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Is GE's Rotational Audit Announcement Good News or Bad?

Blogs Richard F. Chambers, CIA, QIAL, CGAP, CCSA, CRMA Nov 15, 2020

​I shared an article about the decision last week on social media, and it generated a lot of reaction — both positive and negative.

The Wall Street Journal recently reported that General Electric (GE), in an effort to streamline operations, is eliminating its Corporate Audit Staff (CAS) program, a "rigorous multiyear rotation through various divisions that the conglomerate has long used to groom future leaders." To those of us who have long admired the GE model for internal audit staffing, it was big news. GE's internal audit function is one of the oldest corporate audit departments in the world, dating back to 1913 — almost 30 years before The IIA was founded.
 
I first studied the GE model back in the 1990s, when I was leading a re-engineering initiative of the U.S. Army's internal review (audit) program. I was fascinated by the robust and formal structure of GE's CAS program, in which, as the 
Journal reported, "young GE finance executives ... worked long hours and traveled the world analyzing various business units, looking for waste or reviewing internal controls."
I saw extraordinary value in such an approach, which ended with program graduates moving into various business roles in the company. Sadly, the U.S. government's rigid civil service structure precluded such an approach for us. So, we enhanced our program using other strategies.

By the early 2000s, the GE model was considered the gold standard for rotational staffing programs. The concept proliferated, with similar approaches adopted by companies like The Home Depot and Chrysler. During my years in the Big Four, I had the chance to look closely at rotational staffing models, and I came to believe that they were an exciting trend for the profession. We were attracting more diverse talent with extraordinary expertise in the full portfolio of risks and controls.
 
While rotational staffing models were widely admired, the approach was not without controversy. Formal rotational staffing programs, in which everyone was essentially passing through internal audit on their way to another business unit within the company, may have been a magnet for talent that added value for the company. But it was also criticized for the fact that, with everyone just passing through, internal audit struggled to develop valuable institutional knowledge on the company's risks and controls.

I was not a critic. But I did champion a blended model, in which the majority of staff were on a rotational track while a core team of internal auditors was in place for the long term. I compared it to a university, where most students attend long enough to attain a bachelor's degree, and some stayed on longer to earn a master's. Meanwhile, some stayed long enough (or returned) to attain a Ph.D.
Several years ago, I authored a blog post on the topic of rotational staffing models. In "Internal Auditing: Is It a Career or a Career 'Stepping-stone'?" I observed:

Almost paradoxically, the trend toward rotational auditing also has been beneficial for those of us who prefer to stay in the internal audit profession for the long term. The great majority of internal audit groups depend on a core team of seasoned audit professionals to supervise audit teams and perform management duties, and as rotational auditors leave the department and are replaced by inexperienced new staff members, promotional opportunities for the remaining experienced auditors are enhanced.

So, are GE's plans for its internal audit function a good or bad omen for the internal audit profession? I actually think the decision is good news. As the 
WSJ article reported:
"Running GE differently means equipping our developing leaders with increased operational depth and domain expertise," a GE spokeswoman said. "We are evolving a core talent development program to deliver these competencies with greater focus."

GE is splitting up the program by moving the leadership development portion into the individual business units so workers get deeper operational experience, while creating a separate internal auditing team. The changes will happen over six to nine months, the company said.

From that passage, it is evident to me that the company still sees value in the contributions that the CAS program made over the decades. The program isn't being discarded; it's being integrated into the business.

Meanwhile, internal audit will likely continue to foster strong internal controls within GE, as it has for more than a century. I shared the GE article last week on social media, and it generated a lot of reaction — both positive and negative. However, I am inclined to agree with one of my passionate LinkedIn connections who observed that GE's decision speaks to the fact that internal audit "came up with and executed an idea that has positively impacted GE for generations."
  
I also strongly suspect that GE's internal audit department will continue to be a pipeline of talent to the business, as it has for decades. It just won't be done in such a formally structured fashion going forward.
So, what about those internal audit departments that want to adopt or continue to operate with a rotational component? I authored another blog post several years ago in which I offered my insights on what's important to consider when adopting such an approach. In "Internal Audit as a Pipeline of Talent," I identified five things that matter:The size of the organization.Reputation.
Complexity.Quality.
Executive support.

I encourage you to check out that blog post for further insight into the things that matter when adopting a rotational program.

I also welcome your feedback on GE's decision, as well as rotational auditing, in general.

Richard F. Chambers, CIA, QIAL, CGAP, CCSA, CRMA

Former president and CEO of The IIA, the global professional association and standard-setting body for internal auditors.