It’s well known that a company’s tone at the top is critically important in determining its culture, including whether or not it will act with integrity and ethical values – fundamental elements of effective internal control and risk management. And we know it’s not only the words spoken at the top, but also the CEO’s actions that drive culture. What brings this to mind is the recent conviction of the CEO of fraud detection firm Fraud Discovery Institute. While a conviction of the head of this type of firm might appear unusual though not particularly noteworthy, what’s truly compelling about this news is that the CEO is none other than Barry Minkow.
As you may know, the Dodd-Frank Act gave institutional investors and shareholder activists perhaps the item highest on their wish list – gaining ready access to the proxy statement with ability to name its own director nominees. And the SEC developed enabling rules to make it happen. Well, the U.S. Court of Appeals for the D.C. circuit just pulled the rule out from under shareholders. If you’re a shareholder activist, you’re probably outraged, but if you’re a board member or member of the senior management team, you’re likely breathing a sigh of relief!
You’re a CEO, senior manager, or board member watching your once-great company brought to its knees. You imagine yourself on the deck of the Titanic, your world coming to an end—your once confident self embarrassed in front of colleagues, competitors, friends, family, and the larger communities in which you once thrived and were held in such high esteem.
If you’re involved with compliance, you must know that the SEC issued its final rules on whisleblowing. The original proposal was hugely contentious, with serious concern that employees will bypass companies’ internal reporting channels established as part of comprehensive compliance programs instituted and enhanced over recent years, and instead run directly to the SEC for a lottery-size payday.
OpRisk Europe 2011 – now in its 13th year, commenced today at the historic Waldorf Hotel in the West End of London. Somewhat ironic that the risk management conference is taking place in the stylish hotel whose interior is said to have inspired the designers of the “unsinkable” Titanic – a classic case study on risk management.
In one breakout session, Andrew Sheen of the FSA’s risk frameworks and governance team discussed recent developments from the BIS and their impact on operational risk. Citing updates to the “Sound Practices for the Management of Operational Risk” paper recently updated by the BIS Committee, Sheen emphasized several key considerations for the board of directors and senior management team. In particular, he emphasized the need for the board to set the tone at the top in order to promote a strong risk management culture and that banks should “develop, implement and maintain an operational risk management framework that is fully integrated into the banks overall risk management processes.” He also provided guidance for senior management. In particular, he noted that senior management should:
There’s been a lot of great content in Day One of OpRisk Europe, looking forward to tomorrow’s panel discussion on “The Impact of New Regulation on Operational Risk Management.”
Liz Andrews 2700041WEU firstname.lastname@example.org | | Tags:  openpages regulatory_compliance dodd-frank sec | 0 Comments | 1,441 Visits
The following excerpts are taken from “Compliance, complexity and the need for XBRL: An interview with former SEC Chairman Christopher Cox”:
What are the key drivers of regulatory reform? Will Dodd-Frank really reduce systemic risk? Can better compliance processes drive better financial results?
In the weeks running up to the Vision 2011 and OPUS 2011 conferences, experts within IBM Business Analytics Financial Performance and Strategy Management posed these and other questions to Christopher Cox, a former SEC Chairman and keynote speaker at both events. Below is a transcript of that interview.
Looking forward into the next three years, what are some of the key drivers in the US that will be shaping regulatory and compliance reform? How are those different from the past five years?
The most significant characteristic of the time we are living in right now is the remarkable pace of change, both in legislation and in regulations governing corporate America, in particular the financial services sector.
Of course, the Dodd-Frank 2,300-page behemoth is well-known already to senior finance executives. But what is unknowable are the hundreds of rules that will be forthcoming under that legislation. The schedule called for in the statute has the bulk of the final rule makings scheduled for completion in the third quarter of 2011. It is very clear across the regulatory agencies that these deadlines are going to be largely missed.
