Erwin Boeren 270002C43V ERWIN.BOEREN@NL.IBM.COM | | Tags:  grc analytics busness management openpages ibm erwin risk performance boeren | 0 Comments | 633 Visits
Last year IBM acquired OpenPages as a strategic move into the area of Governance, Risk and Compliance. The lasest announcement to acquire Algorithmics (quantitative risk management) shows the continuous commitment of IBM in the GRC market. GRC software will integrate into the Business Analytics Software group, the area where the former acquisitions like Cognos, SPSS and Clarity systems already resides.
Now that Risk Management is evolving, more and more organizations are starting an enterprise approach to risk management. And this is where I see the need for Risk and Performance Management convergence.
In past Risk Management implementations I see that a major portion of time and budget was spent on Risk Reporting and Dashboarding. Especially the need for self service reporting, where users can ad hoc create their own risk reports, is growing. We do not want to wait in the queue waiting for our report to be created. 2 days later you missed the opportunity to respond and the loss is there.
With this self service capability the question automatically pops up 'can I trust my data'. And now we are back in the area of data governance. This is exactly where the area of Performance Management is today.
Apart from these reporting and dashboarding capabilities Enterprise Risk Management means alignment of risks and controls to the strategic initiatives of the organization. What will prevent me from reaching my business goals? Isn't this defined as a risk? And how will we prevent this from happening? Wasn't that defined as a control?
Even more interesting are questions like, 'What if I was able to perform risk scenario planning?', 'What if I could predict risks from happening?' or 'What is the correlation between the risks that have materialized?'.
And there is the proof that Risk Management and Performance Management have lots in common and should be integrated. Lets call it Business Analytics.
Governance, Risk & Compliance Leader
IBM IOT Southwest Europe
Richard Steinberg 270004HRBG email@example.com | | Tags:  global cro mf risk | 0 Comments | 573 Visits
A recent Congressional hearing on MF Global has shed more light on how well the company did, or didn’t, handle its risk management responsibilities. A couple of weeks ago the House Financial Service Committee’s oversight panel heard testimony from the firm’s chief risk officers. As CRO, Michael Roseman in 2010 raised concerns about the firm’s European Sovereign debt positions, reportedly clashing with top executives but in any event seeing to it that the board of directors was informed of what was going on. (For more on this, you can look back to my December 15 posting.) Then in early 2011 MF Global hired a new chief risk officer, Michael Stockman, who like CEO Jon Corzine was a former Goldman guy. One Congressman reportedly said it appeared “Stockman was hired to tell Mr. Corzine what he wanted to hear,” and another called him a “yes man.” Whether that’s fair or not is debatable, though one wonders why the change of CROs was made in the first place. In defense, Stockman said that for the first several months of his tenure he believed the firm’s “risk profile associated with the company’s European sovereign debt position was acceptable in light of then-prevailing market conditions,” but “as credit markets deteriorated in the summer of 2011, I came to the view that it would be prudent for the company to mitigate the increased risks.” Whether his initial assessment was justified and whether he pushed hard and timely enough with management and the board certainly is questionable.
Fascinating here is what was said by the Congressmen doing the questioning, reportedly saying to Stockman that it was up to the chief risk officer to “rein in their bosses risk taking.” If that indeed was said, then it shows a sad lack of understanding of what a chief risk officer’s role truly is. In highly summarized form, if the role is structured well, the CRO is responsible for establishing a process within the organization where managers timely identify, analyze, and manage risk, with communications systems in place to ensure appropriate upstream reporting. The reporting element is critical, not only within the organizational infrastructure but also going to the very top. The CRO needs to be sure top management and ultimately the board of directors are fully apprised of significant risks. And if management refuses to inform the board, then the CRO has to do it him/herself. CRO Roseman seems to have made sure the board was apprised.
