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.


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.


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.


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


Now What?

Enron,World Com,

Global Crossing…

Sarbanes-Oxley


Attitude Adjustment…

-Clement Stone, U.S. Ambassador to England and founder of Combined Insurance, former Irish potato farmer


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.


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


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.


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


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!


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


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


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!


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.


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.


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.”


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?


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.


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.


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.


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.


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


Today’s Critical Choice: Just Keeping Our Heads Above Water or Reaching for Competitive Advantage


Internal

Audit

Managerial Accountability

Clarity & Consistency

Audit

Committee

Communication

External Audit

Accounting & Financial

Mgmt.Competence

World Class

Integrity

Structured Stewardship ModelStructured Stewardship Model


Q&A Exchange!

www.schiffconsulting.com

Thank You!


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.


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.

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