As a result, not only will there be regulatory uncertainty on a continuing basis this year, but also for several years into the future. There are over 100 rule makings that have no statutory deadline at all. I think a significant share of even those that were expected to be completed earlier will also be rolled into the future. So during all of this time, senior Finance executives are going to have to be reading the tea leaves – not to mention the statute itself – to determine how to comply. And it isn’t just Dodd-Frank, of course, where we have all this legislative and regulatory ferment. The unprecedented rapid pace of chance in law and regulation and the continued uncertainty about what the government will do next pertains to the tax area as well. During the last year alone, Congress enacted no fewer than six major pieces of tax legislation – including the two “Obamacare” bills, the HIRE Act, the Education Jobs Act, the Small Business Jobs Act and, of course the year-end Tax Relief Act that temporarily extended the current tax rates.
That last piece of legislation bought us at least two years of tax certainty, but when it comes to long-term capital gains or any of the other rules governing the taxation of investment, two years are scarcely enough to permit long-term planning, and so the uncertainty continues.
That uncertainty about where financial, tax and regulatory policy are headed in turn creates a challenging environment within companies and within firms when it comes to shaping their response to regulatory and compliance changes. That’s the environment in which we find ourselves. Given the extent of this change and the predictable uncertainty that will continue for several years, it is very important that companies respond to this in ways that are exceptionally flexible.
How should Finance organizations prepare for this future regulatory environment in spite of uncertainties, particularly global companies that do business in multiple jurisdictions? What sustainable practices in their control and reporting processes and systems do they need to invest in to prepare for the future?
Being globally active, of course, only ramps up the uncertainty because the requirements from multiple jurisdictions are layered on the responsibility of senior Finance executives for U.S. compliance. It is nonetheless possible to synthesize thematically many of the global requirements, because at least topically, they have very much in common.
What is most important is that the different parts of a global organization can talk to one another and that the human beings who must extract information from the IT systems that collect and disgorge that information can rationalize it. In particular, companies that address these changes in ways that are adaptable and flexible will have a clear advantage. Companies that fail to manage the process in this way will likely find their companies non-compliant and their risk management practices called into question – not only by regulators, but also by their shareholders and their customers.
Do you think that the passage of Dodd-Frank will reduce systemic risk and improve stability in our financial services institutions?
Unfortunately, the Dodd-Frank Act failed to address several of the
most significant causes of instability in the financial system and
sources of systemic risk. The first is the status of the
This is particularly salient, as the conservatorships have required the GSEs to engage in practices that support housing at the expense of their financial well-being. Likewise, the government’s completely unjustifiable practice of keeping these two GSEs off the federal balance sheet, even as they are under government ownership, makes a mockery of financial reporting norms and honest accounting. Addressing this glaring omission in the Dodd-Frank Act remains a top priority of financial reform.
Next in importance is the inadequacy of bank capital and liquidity standards. Dodd-Frank did not adequately address the obvious failure of the Basel standards in the financial crisis. Those standards continue to create powerful incentives for asset concentration in mortgages and a reliance on credit ratings, and of course both of those had a role in generating the mortgage bubble that led to the financial crisis.
So the short answer to that question would be “No.”
Correct. I’d also say that Dodd-Frank has given the Financial Stability Oversight Council a strong incentive to protect competitors rather than to protect competition, which might take market share from the dominant firms. The systemically important designation implies government readiness to support those firms in a crisis, perversely encouraging more risky behavior despite the more stringent capital and other requirements and thus deepening moral hazard.
Can you discuss some of the best practices for boards of directors with regard to risk oversight? Do you think that changes in proxy disclosure with regard to risk governance has had an impact on risk management practices?
Yes. In 2010, the SEC added requirements for proxy statement discussion of a company’s board leadership structure and its role in risk oversight. Now companies are required to disclose in their annual reports the extent of the board’s role in risk oversight, and they’re required to address such topics as how the board administers its oversight function, the effect that risk oversight has on the board’s processes, and whether and how the board or one of its committees monitors risk. That increased focus on risk management has had considerable and very earnest take-up across the corporate community.