A CRO’s job is not easy, especially when a company takes on what can only be deemed unusually high risk positions. The CRO needs to be sure the risks are identified, analyzed and reported, which seems to be the case here. The board was apprised of the risks when Roseman was CRO, and we’re told the directors considered the risks and acquiesced. A board of course should probe deeply enough to truly understand the risks and surrounding circumstances. If those actions occurred, and the CRO was convinced the board had sufficient understanding and insight, then he has done his job – which does not, as the Congressmen asserted, include the CRO himself reining in the risks.
No doubt more insights will emerge and the picture of what happened will become clearer. Investigators might even find out what happened to the more than $1 billion (one estimate is as high as $1.6 billion) of “missing” customer money, and whether internal controls were faulty or overridden as the firm was about to go under. In any event, it’s important that the different roles of a CEO, CRO and board be fully understood. The CRO does not and cannot be responsible for the ultimate actions of a CEO and board of directors. The CRO’s role includes seeing that top management and the board understand the risks and make well-informed judgments. And yes, those judgments may ultimately prove to be bad, or even fatal as was the case with MF Global.
Richard Steinberg 270004HRBG firstname.lastname@example.org | | Tags:  grc risk_management | 0 Comments | 565 Visits
We know that MF Global, the firm run by Jon S. Corzine, recently imploded under the weight of bad bets and huge leverage. Reports say that Corzine, former U.S. Senator, Governor of New Jersey, and co-head of Goldman Sachs, did at MF Global what he did at GS – and that’s take large risks in trading. How, one could ask, could it have turned out so wrong?
Effective risk management processes have at their core identifying, analyzing and managing risks. It will be a while before we know all the details of MF Global’s risk management process, but it appears to have worked reasonably well. Wait, what – is that a misprint? Probably not.
Based on reports, Corzine knew the risks he was taking. Basically, he bet that the European leaders would act in a way to alleviate the sovereign debt crisis. He put over $6 billion of the firm’s money at risk, which with the associated leverage put the firm’s existence at risk. And the firm’s risk officers also knew, and they seemed to have done what they were supposed to – they brought the matter to the board of directors. Reports say a senior risk officer described the situation and the risks to the board, with Corzine present. The risk officer pointed out not only the nature and size of the risks, but also that risks included both potential defaults on the sovereign debt and the bonds losing sufficient value to cause a liquidity crisis at the firm. The directors listened, and decided to approve what Corzine was doing.
Now, we weren’t in the room with the directors, or inside their heads, so we don’t know whether they made a thoughtful and rational business judgment, or whether they rolled over under Corzine’s undue influence. If the latter, then they failed in their job. But if the former, then they determined that they and the firm had a risk appetite large enough to “bet the ranch.”
So, whether this is a failure of risk management will be decided as the investigations continue and more facts emerge. And of course the missing “segregated” client funds is another matter, likely centered on specific internal controls over that money and what control activities might have been overridden by more senior executives. Also at issue is whether regulators did their job effectively. It will be interesting, indeed, to learn more, as no doubt we will as the investigations unfold.
Richard Steinberg 270004HRBG email@example.com | | Tags:  dodd-frank risk risk_management openpages | 0 Comments | 520 Visits
If you’re in or work with the financial services industry, you probably know about the late December holiday "gift" from the U.S. Federal Reserve – proposed rules implementing provisions of the Dodd-Frank Act which could have a profound effect on how boards and managements deal with risk. In any event, you’ll want to keep in mind that the Fed is accepting comments only for the next month – until March 31.
The proposed rules are far-reaching, including requirements for risk-based capital and leverage, liquidity, stress tests, sing
The risk committee is required to "document and oversee, on an enterprise-wide basis, the risk-management practices of the company's worldwide operations." The committee would be chaired by an independent director, and at least one member needs to have risk-management expertise commensurate with the company's size, complexity, and other risk-related factors. Further, its members are expected to understand risk-management principles and practices relevant to the company, with specified experience in risk management. And there are rules for a committee charter, meetings, and documentation.
