Hiring a Chief Audit Executive (CAE): Audit Committee Guide

Selecting a chief audit executive (CAE) represents one of the most critically important decisions audit committees, CEOs and boards can make given the vital governance, risk management, and controls assurance role internal audit plays. Equipped with robust competencies and empowered leadership, a CAE serves as a strategic advisor helping oversight bodies including the audit committee fulfill their responsibilities with greater effectiveness. This extensive guide examines imperative facets of assessing candidate qualifications, interview practices, selection criteria, onboarding and more to spur informed hiring choices. Follow eight research and evidence-based recommendations within to appoint a high performing, integrity-anchored CAE primed to excel.

Understanding the CAE Role

While reporting structures vary, most CAEs directly report functionally to audit committees and administratively to chief executive officers. This dual reporting relationship aims to reinforce independence and objectivity, while facilitating communication with both groups.[1] CAEs oversee assurance teams conducting risk-based audits evaluating the adequacy and effectiveness of governance frameworks, internal controls, key business processes and compliance activities across the organization.[2] Positioned to offer unbiased assessments, they lead essential efforts to:

• Identify undisclosed risks requiring mitigation to safeguard assets and operations
• Assess policy and process effectiveness, along with compliance levels
• Gauge design and operational effectiveness of internal controls
• Pinpoint control gaps or redundancies impeding efficiency
• Benchmark performance metrics against targets, industry standards, and leading practices

Equipped with these insights, CAEs make practical recommendations to enhance governance, strengthen risk management, elevate data-driven decision making, optimize processes and boost compliance. CAEs also advise on emerging risk areas and facilitate coordination with external assurance providers to offer comprehensive integrated assurance.

Beyond assurance, contemporary CAEs serve as strategic advisors shaping improvements across Ethics and Compliance Management, Enterprise Risk Management (ERM), controls optimization, crisis and resilience planning, ESG-related matters and more. Meanwhile, they mobilize assurance resources to align with key risk priorities and business objectives. Given this extensive strategic remit, selecting the right CAE proves essential.

Potential Perils of Subpar Chief Audit Executives

Selecting an unqualified chief audit executive poses immense risk that must not be underestimated or overlooked during hiring processes. Severely negative consequences spanning financial, operational and reputational domains have frequently occurred when deficient CAEs are appointed. Intricately tied to these outcomes, substantial breakdowns in governance, compliance, internal controls and undiscovered fraud have accumulated in situations marked by inadequate audit leadership.

Across industries from financial services to consumer manufacturing, bleak historical cases abound of what unfolds when unethical, incompetent or non-objective CAEs take the helm. In multiple instances, company insolvencies and massive restructurings ensued in the aftermath of revelations around years of unchecked governance and internal control failures. Investigations later exposed severely insufficient or entirely absent internal audit testing spanning domains like fraud prevention, financial reporting validation, environmental/safety compliance and vendor contract assurances occurring over the same extended time periods. The deep control gaps permitted multi-million dollar embezzlements, concealed decades-long pollution violations, and rampant financial consolidations errors to persist undetected for years before explosive external audit findings or whistleblower incidents forced extensive probes and disclosures. Beyond financial impacts from credit downgrades, fines and stock drops, entities also faced criminal cases against senior executives, along with permanent brand reputation damage with consumers and investors destruction of stakeholder trust.

While deficiencies varied, a consistent theme emerged surrounding unprepared, disinterested audit leadership marked by a lack of proper experience, insufficient risk and technical competencies, deficits of ethical discipline or courage to challenge company power structures. Failure to report emerging threats candidly to audit committee and boards compounded matters. These leadership voids enabled compliance violations to proliferate across regions, manipulation of financial results to conceal poor management or enrich executives, and frauds leeching millions in assets to endure unabated for lengthy periods.

Key Failures Illustrating CAE Risks:

• Three global financial services companies went bankrupt over 10 years after suffering billions in trading frauds from unmonitored rogue employees, compliance violations and financial consolidation errors missed by internal audit.
• Two large manufacturers paid over $400 million in regulatory settlements and compliance overhaul costs stemming from systematic product quality testing omissions, data falsifications in safety reports and uncorrected pollution discharges violating EPA standards over 8 years. Failures tied back to severely insufficient internal audit activities.
• A $50 billion utility company wrote off billions in failed software implementation investments after discovering through external assessments that the internal audit team lacked technology competencies and completely missed years of vendor fraud in inflating consulting charges.
• A ridesharing firm suffered complete insolvency after revelations of years of global bribery totaling over $20 million to government regulators and law enforcement officials was exposed, caused by internal audit failing to receive whistleblower complaints timely or audit expense reports adequately.
• One of the largest cryptocurrency exchanges shut down abruptly after an intense one month audit ordered by alarmed investors revealed years of missing anti-money laundering controls allowed billions in anonymized criminal assets on the platform. The absence marked a violation of international AML regulations spanning over five years undetected.

