A report from the Federal Housing Finance Agency (FHFA) Office of the Inspector General slams Fannie Mae’s decision to select the head of the Single Family Business Group to become the new Chief Audit Executive in October 2013, saying that “the process used by Fannie Mae’s Audit Committee to select a candidate to fill the important and challenging CAE position was haphazard, at best.”

While external auditors have since declared Fannie Mae to be in compliance with international standards, the lax attitude toward auditing and the amount of effort needed to get Fannie Mae to take the matter seriously is troubling.

Inspector General Slams Fannie Mae Over 'Haphazard' Practices
Source: Wikimedia Commons

Audit Committee made a ‘haphazard’ decision on new CAE

In early 2013 the former head of the Enterprise Project Management Office was getting ready to leave and it was decided that then-CAE Patricia Black would take over the position. This gave the Audit Committee plenty of time, from at least July to September of that year, to figure out who they might want to hire. At the same time Fannie Mae was working on succession plans for senior management positions across the agency, work that the CEO and Chief Human Resources Officer were both involved in. That report determined that there was no one within the organization ready to take over the CAE position immediately (though it identified vice presidents who might be ready in a few years) and recommended hiring someone externally.

On September 19 the Audit Committee decided to ignore that report and restrict its search to internal candidates and asked HR to draw up a list. On September 25 two members of the Audit Committee reviewed the list and on October 3 they selected then-Chief Credit Officer of the single family business John Forlines to be the new CAE.

[drizzle]Not only was a major executive position filled rather quickly, but there are no records of the Audit Committee formally discussing other candidates for the job.

New CAE has conflicts due to his previous position within Fannie Mae

Maybe you could forgive the hiring process if Forlines was a slam dunk for the position, but the OIG report raises a number of serious concerns. First of all, since he had been the CCO of the single family business (the largest of Fannie Mae’s operations) Forlines would be considered conflicted on a number of projects that needed to be audited. That’s actually not a deal breaker, but it means that Fannie Mae’s Audit Committee would need to put together a clear plan to mitigate those conflicts – and they didn’t. Then FHFA requested such a plan and Fannie Mae didn’t provide an adequate response for the better part of a year.

Forlines also doesn’t have the requisite experience in Fannie Mae’s own job description. He has about seven years’ experience as an auditor, instead of 15+, and the most recent is back in 1992. The job description asks for auditing experience at one of the Big 4 auditing firms or another complex financial institution, but Forlines worked at a small bank before he took a job at Fannie Mae. Forlines has had a long successful career at Fannie Mae, but the CAE position requires a combination of independence and auditing experience that he doesn’t seem to have.

Eventually auditing and advisory firm Grant Thornton was brought in to do a “CAE Independence Review” and found that Fannie Mae was ‘partial conforming’ with international standards, recommending 11 changes to bring it into full compliance. Fannie Mae finished implementing those suggestions in February of this year and Grant Thornton has changed it opinion of Fannie Mae to ‘generally conforming,’ but if Fannie Mae wants to win back people’s trust, grudgingly accepting international standards for its internal auditors isn’t the way to do it.

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