The committee’s responsibilities include reviewing and approving an appropriate risk-management framework commensurate with the company's size and other factors. The framework’s scope is outlined, including requirements for risk limits appropriate to each line of business, policies and procedures for risk-management practices, processes for identifying and reporting risks, monitoring compliance with risk limits and procedures, and specification of management's authority and independence to carry out risk-management responsibilities. Additionally, the larger covered companies will need to appoint a chief risk officer in charge of implementing and maintaining the risk-management framework and practices approved by the risk committee, with the rules specifying responsibilities and qualifications for the CRO and reporting relationships.
If not already under way, now is the time to analyze the proposal and its implication, and let the Fed know what changes are needed. If interested, you might want to tune into the upcoming IBM OpenPages webinar where I’ll be discussing the proposed rules, their implications and the challenges they present – March 8, 2:00 pm Eastern Time.
Richard Steinberg 270004HRBG firstname.lastname@example.org | | Tags:  fraud risk_management | 0 Comments | 506 Visits
We know the Olympus Corp. suffered a major management fraud. Financial statements were manipulated to hide huge losses, resulting in its stock price dropping like a rock and jeopardizing the company’s listing status and indeed existence in its current form. For more on the fraud, you may want to look at my October 15, 2011 blog posting.
Those looking at this fiasco may well be asking why this fraud, which had been going on for more than a decade, wasn’t brought to light any sooner – that is, before newly appointed CEO Michael Woodford began to smell a rat. Well, now it’s come out that one critical element in detecting and possibly preventing fraud at the highest management levels – which is having an effective whisleblowing process – wasn’t in place at Olympus. Sure, they had a process, but now it’s reported that the very executives perpetrating the fraud were in charge of the hotline! It’s said that the company’s internal auditors and other employees wanted the whistleblower system to be run by outside parties, but at least one of the executives alleged to have been driving the fraud objected and won out. According to an independent panel investigating the fraud, the corporate atmosphere was such that the hotline was “significantly disabled.” Is it essential to have the hotline outsourced? No. But it is critical that company personnel feel comfortable that their communications will not come back to haunt them, which is said not to be the case at Olympus.
Much has been written about management fraud, and what internal controls are needed to prevent or detect it. But my experience is that it really comes down to four key factors. One is having a culture of integrity and ethical values, with the “right” tone at the top of the organization and open communication channels. Another is a board of directors (and audit committee) that is independent and providing effective oversight. One more is an effective internal audit function. And then there’s an effective whistleblower process. Based on what’s been reported, Olympus evidently didn’t have any of these big four – we don’t know much about the functioning of its internal audit function, but now learn that the company is suing the former internal auditor along with two other executives who an independent panel said “orchestrated the scheme.” So is it surprising that such a fraud could have existed for so long? In light of its governance, risk management and internal control processes, the answer is “not really.”
When we look at the potential of management fraud, it’s critical to look at these four elements. If even one is missing, the chance of fraud going undetected increases greatly. And no one should proceed with the odds stacked in favor of bad actors.
Liz Andrews 2700041WEU email@example.com | | Tags:  openpages regulatory_compliance dodd-frank sec | 0 Comments | 506 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.
Regular readers of this blog undoubtedly are familiar with the FCPA and related Justice Department and SEC enforcement activities. On a personal note, I remember well when the FCPA was enacted, as I took on responsibility in my firm for providing our clients with analysis, guidance, and support materials to help deal with the new law. Emphasis was put as much on the Act’s internal control provisions, which require (with somewhat different terminology) effective systems of internal control over financial reporting – this of course, long before SOX. Companies did look at their internal control systems for opportunities for strengthening, but without required management reporting or auditor involvement, we did not see the kind of focus that came in more recent years under SOX. Significant attention was given to the bribery provisions, though with little regulatory enforcement activity for many years, attention subsequently waned.
But life under the FCPA now is very different. It’s reported that in the last four years 58 companies paid almost $4 billion in settlements – including Siemens (whose securities are traded in the U.S.) paying $800 million each to the German and U.S. regulators – and 42 individuals have been convicted. Early this year, for example, an oil company executive was sentenced to a two and one-half prison term. “I am truly sorry,” he said, “I lost touch.” At the moment some 78 companies are reportedly under investigation, including the likes of Alcoa, Avon, Goldman Sachs, HP, Pfizer, and Wal-Mart – it remains to be seen whether they will be formally charged. And we know that Rupert Murdoch’s News Corporation, among others, is in regulators’ sights.
