited speculation that the most recent departure of key internal audit personnel was an ominous sign and that the enterprise was headed for major trouble.
While I’m not one to encourage speculation, especially about something as significant as the overall health of a company, I’ve concluded that sudden or unexplainable turbulence in an internal audit function can serve as the “canary in the coal mine.”
The analogy of the canary in the coal mine may be getting dated so here’s a short history lesson. In centuries past, coal miners would take caged birds (often canaries) into the mine shafts. If dangerous gases, such as carbon monoxide, collected in the tunnels, the birds would be overcome by the gases first, giving the miners ample warning to exit safely.
Today, the expression has come to be an analogy for something whose sensitivity to adverse conditions makes it a useful barometer or warning sign that such adverse conditions exist.
Should the speculation in the blog turn out to have merit, it would not be the first time in my experience that unrest in the internal function signaled more significant underlying problems with the business model or culture of organizations. And this phenomenon doesn’t discriminate by industry sector or the size of the organization. I recall one Fortune 500 company where management butted heads with a seasoned and respected CAE who was demoted and replaced only to have his replacement replaced less than a year later. To a board member or outsider the revolving door of CAEs should have raised serious questions about what is going on inside that company.
As I have written in previous blogs, the effectiveness of the internal audit function can quickly be eroded if management is allowed to shop around for a CAE that suits the C-suite. The organization is not well-served if the CAE’s relationship with management is to go along to get along.
What’s more, if senior management has a significant resistance to strong internal audit leadership, this may be a sign of a toxic or at least misaligned corporate culture – one that values lap dogs over watch dogs.
This scenario also hints at weak oversight by the audit committee. Management should not be able to ride roughshod over the CAE when there is disagreement. This can happen only when the audit committee fails to properly exercise its role as the functional reporting line for internal audit.
I don’t want to over dramatize the point. Clearly, there are instances where the CAE’s performance doesn’t meet the company’s needs, and turnover of the CAE position is inevitable in all organizations. However, if suddenly the CAE leaves, is demoted, or is fired, investors, regulators, and investigators should take heed. And if it happens frequently, or is accompanied by an epidemic of voluntary departures from the internal audit function, then investors, regulators, and investigators should become very inquisitive. Sometimes what is happening with internal audit is a latent sign of deeper problems within the organization, and is a leading indicator of future risks for the organization.
As always, I look forward to your comments.