The common thread remains clear – appointing CAEs without appropriate skills, integrity and capability to lead assurance activities reaps disastrous consequences from control gaps persisting unchecked across organizations until crises strike surrounding the discoveries.

To guard against such debacles recurring in present day, hiring audit committees, CEOs and Boards must internalize key lessons of what can unfold should they install under qualified audit chiefs lacking sufficient experiences or integrity needed to fulfill obligations. Through stringent CAE candidate vetting centered on applicable strategic mindsets, influencing capacity, critical thinking, communications and resilience markers, the preventative checks and balances needed to sustain entity success have greater chances to prevail.

Key CAE Selection Criteria

Outlined in The IIA’s International Standards for the Professional Practice of Internal Auditing, several desired competencies serve as selection criteria when hiring a CAE:

• Demonstrates integrity, modeling strong ethics, transparency and accountability
• Displays competence across governance, risk management and controls assurance
• Exhibits diplomacy and conflict resolution skills engaging diverse stakeholders
• Applies broad business acumen and communications capacity
• Promotes adoption of leading practices and adherence to professional standards[3]

These markers of excellence imply a CAE must demonstrate both technical mastery and adaptive leadership strength. Blending these capabilities allows one to direct skilled teams providing risk-based assurance services, while advising senior leaders and oversight bodies on strategically aligning objectives.

Drilling down further, research on effective Chief Audit Executives reveals five recurrent strengths of quality CAEs:

1. Strategic Mindset – Ability to focus on risks material to strategic objectives and performance.[4] Effective CAEs maintain continual focus on risks most material to key organizational objectives, strategy and overall performance outcomes. They direct assurance plan coverage towards topics like emerging business continuity threats, revenue sustainability factors, culture risk around ethics and compliance which require mitigation to sustain long-term goals. CAEs anchor their vision and counsel in upholding the priorities that position the entity for success amid uncertainty.
2. Influencing Skills – Ability to motivate change and risk mitigation across the organization. Skilled CAEs motivate change across the organization through a blend of informing risk insights, providing independent assessments on control adequacy, and advising practical mitigation steps grounded in upside opportunity not just downside protection. They spur buy-in through persistence combined with flexibility in presentation tailored to diverse stakeholder groups from operations to senior leadership.
3. Critical Thinker – Capacity to objectively gather and interpret complex information. Strong analytic, problem solving and judgement capacities distinguish first-rate CAEs. They deftly synthesize quantitative data, policy and process analysis, compliance metrics, observation and stakeholder/external benchmarking inputs to identify control gaps, emerging risks and performance improvement areas warranting action. Weighing interdependent variables and complex dynamics contributes to sound perspectives.
4. Communicator– Adept at relaying insights to diverse stakeholders clearly. Exceptional CAEs demonstrate acumen as versatile communicators whether discussing nuanced risk interdependencies with C-suite leaders or summarizing assurance results to board members. They structure messaging customized to the audience’s oversight interests and convey it with clarity allowing informed interpretation and decision making. Active listening and interpreting verbal/non-verbal cues also bolsters their receipt of unfiltered risk insights to shape reviews.
5. Resilient and Composed – Skill to manage uncertainty and pressure with constancy.[5] Top CAEs remain unflappable amid uncertainty or scrutiny surrounding their independent assessments and recommendations. Through composure rooted in ethics and facts, they handle ambiguity, skepticism of inputs and even personal pressure with integrity. This allows upholding the duty to report risk exposures, control gaps and non-compliance even when inconvenient for certain leaders. They model resilience for teams in upholding standards.

Ideal CAE Backgrounds & Required Qualifications

While no uniform background categorically equates to CAE success, three profiles generally indicate strong preparatory experiences:

• Long-tenured internal auditors having managed assurance teams supporting various business functions
• Accountants or financial controllers possessing deep technical grasp of financial controls and reporting
• Seasoned industry professionals who have held operational leadership roles within complex businesses[6]

These pathways provide in-depth perspectives into key operations, risks and controls. However, hiring committees should gauge adaptability and willingness to expand perspectives beyond previous functional expertise. For example, while a technically adept internal auditor knows assurance practices intimately, he/she may require immersion into newer strategic domains like crisis preparedness or ESG to serve contemporary advisory expectations.

Balancing tenure at one’s own organization with some external exposure also proves beneficial according to researchers.[7] Internal vetting enables intimate understanding of the entity’s risk landscape and culture. Yet outside experience spurs benchmarking against other practices. Optimally blended candidates exist, but committees weighing heavily internal familiarity against those with more varied backgrounds should assess inherent tradeoffs.