There has been pushback by business, saying regulators have been overzealous and thereby stifling legitimate business initiatives – especially so with their going after not only companies but individual executives as well. The United States Chamber of Commerce is looking to have the law amended, with a Chamber official recently noting “The last time I checked, we were not living in a police state.” But enforcement officials don’t seem to be perturbed, with the assistant Attorney General making clear that the Department is expanding its staff and enforcement actions are on the rise. With that said, discussions between the groups have begun, and desired guidance may be forthcoming.
What to do? Clearly there’s no silver bullet. Close attention needs to be paid to ensuring strong compliance programs – which, importantly, the DOJ has said it will look to in a positive way when considering enforcement actions. Yes, further clarity has been requested from the Department in that regard, and we know about concerns with Dodd-Frank’s whistleblower provisions, but that shouldn’t stop compliance officers and senior managements from continuing efforts to strengthen internal programs. Many law and other firms have provided guidance on identifying high-risk areas and steps to be taken, which certainly are worth serious consideration. Among important areas of focus are risk assessment, policy management, clear authorities and fixed responsibility among line managers, real time communication, close monitoring by line management as well as compliance and internal audit personnel, and immediate and decisive action when red flags appear. It’s not easy, but with the Act in place and regulators expanding scope, close attention is critical.
You may have heard the news about an SAT cheating scandal, where students were accused of accepting payments or paying others to take the test for them. It seems to have started at Great Neck North High School on Long Island, New York, which I happen to know well – it’s where I went to the high school, which has a proud heritage of being regularly rated among the top high schools in the nation, with a high percentage of graduates going on to top colleges. Rumors of the cheating is reported to have sounded alarms with the school principal, who did the right thing in reporting to the proper authorities.
What’s relevant from a risk management and control perspective is what the College Board, which owns the SAT, and the Educational Testing Service (ETS), which administers the tests, have done. Based on reports, prosecutors relayed that the first thing ETS said was that there’s no problem – the cheating was an “isolated incident,” and the SAT is “secure.” At a state senate meeting, where legislators and school officials accused both the College Board and ETS of having lax security and a system that failed to punish cheats, ETS said if cheating is discovered the score is cancelled, and the student can get a fee refund and retake the test – that’s it! No one, not the high school nor any college, is notified. ETS claimed that state law prohibits it from releasing information about cheating, but prosecutors say that’s just not so. ETS’s approach of downplaying the problem is all the more surprising in light of past problems. Media reports speak to extensive incorrect scoring of tests and losing test results in England in 2008, with the UK Parliament calling their operation a “shambles.” And going back to 1983, cheating was suspected in California.
We can learn lessons from what’s happened here. Importantly, as with ETS, this isn’t the first time the College Board has had a serious problem with the SAT. Regular readers of this blog may remember my posting of a year ago that highlighted what the College Board did when it learned of problems with incorrect scoring of test results. At that time the president said, to the dismay of many, that it wasn’t necessary to look back to see what caused the incorrect scoring – that it would take too long, and in any event it was sufficient only to re-score the tests results. There was no interest in looking at the risks related to incorrect scoring and determining how they could be managed going forward! There was no attempt at risk identification, analysis and mitigation to deal with potential future problems; rather, it was like putting the organization’s collective head in the sand. Well, maybe the College Board has learned something – when this cheating scandal broke, the College Board president said it has hired a former FBI director to investigate security matters.
There’s little doubt that for both the College Board and ETS their reputations and indeed survival may well depend on academic communities having confidence in their ability to identify in advance what could go wrong, and take prudent actions to proactively prevent problems – to ensure the test results are those of the identified students and accurately reflect their performance. Anything less is unacceptable. And those organizations must fully understand that reputations are intertwined. Although the College Board outsources SAT test administration to ETS, that of course doesn’t mean it removes responsibility, certainly not in the eyes of the marketplace. It doesn’t work that way. It’s critical that these organizations get their risk management and crisis management right, with an appropriate level of coordination.