There are several types of actions that companies and their appropriate committees have been taking to step up their focus on risk management. Without question, they are spending more time with management, and isolating the categories of risk that the company faces – focusing on risk concentrations and interrelationships, the likelihood that these risks might materialize, and the effectiveness of the company’s potential mitigating measures.
Many companies have created risk management committees. Financial companies, of course, that are covered by Dodd-Frank must have designated risk management committees, but boards of other companies have carefully considered the appropriateness of a dedicated risk committee, and many of them have found it prudent to create one. In other cases, boards have delegated oversight of risk management to the audit committee, which is consistent with the New York Stock Exchange rule that requires the audit committee to discuss policies with respect to risk assessment and risk management.
For large-cap companies that have a Big Board listing, that has continued to be another way to address these heightened concerns. I think boards are carefully bearing in mind that different kinds of risks may be better-suited to the expertise of different kinds of committees, so they may not always wish to stovepipe responsibility for risk in a single committee.
Above all, best practices today are focused on the fact that regardless of how the board subdivides its responsibilities, the full board has the responsibility to satisfy itself that the activities of its various committees are co-ordinated and that the company has adequate risk management processes in place.
It’s a fascinating world. I can see why if you’re a controller or CFO it’s an exciting but intense place to be.
I think that’s absolutely right. All of these changes we’ve discussed – in particular in the US – mean that we are entering an era of unprecedented demand on companies’ governance, risk, and compliance processes and IT infrastructures. I think that companies have dealt with regulatory changes over the past half-century largely incrementally. They’ve made adjustments to their enterprise-wide systems as needed to comply with what have been modest changes from year to year. But given the enormous scope of changes in these forthcoming new regulations, companies will find it necessary to find a comprehensive and holistic approach to at least regulatory reporting – and, in my view, their management control as well.
Companies have traditionally relied on different processes to gather enterprise data to help management run the business on the one hand, and to gather data in order to satisfy regulators, on the other. In part, that was sustainable because the information that regulators were requiring was historical and post-facto. But things are rapidly changing under these new frameworks. Regulators including the SEC are now requiring information that is risk-based and predictive. While that is a big change, it’s also a significant silver lining in that this will align the process of collecting and gathering information more closely with what management needs. That means that CIOs should be looking for ways to integrate their regulatory and their management reporting processes. For that reason, regulatory reporting doesn’t have to be viewed as sheer cost, or necessary evil. Instead, there can be significant efficiencies and productivity gains for the enterprise by merging the requirements of management and regulatory data gathering processes.
This convergence will also allow companies to restructure their data in a way that will feed predictive analytical systems. That, in turn, can lead to an improvement in both risk management at the board level, and risk-based decision-making processes at the management level.
About Christopher Cox, Former Chairman, United States Securities and Exchange Commission (SEC)
Beginning in 1988, when he was elected to the House of Representatives, Christopher Cox established a record of legislative accomplishments that elevated him to the top of the Congressional leadership. His wide range of expertise in a variety of complex issues gives him the ability to take the long view of the economic future, predicting both the actions of Congress and the effects those actions will have on the marketplace. The author of the Internet Tax Freedom Act, which protects Internet users from multiple and discriminatory taxation, Cox held leadership positions ranging from chairmanships on committees and taskforces overseeing everything from budget process reform and policy to homeland security and financial services. During his tenure as chairman of the Securities and Exchange Commission, he continued this fight for justice and transparency in the world of investing.
An Accomplished Lawmaker and Reformer. During his seventeen years in Congress, Cox served in the majority leadership of the U.S. House of Representatives. He authored the Private Securities Litigation Reform Act, which protects investors from fraudulent lawsuits, and his legislative efforts to eliminate the double tax on shareholder dividends led to legislation that cut the double tax by more than half. In addition, he served in a leadership capacity as a senior member of every committee with jurisdiction over investor protection and U.S. capital markets, including the Energy and Commerce Committee, the Financial Services Committee, the JointEconomic Committee, and the Budget Committee.
