I recently had the privilege of attending an International Federation of Accountants Council (IFAC) meeting where we discussed the credit crisis, its impact on different countries’ economies and the profession’s reaction to the crisis including professionals in practice and professional accountants in business.
IFAC’s main purpose is the development of auditing, ethics and education standards for professional accountants. This being the case, IFAC and the International Auditing and Assurance Standards Board took the opportunity to do some introspection and consider the influence of reporting and auditing standards on the economic crisis.
A review of what can and must be done to more effectively regulate and report on market and business performance to ensure that a repeat of this kind of event does not happen is essential. IFAC has committed itself to working with regulators, standard setters and other role players to proactively review its own governance structures, processes and current standards to improve overall effectiveness of global markets in the public interest. I guess, however, that the answer might lie not just with the auditors and accountants but with business in general.
How does a Board or audit committee member react in conditions like the current economic crisis?
One of the questions that I encounter almost weekly comes from members of Boards and audit committees most affected by the crisis. The question is, ‘What was it that I did not ask that precipitated this crisis? How does a Board member or an audit committee member most effectively execute his/her duties to minimise the risk of errant products and/or service lines getting into a system and jeopardising the stability of an organisation as a whole?
One answer is in the establishment of a robust ERM system. What does that mean? To my mind, it is the establishment of a system that, amongst other things, allows an organisation to effectively assess product strategies and proactively identify risks modelled around various scenarios related to those product and service lines. This is of course a subset of broader ERM and places a greater burden on Board members to more intimately understand the businesses they serve and the offerings these take to market. Often an inconspicuous service line that appears immaterial can be the one that carries more risk than established high value revenue earners. It is the responsibility of a Board member to ensure that processes are in place within an organisation to identify, manage and mitigate risks that stem from product and service lines that are often innovative, with high risk and potential high reward.
The question that stems from here, then, is this: How does a Board member do all of this without effectively becoming an Executive in that organisation? My advice to any Board member would be to focus on the basics.
• Ensure that the organisation has developed a short-, medium-and long-term strategy that is effective and has been properly interrogated.
• Review the strategy and implementation plans regularly to ensure that it is appropriate in a fluid market.
• Ensure that appropriate processes and tools are in place to properly document, drive and record achievement of objectives.
• Ensure that a properly articulated risk management process is in place that regularly reviews, identifies, manages and reports on key risk areas within the organisation.
• Ensure that governance structures are optimal and functional.
How do we as a profession respond to the crisis?
With every challenge comes opportunity. Our profession will, at some point, face difficult questions relating to this economic crisis. I suggest that rather than be defensive, we proactively seek solutions now. In so doing we will become part of the long-term solution to effective risk management, reporting and assurance. No doubt, market forces will drive increased regulation and increased levels of reporting. As a result, the markets will look to professional accountants and auditors to provide greater levels of assurance and design improved mechanisms that provide greater assurance, improved reporting, enhanced risk management and improved performance management metrics and reporting processes. Again, I stress that this becomes an opportune time for us all to reflect and become part of the long-term solution to the crisis.
Nazeer Wadee CA(SA), is Chief Operations Officer, SAICA.
