Ethics in Finance : The State and the Change We Need

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Ethics in Finance : The State and the Change We Need

by Mustafa Mustansir, FIFC

Introduction:

When we talk about the financial world, corporations and economies, we can recall its negatives well. These days they remind us of the global recession, austerity, rising sovereign debt, higher taxes, exploitation of market-illiterate customers, higher bonuses for bank executives, Eurozone crisis etc. People associated with the financial sector suffer a lack of trust from the society.

The paper discusses why people want to be unethical, and the types of unethical behaviours. How do they do it and live with it successfully? It also makes recommendations to help us improve the situation. The case for ethics in finance is a much broader topic for discussion and discovery than just financiers and their malpractices and the economic meltdown. It is a global disease which infects the sacred function of finance in every economy of world.

What is ethical? Who decides?

Ethics have a different meaning in every environment and so does what is ethical. Often what is ethical cannot be defined and is thought of as being something deterministic. But defining what is ethical and eliminating who decides what is ethical is not as difficult. It is a fact that individual benefit is only maximised when he seeks to increase his as well as other’s benefit. Hence, anything which is done only out of benefit for oneself at the cost of others’ interests is unethical then.

Why do financiers want to be unethical?

People want to be unethical because of some reasons and a basic reason for being unethical is greed. Wherever there is money, there is greed. Greed has no limits and it can tempt one to go way beyond acceptable limits. Greed made Bernard Madoff run a giant Ponzi scheme, which lasted longer, reached wider and cut deeper than any similar scheme in history. After its collapse, regulators say Madoff himself estimated $50 billion in personal and institutional wealth from around the world was gone.i An already successful investment broker, adviser and financier, with only one department of his firm involved in the crime, what else than greed could have made him do it?

Moreover, according to the hypothesis of Donald Cressey and as published on the website of the Association of Certified Fraud Examiners, a Fraud Triangle can be used to explain fraud emanating from one or more of the three components i.e. Perceived unshareable financial need, perceived opportunity and rationalization.

Today, fund managers, wealth managers, investment banks etc. are under a constant pressure to perform. Making money is becoming difficult day by day and the clients want to be making money the next day they invest. Plus, with several specialist designations in finance like CFA, CFP, CPA, CIM, CHP, RHU, CAIA, CIIA, MFCii etc., there are more highly educated, experienced and sophisticated institutional and private portfolio managers and other financiers than there were ever before.

At the same time the pool of wealthy customers is growing shallow as businesses from which these customers make monies are itself slowing down leading to a natural loss of wealth, leaving little for them to invest in funds and making them desperate for returns like never before. It follows a domino effect. The global recession though routed out to a great extent still prevails in the form of uncertainty and shaky consumer confidence the world over. People seem like spending but they are not spending. They have grown more prone to risk aversion and shy away from the lucrative products offered by financial institutions.

Another pressure factor is the bonuses which are tied to individual performance. This is where the financiers do their very best every year. Some of them employ absolutely cunning schemes to attract new clients, sell overly risked products, bet against what they are selling their clients, run Ponzi schemes, short-sell and also indulge in insider trading. It is interesting to note that no matter what the outcome, bonuses remain high and are paid out every year.

In 2008, the worst year of the financial crisis, nine banks, including Citigroup Inc. and Merrill Lynch & Co., paid over $32. 6 billion in bonuses while receiving $175 billion in tax payer funds, according to a report by New York Attorney General Andrew Cuomo (iii). Institutions declare bankruptcies, and it is the clients who are forced into streets and even poverty. Taxpayers foot the bill to save the job losses and the economy. But the bankers who sold risky products which drowned money lose not even a dime! This is because the seller is always protected. This is the beauty of the system-a source of opportunity.

Further, the opportunity to engage in unethical behaviour is also an important factor. This opportunity emanates from the fact that financiers are not dealing with their own money but their client’s money i.e. someone else’s money. They are merely agents. Hence, risky bets and trades are made with utmost courage and confidence. Sometimes bets are counter bet and transactions hedged in such a way that win or lose, the financial institution always wins.

The same opportunity is also created with a majority of customers being illiterate about the market and its dynamics. Some of them even have no idea where the economy is headed. All they have is money which they want to invest somewhere to safeguard its value and make a return on it. Plus, today’s financial products have grown so sophisticated that even their very sellers are unsure about how they would work out and the risks involved, let alone the client to whom they are selling it too.

