CLICK HERE to view the report in PDF or scroll down

Author Stuart Higson at Leathwaite.

The struggles of audit leadership hiring in asset management:

The requirement for asset management companies to hire exceptional audit talent has never been higher as the industry continues to develop and upgrade the third line in response to the increasingly challenging regulatory agenda.

The UCITS IV directive, AIFMD and increased reporting requirements, such as FATCA are now entrenched in the operating models of asset management firms, with MIFID II, MAD II and UCITS V on the horizon. Mark Carney, governor of the Bank of England, recently declared on SMR: “Integrity, honesty and skill are not optional, whether you run an insurance company, global investment bank or building society”.

The extension of the regime to asset managers seems inevitable. Audit functions are therefore being put under unprecedented pressure to provide business consultation and steadfast assurance.

Responding to the challenge

When comparing asset management to sectors that have experienced greater levels of regulatory change, there are two particular skillsets that have proved invaluable in helping businesses adjust to their new operational environment:

Business partnering

According to Grant Thornton’s ‘Regulation in Asset Management’ report, 70% of asset management firms feel that adapting to regulatory change is making them more risk averse and challenging their entrepreneurial culture. Therefore, the ability of chief auditors to partner with CEOs and audit committee chairs in a commercial and consultative manner, while also maintaining independence, is becoming an essential but difficult skill to secure.

Data

In an industrywide study conducted by The Economic Intelligence Unit and sponsored by Northern Trust in 2016, only 13% of managers suggested their organisation was able to capture the value of data ‘entirely’. Yet, at PwC’s 19th Annual Global CEO Survey (2016) 79% of CEOs believed that data & analytics would generate the greatest return in terms of engagement with wider stakeholders.

It is widely appreciated that the full potential of technology is yet to be harnessed by the fund management industry and therefore significant investments in IT development and infrastructure are inevitable.

In addition, the sheer data required for reporting standards is putting strain on risk and control procedures. Auditors with data analytics exposure are therefore in high demand.

How can asset management companies acquire these skills?

It is natural for firms to initially explore the talent that is available within competitor asset management companies, especially given their inherent knowledge of the sector. However given that the teams are smaller and the regulatory environment has been less aggressive, the current talent pool of auditors able to bring commercial business partnering skills, transformation experience and regulatory relationships is significantly limited.

As such, it is advisable to consider looking towards industries that have greater experience of navigating this level of change, most notably the banking and consultancy arenas.

Banking

As the banking sector continues to shrink, with double digit cost reduction programmes dominating the agenda of most infrastructure function heads, the opportunity for auditors to progress their careers has slowed.

Examples of this include Citi and JPMorgan, who in some cases increased global audit headcount by up to 40% between 2010 and 2014 and have now begun to rationalise and streamline the function as significant improvements to risk and control frameworks take hold.

Investments in technology, the rise of the audit COO function and more robust first line of defence teams, have also meant that banking chief auditors feel less pressured to over-hire to alleviate regulatory concerns.

Senior auditors who have overseen these improvements in the banking space are therefore more open than ever to considering a move into broader financial services businesses.

When considering hiring from the banking sector, it is worth considering the following:

Board exposure – A key requirement for an audit leader is their ability to interact with the board and audit committee. While this does exist in the banking sector, the size of the groups in comparison to most asset managers means only the chief auditor holds this experience. However, given the increased focus on legal entity governance in banking, more junior audit leaders are owning relationships with senior governance forums hence enhancing their ability to transition to the buy side.

Business complexity – Traditionally a sticking point when attracting investment banking auditors into broader financial services firms however with the banking sector shrinking – it is becoming less of an objection.

Leadership & management – Given the size of the audit functions within the banking sector, it is important to differentiate between pure people managers and strategic leaders. Those who can step into the detail where required while also providing strategic direction to their teams, the broader audit function and the business, are most likely to make a smooth transition to the buy side.

Compensation – However, one potential barrier restricting asset management companies from attracting this talent is compensation. Historically, a lack of qualified talent in the banking sector led to leadership level audit compensation ballooning between 2012 and 2015. While there may now be the desire for banking auditors to move to the buy side, the challenge remains that asset managers struggle to compete financially against like for like roles.

Practice

The ‘big 4’ continue to be a good hunting ground for rising audit talent. Historically, external audit professionals held an engrained loyalty to global accountancy firms in exchange for swift career progression and opportunities to join the partnership.

With the rise of risk assurance to address emerging threats such as cyber, and mandatory audit rotations leading to intended market share reduction at the likes of PwC and EY, the traditional external audit practices are becoming more stagnant.

Furthermore, the well-publicised release of 50 partners from KPMG’s UK business in 2016 demonstrates the desire of professional services firms to overhaul their operating models, invest in technology and re-direct talent to new practice areas such as regulatory reform and social responsibility.

Senior directors and partners in external audit are therefore further softening to the idea of a move into industry.

Just as with the banking sector, there are relative strengths and weaknesses associated with hires from this sector:

Board exposure – External audit practices push directors to own client relationships and take on increased sales responsibility that historically would have sat with a partner, leading to notable board and senior management exposure.

Business complexity – Auditors in practice have the benefit of a roster of clients of varying sizes and requirements, hence it is important to offer breadth of responsibility including transformation and change projects to ensure they remain challenged in industry.

Leadership & management – Big 4 audit practices operate a pooled resource model so directors will often have less direct management experience when compared to banking.

Compensation – Directors in practice however remain below market compared to their ‘in industry’ peers which allows financial services firms including asset managers to offer attractive compensation packages.

Summary

There seems to be a unique opportunity for buy side firms to attract senior audit talent from broader candidate pools. If hiring managers can be cognisant of the need to flex traditional role requirements such as direct fund experience and board exposure as well as offering roles involving delivery, strategy and transformation, then they will reap the rewards of attracting quality audit talent capable of delivering a dynamic and significantly improved third line of defence.

To read more insight articles by Leathwaite, please click here