Richard Steinberg 270004HRBG firstname.lastname@example.org | | Tags:  erm coso | 0 Comments | 431 Visits
In case you were too busy watching your kids open their holiday presents you might have missed a “gift” for you – COSO’s updated internal control framework. During the holiday season the draft was exposed for public comment, so if you haven’t already done so, you might want to get your hands on it and tell COSO what you think, and how it might be further improved.
In looking over the draft you’ll see that the fundamental concepts and structure remain. The definition of internal control, the five components, and the COSO cube are unchanged. So are the three categories of objectives, except that the reporting category is expanded to include all reporting by an entity: financial and non-financial, internal and external. This brings the internal control framework in line with how the reporting category of objectives is defined in COSO’s Enterprise Risk Mana
Other enhancements include:
You’ll see the term “ICEFR” (pronounced ice-eh-fer), which is the acronym for internal control over external financial reporting. Because of the importance of the internal control framework for reporting under such requirements as Sarbanes-Oxley, COSO decided to offer a separate guidance document highlighting how the framework can be effectively applied for that purpose. It’s organized around the five internal control components, containing approaches for and examples of their application, with direct linkage to the principles and attributes in the framework. It’s important to keep in mind that the ICEFR guidance is just that, guidance; it will neither replace nor modify the framework. It will be exposed for comment later on this spring.
Well, it’s a case of speak now, or…. If you’re involved in any way with internal control, you’ll want to provide your input on the document. By the way, I’m biased in a positive way – for full disclosure, I was the lead PwC project partner of the team that developed the original Framework, played a similar role with the COSO ERM framework, and advised the project team that developed this updated framework. But you may have different views, and it’s important to make them known. The comment period ends March 31.
Richard Steinberg 270004HRBG email@example.com | | Tags:  risk_management | 0 Comments | 425 Visits
We know that senior executives, especially chief executive officers, look to drive their organizations’ growth initiatives. Many are hard-driving, proactive, and intently focused on doing what needed to carry out strategic plans. Optimism is a typical trait, which can be contagious in getting others in the organization to work in sync towards established goals. This is what CEOs are charged to do, and a key reason why those who do it successfully get the big bucks.
With that said, experience shows that many CEOs are not sufficiently attentive to what can go wrong – that is, what future events could keep their organizations from successfully carrying out the established initiatives. Of course many CEOs and their C-suite teams do focus on such risks, and their organizations benefit from doing so. One such company is Mazor Robotics, a medical technology company based in Israel, whose CEO Ori Hadomi recently was interviewed. He makes a number of interesting observations, one of which is especially insightful – describing risk management in a particularly understandable and compelling way. He associates risk management with ensuring there’s a devil’s advocate involved in key decision-making.
He says: “One of the most obvious mistakes we found is that too often we choose to believe in an optimistic scenario — we think too positively. Positive thinking is important to a certain extent when you want to motivate people, when you want to show them possibilities for the future. But it’s very dangerous when you plan based on that. So one of our takeaways from that was to appoint one of the executive members as a devil’s advocate.” Hadomi expands on how that works, emphasizing that the assigned executive knows the right questions, and asks them in challenging assumptions and pointing out a need to be “more humble with our assumptions.” Hadomi notes that the most surprising thing is that this devil’s advocate is the V.P. of sales for international markets: “You would expect the V.P. of sales to be pie-in-the-sky all the time. But he has a very strong, critical way of thinking, and it is so constructive,” adding that one of the pitfalls of leadership is “thinking too positively when you plan and set expectations.”
I’ve worked with many large companies, and certainly smaller company executives learn from them. But the reverse also is true. In this case, the CEO of Mazor Robotics provides useful insight into how risk management can be effectively conceptualized and applied. Of course, there’s much more to risk management, including capturing the identified risks, analyzing them, and managing them with accountability for needed actions, follow up, etc. But the concept of a devil’s advocate is powerful, especially for executives who may be struggling with what risk management is about.