An Advocate for Investors. At the SEC, Cox focused on the enforcement of securities law enforcement, bringing a variety of groundbreaking cases against market abuses such as hedge fund insider-trading, stock options backdating, and municipal securities fraud. He also helped turn the Internet into a secure environment, free of securities scams, and he worked to halt fraud aimed at senior citizens. As SEC chairman, he was one of the world’s leaders in the effort to integrate U.S. and overseas regulatory policies in this era of global capital markets, making international securities exchanges safe, profitable, and transparent. As part of an overall focus on the needs of individual investors, Cox reinvigorated the SEC’s initiative to provide important investor information in plain English, championing the investor’s right to a transparency. His reforms included transforming the SEC’s system of mandated disclosure from a static, form-based approach to one that taps the power of interactive data to give investors qualitatively better information about companies, mutual funds, and investments of all kinds.
In 1994 Cox was appointed by President Clinton to the bipartisan commission on entitlement and tax reform, which published its unanimous report in 1995. From 1986 until 1988, he served in as senior associate counsel to President Reagan. From 1978-1986, he specialized in venture capital and corporate finance with Latham & Watkins. Cox received an M.B.A. from Harvard Business School and a J.D. from Harvard Law School, where he was an Editor of the Harvard Law Review.
We know the banks and related mortgage service organizations have been under fire for their role in the financial system’s near meltdown and ensuing foreclosure fiasco. JPMorgan Chase’s CEO Jamie Dimon reportedly owned up to taking some responsibility, saying “Some of the mistakes were egregious, and they’re embarrassing . . . but we made a mistake, and we’re going to pay for that mistake.” The 50 state attorney generals and the SEC, among others, are pushing for changes in how the banks and services operate, and there’s little doubt changes are coming.
The sea of blue suits at the OpRisk North America conference being held in New York City this week provides a stark contrast to the cold rain falling in Times Square. The conference kicked off with a keynote address from Mitsutoshi Adachi, director and deputy division chief at the Bank of Japan. Mr. Adachi, who also serves as chair of the SIG Operational Risk Subgroup for the Basel Committee, noted that his travel plans had to be moved up a few days in order to account for the continued travel delays out of Japan.
His keynote highlighted a recent report published by the Basel Committee on Banking Supervision titled “Operational Risk – Supervisory Guidelines for the Advanced Measurement Approaches” which found that “Operational risk capital for non-AMA banks is higher than for AMA banks, regardless of the exposure indicator used for scaling.” Mr. Adachi also noted in his address that AMA firms showed “only modest increases in losses during the financial crisis period.” Certainly not an unexpected result but what was telling was his finding that for the period of 2008 to 2009 (during the financial crisis), operational risk losses for all banks were “2 to 3 times fold” compared with the previous Basel Committee internal loss data collection period of 2005 – 2007. Mr. Adachi declined to field a question on which business lines contributed the most to the losses, per his obligation to keep such information confidential.
He concluded by saying that “the Basel Committee finds it even more important to engage with the industry” moving forward. Looking forward to the Plenary address “Reforming U.S. financial markets: reflections before and beyond Dodd-Frank.”
Unless you’ve escaped to a remote island with no communication capability, you know about the serious issues facing banks and mortgage generators and service companies surrounding the foreclosure fiasco. For background, you might want to refer back to my October 15 blog which outlines some of the problems stemming from shortcomings in risk management and related internal control.
Chief audit executives do a lot of things really well, adding value to the companies they serve. What is especially interesting is how well many, especially CAEs of larger companies, gain information and insight through networking. Many are involved with their peers in industry or geographically based discussion groups, sharing through blogs, conferences, and internet-based information exchanges. And of course there’s still the opportunity to communicate via email or text or pick up the phone to talk with a valued colleague.