Fannie Mae failed to properly oversee and examine the appointment of its chief audit executive (CAE) in October 2013 and the process used was haphazard, at best, the examination report from the Federal Housing Finance Agency Office of the Inspector General said.

In 2012, the FHFA granted power to both Fannie Mae and Freddie Mac to hire executive officers and the authority to review and approve the compensation of those officers.

The FHFA decided to evaluate Fannie after the appointment of its new CAE, a position that is critical to the enterprise’s risk management controls.

The CAE directs Fannie Mae’s internal audit department, which is tasked with providing independent, objective assurance of the enterprise’s governance, risk management and control processes.

According to the report, Fannie did not start looking for candidates until the position was empty on Sept. 19, 2013, even though it knew the position would be vacant in the spring of 2013.

Fannie’s CEO and chief human resources officer and external consultants worked to develop a strategy to retain and develop key talent across the enterprise, creating a document that summarized their efforts.  Most notably, the document said that there was no internal candidate who was “ready now” for the CAE position and that a permanent successor would require an “external” candidate.

However, since the audit committee is not bound by the senior management’s plan, it decided it would limit its search to internal candidates due to problems in the past with external hires.  

“The lack of any prior planning by the audit committee led to a scramble to identify a qualified candidate for the CAE position,” the report said.

Within six days, the CHRO identified and presented to the committee a list of nine potential internal candidates, which included the chief credit officer of Fannie Mae’s largest business unit, the Single-Family Business Group, who was selected to fill the role even though:

  • He had not been identified for the CAE role in senior management’s succession plan.
  • His professional audit experience did not meet the audit qualifications deemed “preferable” in the CAE position description.
  • He was burdened by significant conflicts because of his management responsibilities in single-family.

The report explained that since no meeting of the audit committee was recorded in the corporate record books before the announcement of the new CAE, it is not possible to determine whether the committee understood the risks associated with its decision or properly evaluated its choice.

As a result, the FHFA-OIG recommends the following:

  1. Implement a sufficiently robust internal communications process to ensure that the FHFA director is informed of significant issues and concerns.
  2. The Fannie Mae audit committee should hold meetings relating to its oversight responsibilities, along with fully documenting meetings.
  3. Conduct a comprehensive evaluation of the audit committee’s effectiveness.
  4. Direct the audit committee to align its meetings to address priority issues and risks so that standard reports and informational materials are provided to the committee in advance of the meetings.
  5. Assess the adequacy of the criteria and processes used by the enterprise’s board of directors to populate each committee of the board and to rotate committee membership.