Reforming & Revitalizing Internal Control Structures Guidance for Business and Financial Leaders...
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Transcript of Reforming & Revitalizing Internal Control Structures Guidance for Business and Financial Leaders...
Reforming & Revitalizing Internal Control Structures
Guidance for Business
and Financial LeadersJonathan B. Schiff
Professor of Accounting, FDU
Copyright, Schiff Consulting, 2003
Signs That Your Company Has Gone Too Far With Cost Cutting… The head of purchasing goes
to employees’ homes and steals back office supplies.
Water coolers are coin operated. To get paid company life insurance, you have
to sell ten policies to relatives. You have to call in sick on a 900 number. Company blood drives are now considered a
profit center.
Copyright, Schiff Consulting, 2003
Specific and Relevant Experience and Expertise Corporate audit committee service. Author of The Conference Board Research
Report, New Directions in Internal Auditing. Consulting to several Fortune 500 companies
on controllership and integrity practices. Author and researcher of foundation study for
the COSO Report and several articles on integrity, stewardship and governance.
Copyright, Schiff Consulting, 2003
Specific and Relevant Experience and Expertise Won national recognition for our work in this space,
including the Communicator Award, Telly Award, and the CFO Reach Award.
The Wall Street Journal identified Schiff as an ”authority on corporate internal controls.”
Designing and developing a new internal audit function for a NYSE-listed company.
Launching a new skills and competency model for the CFO Organization of American Express Company.
Copyright, Schiff Consulting, 2003
Finance Development & Training Institute ConsortiumCurrent Membership, Founded in 1994.
American Express Cisco Systems DaimlerChrysler Dow Chemical Intel Liberty Mutual
Group
Merck & Co. Microsoft Procter & Gamble Verizon Williams
Copyright, Schiff Consulting, 2003
Attitude Adjustment…
-Clement Stone, U.S. Ambassador to England and founder of Combined Insurance, former Irish potato farmer
Copyright, Schiff Consulting, 2003
On Auditor Independence…
“As the results of two new studies show, the business as usual crowd still reigns.”
-“On Reform, It’s Time to Walk the Walk,” The Sunday New York Times, October 6, 2002 page 1, section 3.
Copyright, Schiff Consulting, 2003
Percent of Total Fee to the Audit Firms for Consulting Services
Company 2001 Lucent 89% Tyco 74% WorldCom 74% Xerox 86%
____The New York Times
Copyright, Schiff Consulting, 2003
Implications
Increasing discomfort from audit committee regarding both appearance and reality independence of the audit firm.
Increasing pressure to identify internal resources to support initiatives and project traditionally farmed out to the audit firm.
Opportunity to grow the quality of internal financial and accounting services.
Copyright, Schiff Consulting, 2003
What’s Not New? Demand for reliable, understandable and
timely information, for both internal and external customers
Transaction complexity is not going away Need for independent “adversarial”
assessment to validate management’s representations
Reporting line issues Performance pressures
Copyright, Schiff Consulting, 2003
What’s Not New? Shareholder value growth mission Need for a profession that reeks of integrity,
not opportunism Economic recession always surfaces
accounting and business failure and financial fraud-Making $$$ is a great deodorant!
US approach is still rigorous in the global context!
Restoration of credibility, both internally and externally is the imperative!
Copyright, Schiff Consulting, 2003
What type of strategies historically worked to restore confidence and build shareholder value?
1980’s/McNeil’s Tylenol-Johnson & Johnson’s Ralph Larsen
1990’s/GE’s Kidder Peabody’s CEO, Mike Carpenter and Jack Welch
Copyright, Schiff Consulting, 2003
GE’s Kidder Peabody…
“Controllership is the job of the finance guy-My job is to grow this business”-Mike Carpenter, former, CEO, Kidder Peabody.
-As reported in The Wall Street Journal
Copyright, Schiff Consulting, 2003
Risks and Symptoms Is auditing (a.k.a. assurance) and consulting
services a “poisonous combination?” Is too much out sourcing a good thing? Influence run amuck in many instances Has auditing lost it traditional adversarial
edge? For the first time, investor’s fear that
aggressive accounting may not be an extreme exception, but a standard of practice!
Copyright, Schiff Consulting, 2003
Even the National Media Has Caught On…
“No Creative Accounting Here. Just the #1 business program on cable.”-Fox News Advertisement for Neil Cavuto’s daily
program in the May 29, 2002 issue of The Wall Street Journal, page A21.
Copyright, Schiff Consulting, 2003
New Risks and Old Symptoms
Enron audit committee leader, lauded professor of accounting and Dean, Dr. Jaedicke of Stanford University’s Graduate School of Business was in the same position for 25 years, since the Company’s inception.