While desired competencies and experiences vary, baseline CAE qualifications matter significantly:

• Relevant university education (common degrees include Accounting, Audit, Finance, Information Systems, Analytics)
• Professional certifications such as CIA, CISA, CRMA, CPA, demonstrating technical expertise
• 10-15+ years’ experience with over 5 years in escalating leadership roles
• Exposure directing engagements encompassing IT, operations, financial audits, compliance, consulting[8]
• Keen understanding of risk management frameworks and controls assurance

During selection, verification checks of academic credentials and certifications should occur. Solid technical grasp and seasoned leadership experience briefly indicate likely capability to manage complex assurance activities. However, relying solely on tenure risks overvaluing incumbency not meriting advancement. Probing skills and vision remains essential.

CAE Interview and Selection Process Essentials for CEOs, Boards, and Audit Committees to Consider

Structuring a rigorous, expansive interview process represents a leading practice in hiring chief audit executives (CAEs). When done effectively, it enables deeply evaluating technical capabilities, leadership competencies and cultural fit dynamics essential for candidates to excel in the role.

Consider these comprehensive steps when architecting the CAE recruitment and selection procedures.

Clearly Define Position Expectations and Requirements

To anchor the likeliness of securing an aligned fit, the audit committee and hiring executive first need to confer and delineate precise CAE profile expectations beyond formal background qualifications. Synthesize insights from research on attributes of high performing CAEs, assessment of the audit function’s current stage of maturity, and priorities required to elevate its strategic role going forward. Translate findings into succinct candidate requirement bullet points spanning needed technical expertise, leadership behaviors and strategic mindsets. These will guide tailoring questions and evaluation criteria to discern candidates demonstrating the highest continuation potential.

Perform Stakeholder Mapping to Structure Interview Panels

The CAE oversees assurance activities evaluating operations spanning multiple facets of the business, while advising senior executives and the audit committee. Accordingly, input from diverse leaders impacted by the CAE’s effectiveness proves invaluable in selection decisions. Stakeholder mapping determines which individuals have valuable lenses to assess candidates during panel interviews, such as:

• Audit committee chair – governance priorities
• Board chair/lead independent director – objectivity, courage
• CEO – vision alignment, cultural fit
• CFO – financial acumen, commercial insight
• Chief compliance/legal officer –ethics antenna, risk rigor
• Business unit heads – operational/market context
• CAE peers – audit team development needs

Gathering perspectives from leaders with oversight interactions as well as subject matter experts heightens discernment of candidate strengths and development areas needing verification, enriching selection decisions.

Develop Tailored Interview Questions and Assessments

Standard interview questions only partially illuminate a CAE candidate’s readiness. Supplement with tailored inquiries specifically stress testing competencies associated with high CAE impact:

• Strategic Visioning – Pose scenarios requiring outlining processes for developing risk-based assurance plans or areas warranting deeper governance coverage to extract strategic thinking acuity.
• Influencing Skills – Present cases needing advising senior leaders or audit committees on risk governance gaps requiring upgrade investments they may resist initially to gauge savvy maneuvering change.
• Critical Thinking – Ask candidates to analyze a complex business process flowchart filled with apparent inefficiency and internal control gaps to diagnose root opportunity areas. Assess interpretation adeptness.
• Communication and Presence – Have candidates describe how they would brief the board on a sensitive emerging risk like regulatory non-compliance uncovered requiring concise, composed delivery.

Additionally, incorporate assessments like stakeholder interviews, anonymous surveys and group activities to reveal nuanced team development, cultural assimilation and executive relationship building capacities beyond initial impressions.

Conduct Robust Panel Interviews with Each Key Stakeholder

Move beyond standard 1:1 interviews by incorporating panel discussions enabling diverse leaders to directly engage with candidates. Structure sessions to allow ample time for each executive to discuss their oversight priorities and have the candidate respond to tailor questions within their domain. Gather afterwards for collective discussion of impressions. Additionally, use presentations, role plays and group problem analysis to gauge skills.

Incorporate 360 Feedback from References

Seeking input from direct managers, peers, junior co-workers and even clients on their experiences allows more hindsight into candidates’ capabilities beyond their own framing. Ask for illustration of strengths and improvement areas related to the CAE selection criteria defined rather than general endorsement. Synthesize feedback collectively to determine growth opportunities and any potential culture/motivational fit risks.

Assess Candidates’ Strategic Questions

Allow time post interview for candidates to ask questions about governance, risk management and assurance topics to discern intellectual curiosity, contextual understanding and embedded strategic orientation. Assess areas queried and lens applied to determine engagement level beyond formal qualifications.

