The Federal Housing Finance Agency has provided a primer for audit committees to study on how not to appoint and manage a chief audit executive.

FHFA’s Office of Inspector General released a detailed report criticizing Fannie Mae’s selection of a chief audit executive in 2013 when the job became vacant, calling the audit committee’s search process “far from diligent” and “haphazard, at best.” The audit committee failed to perform a reasonable, timely search when it knew the job would be vacant, failed to hire a candidate who fit the minimum job qualifications, and failed to take into account or adequately address the significant conflicts the new CAE would be facing as he assumed the role in a lateral internal move, the report says. Fannie Mae did not immediately respond to a request for comment.

According to FHFA’s investigation, Fannie Mae’s audit committee knew in the spring of 2013 that the chief audit executive would be gone in September, but waited until the position was actually vacant before launching a search. Fannie Mae’s succession plan indicated there was no one inside the company qualified for the job, but the audit committee limited its search to internal candidates.

Their selected appointee was then the chief credit officer of Fannie Mae’s largest business unit. The report says the new chief audit executive’s audit experience didn’t meet the qualifications deemed “preferrable” in the job description, and he lacked independence based on his immediate past responsibilities in the organization.

FHFA even acknowledges its own failing in approving the CAE’s compensation without pushing back on the audit committee’s process, even though individuals with FHFA discussed concerns among themselves. FHFA and Grant Thornton pressed Fannie Mae to address the conflicts faced by the new CAE with internal controls to mitigate the lack of independence. That process dragged on for months, the report says.

“Our current evaluation found numerous corporate governance failures, both by Fannie Mae and by FHFA, which created a weakness in Fannie Mae’s risk management structure,” the report says. “In view of these significant lapses in corporate governance, we question whether the current Fannie Mae audit committee appreciates its governance obligations in this environment and whether it is prudent for FHFA to continue to rely upon this committee to execute other delegated responsibilities, without adopting and implementing the recommendations in this report.”

The recommendations include: beefing up FHFA’s internal communications to assure such any issue won’t slip by in the future, require Fannie Mae’s audit committee to meet regarding its oversight responsibilities, evaluate the audit committee to determine if its members are independent of management and adequately proactive in meeting their responsibilities, and direct the audit committee to generally get more organized and more efficient.

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