“GE names two new outside directors…in a bid to strengthen corporate governance,”
–The Wall Street Journal, October 25, 2002, page A3.
Copyright, Schiff Consulting, 2003
New Risks and Symptoms
According to researchers from Columbia and Yale Universities, McKinsey’s The War for Talent and Talent Mindset consulting was a key driver of Enron, Tyco and other failures. – “Don’t be afraid to promote stars without specifically relevant
experience, seemingly over their heads.”
– “We hire very smart people and pay them more than they think that they are worth.”
– “At Enron the needs of the customers and the shareholders were secondary to the needs of its stars.”
– “It never occurred to them, that if everyone had to think out of the box, maybe it was the box that needed fixing.”
Copyright, Schiff Consulting, 2003
Influence Run Amuck-Voices From the Field “Virtually our entire financial leadership team comes
from our audit firm”-Large HMO
“We single source our management consulting services from (one of the final four)”-Money Center Bank
“We (the board of directors) does make a move without the auditors”-Healthcare Services Giant
Who’s Driving the Bus?
Copyright, Schiff Consulting, 2003
Enron Fall Out-Opportunities
The timing is ripe for an assessment across functions with respect to controllership, stewardship, audit, integrity, risk assessment, information reliability and relationships.
This may be the best opportunity to create sustained positive change that delivers a competitive edge.
Copyright, Schiff Consulting, 2003
Creating Competitive Advantage-What Works Straight forward, understandable Integrity document
and sign-off for all employees, annually! Leaders and staff have different, but important roles. On-going, regular focus and communication for both
leaders and staff. Controllership and integrity skills identification
and assessment across the organization-Ironically, rarely part of new employee orientation!
Ombudsman program-A key Six Sigma Quality linkage and leverage point.
Copyright, Schiff Consulting, 2003
Creating Competitive Advantage-What Works Specifics that are easily understood that include the
sanctity of both operational and financial information-Going beyond the FCPA.
Strengthening the objectivity, competence and acumen of the audit committee. No weak links!
Increased accountability and transparency with respect to expected conduct and practices.
Critical detailed skills assessment and analysis to assure that the “careful selection and training of finance and accounting staff” is a reality.
Swift, fair and clear impact resulting from violation.
Copyright, Schiff Consulting, 2003
Integrity, Controllership and Stewardship Education Most basic orientation and manager
programs contain little or no content of this subject.
Accounting students focus on the subject primarily with respect to limited coverage on the Uniform CPA exam
Other business school majors receive little or not exposure to this subject matter.
Copyright, Schiff Consulting, 2003
Controllership Practice Case-NBC
Items to Note Note title and introduction to the subject Who’s doing the talking? Communicating broadly The value proposition-What’s in it for me? This video was designed as the front piece to
a corporate-wide controllership initiative
Copyright, Schiff Consulting, 2003
Today’s Critical Choice: Just Keeping Our Heads Above Water or Reaching for Competitive Advantage
Copyright, Schiff Consulting, 2003
Internal
Audit
Managerial Accountability
Clarity & Consistency
Audit
Committee
Communication
External Audit
Accounting & Financial
Mgmt.Competence
World Class
Integrity
Structured Stewardship ModelStructured Stewardship Model
Copyright, Schiff Consulting, 2003
Schiff Consulting GroupActivities and Accomplishments
• "Enron Fall-Out: Implications for Financial Leaders," lead segment, Financial Management Network (and FMN Online) video series, February 2002. The FMN series reaches over 950 companies monthly. Top-rated segment for the 1st quarter!
• “Everyone Out of the Pool-A Segment Reporting Perspective,” Management Accounting Quarterly, Spring, 2002, pages 1-6.
• "Employee Access to Cost and Financial Information: An Interview with Jonathan Schiff," Journal of Cost Management, Warren Gorham & Lamont, January-February, 2002, pages 3-11. Also in the current issue of Gestion in Spanish.
Copyright, Schiff Consulting, 2003
Schiff Consulting GroupActivities and Accomplishments
• Research Report: Enhancing Research & Development Productivity Through Aggressive Financial Management, Consortium for Advanced Manufacturing-International. An interview article about this study’s findings and insights appears in the June 2002 issue of Financial Executive magazine. Also in the October 2002 Financial Management Network video series.
• CFO Top Development Practices Study, Financial Executives-International Research Foundation, available March 2003.
• "MiCRUS: Activity-Based Management for Business Turnaround," (with Bob Kaplan), Harvard Business School Case.
• Sarbanes-Oxley Legislation Impact: Lead Segment, September, 2002 issue of the Financial Management Network.