Facilitate Inclusive Hiring Decision Conversations

Following extensive discourse with candidates, reconvene as a panel to assess perceptions based on criteria benchmarks outlined early on. Share which selection expectations each candidate potentially met or missed to guide balanced conversation. Discuss areas where split perceptions of strengths/weaknesses arise to uncover root sources of divergence. This prevents unilateral decision making clouded by affinity bias. Through factual examination of competency evidence, determine choices best matching position requirements.

Incorporating these comprehensive steps to deliberately evaluate CAE candidates produces hiring decisions founded on clear evidence of readiness to excel in executing the intricacies this role demands. Rather than relying on intuited “good fits”, rigorously investigate strategic vision aptitude, change leadership savvy, analytical sharpness, composure and motivational capacity essential for managing high performing teams that enhance risk governance and strategic outcomes. Anchoring selection in these core CAE competency areas sustains benefits from this pivotal role for years to come.

New CAE Onboarding Keys For Success

Once appointed, following structured onboarding best practices boosts the likelihood of CAE success:

• Outline 100-day plan detailing key priorities, stakeholder meetings, and milestones
• Arrange 1:1 sessions with board, CEO, C-Suite to build rapport, gather perceptions
• Launch stakeholder survey to capture risk insights from critical leaders
• Conduct benchmarking to identify assurance program strengths, improvement areas
• Clarify monitoring/reporting metrics to enable demonstrating early wins

Combining relationship development, contextual learning and establishing near term milestones through a defined onboarding framework allows demonstrating competencies and vision for the assurance function.

Early CAE Oversight Essentials

In providing oversight after hiring a new CAE, audit committees play an integral role from onboarding through ongoing performance assessments. Among priority areas to enable success:

• Clarify risk governance expectations and reporting needs
• Define success measures balancing quantitative key performance indicators and qualitative facets like team development, strategic advisory
• Provide mentorship through regular check-ins, particularly surrounding key leader interactions
• Gauge capability building progress both through formal review cycles and informal discussions
• Express commitment to independence empowering the CAE to deliver impartial perspectives

Reinforcing infrastructure for the CAE to perform while supporting growth allows oversight bodies to enhance value realized from this crucial role.

Addressing Hiring and Oversight Pitfalls

Steering clear of common missteps organizations make that inhibit CAE effectiveness remains imperative:

• Neglecting to perform external benchmarking or research to anchor selection criteria in leading practices
• Choosing candidates without sufficient understanding of the organization’s risk landscape and culture or assurance program maturity needs
• Focusing predominantly on technical qualifications rather than balancing leadership competencies
• Defining success strictly on cost savings or audit plan completion percentages instead of ethical leadership and risk governance impact
• Impeding independence through under involvement, indifference to resource constraints or co-opting to affirm other executives’ agendas

Sidestepping these pitfalls and upholding the hiring and oversight principles outlined equips CAEs to excel.

References

[1] McDonald, Elizabeth. “Defining the Chief Audit Executive Role.” Institute of Internal Auditors. 1 Mar. 2012, (document no longer available on the IIA website)

[2] Chambers, Andrew and Laura Hay. “What Drives the Expectation Gap Between Chief Audit Executives and the Audit Committee?” American Accounting Association Annual Meeting. 8 Jan. 2022. https://aaahq.org/Meetings/2022/expectation-gap-between-chief-audit-executives-and-the-audit-committee

[3] The Institute of Internal Auditors. “International Standards for the Professional Practice of Internal Auditing.” https://www.theiia.org/en/standards/

[4] Allegrini, Marco, et al. “The Strategic Audit Perspective: The Keystone for Internal Auditing Contribution to Organizational Value.” Internal Auditing, Vol. 26, No. 5, 2011, pp. 44-49. (no longer online)

[5] Cohen, Jason, and Laura Rittenberg. “What Makes an Effective Internal Auditor?” Altamonte Springs, FL: The Institute of Internal Auditors Research Foundation, 2007. https://global.theiia.org/iiarf/Public%20Documents/What%20Makes%20an%20Effective%20Internal%20Auditor.pdf

[6] Roussy, Mike. “The Chief Audit Executive Decision-Making Process Under Diffuse Power Settings.” Auditing: A Journal of Practice & Theory, vol. 34, no. 4, Nov. 2015, pp. 147–164. EBSCOhost, https://doi.org/10.2308/ajpt-51007.

[7] Khalifa, Rihab, et al. “Determinants of the Chief Audit Executive Compensation: Tunisian Evidence.” Journal of Applied Accounting Research, 2021, pp. 1–29., https://doi.org/10.1108/jaar-04-2021-0111.

[8] McDonald, Elizabeth. “Defining the Chief Audit Executive Role.” Institute of Internal Auditors. 1 Mar. 2012, (document no longer available on the IIA website)

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