All this makes it very easy to unethically drive-in business by fraudulent targeting of customers by selling them products they don’t need or have no risk appetite for or in worst cases products you yourself aren’t sure about, in fact you are betting against them! If it helps get business, why not go for it? All this leaves the client with no choice but to trust you and you know you can manipulate him or her and get away by blaming everything on the market and the economy.

Moreover, regulators too at times also fail to undertake the right investigations and scrutiny despite surprising facts and figures posted by some funds and investment institutions. In an interview from prison, the infamous Bernard Madoff cited a failure to conduct normal scrutiny by any partner institutions or the regulators. He also claimed that they had to know but showed an attitude that, “If you are doing something wrong, we don’t want to know.” (iv)

Finally, a culture of acceptance towards unethical behaviour, where being unethical is no more seen as deviance but rather the practice itself becomes the norm. (Rationalization) This is the worst scenario. People belonging to corporate cultures where boundaries between what generally ought to be ethical and unethical are narrow, are much likely to engage rather involve in enhanced ways to breach ethical values.

An investment bank where it is common culture to sell high-risk products and betting against them yourself, talking otherwise would sound unethical! Similarly, in a small fund, where the manager resorts to insider information from dispersed sources regularly to drive returns, insider trading would never be perceived as unethical but a part of business. To sum it, acceptance changes perception and leads to breach of ethics on a regular and in some cases, on a mandatory basis.

Types of unethical behaviours
Having discussed why people from the financial world want to or are forced into being unethical, it is time for us to examine in further detail the types of unethical behaviours they indulge in. Here we will talk about companies from all sectors including the financial sector because at the core of it all breach is either carried out by a financier or effectively covered by one.

Fraudulent financial reporting

Fraudulent financial reporting is the single most committed unethical act in the financial world. Almost every company has been involved in fraudulent financial reporting over time. Every reporting period there are transactions, adjustments and facts which are ignored intentionally or intentionally taken note of by those responsible for preparation of financial information. They know where they want to take the organization and how they could take it there.

Hence, to a good extent the numbers we see as the indicators of a company’s financial performance and position, lack intrinsic value. In case of companies which do not face statutory requirements for publishing their financial information the situation is even worse. Companies are out of business long before they declare bankruptcy. It is only by virtue of fraudulent financial reporting that these companies are able to prolong their fall in hopes of improved conditions in future-which rarely improves.

Fraudulent client targeting
Fraudulent client targeting basically refers to targeting clients to buy products or services which they actually do not need or which would harm them more than they would do them good but in all scenarios the seller will benefit. This is a common practice among investment banking firms currently. Nobody questions such exploitation because at the time when such decisions are being made, all those present share a common interest of getting the client and believe they are doing the right thing. We have talked about client exploitation in detail already in the section ‘Why do financiers want to be unethical?’

Collusion with regulators
Breach of ethics also involves collusion with the regulators directly or indirectly colluding with the ones responsible to enforce the will of regulators, including collusion with the auditors of the company. History bears witness to hundreds of scandals involving collusion between the company’s management and their auditors. The Enron incident of 2001 shook the financial world and the audit profession leading to the end of the Group and their auditors (one of the top firms in world).

Unfortunately, in some parts of the world, the practice of auditing the financial information of a company has become more or less a drama performed by the auditors and the company’s management in front of the shareholders and regulators like the Securities & Exchange Commission. In order to maintain fruitful relations with the client, the auditors agree to numbers for provisioning and profitability and allow suspicious adjustments and reversals which improve the company’s profitability.

Everything as long as it would not get noticed in the eyes of law is allowed and done in partnership. This is one major reason why corporations with clean audit reports and absolutely no doubts about them being a going concern in the foreseeable future just so suddenly file for bankruptcy. The sudden effect was never there, this is what we think after having believed and trusted the financial viability of a company for years through its audited information when in fact it was all cooked up.

Circumventing the law and Money Laundering
Another quite regular unethical move which is in fact ethical in the eyes of law is actually circumventing the law. The impact of such circumvention is different for all dependent upon their sphere of influence and the amount of society’s trust breached. Every year countries are robbed of billions of tax revenue monies because cunning tax advisers and consultants (almost all of them with a finance background) help people evade the law by not actually breaking the law.

Illegal activities like money laundering are also aided by financiers the world over to keep clients happy and to make profits. Places like the Cayman Islands, Bahamas, Bermuda, Switzerland, Luxembourg, Singapore, Hong Kong etc. notoriously offer tax havens for wealth which has more or less come from black sources and illicit activities. According to a report by Tax Justice Network, there may be as much as $32 trillion of hidden financial assets held offshore by high net worth individuals (v).

Is this ethical? Yes! It is quite ethical because without this black money the economies and the banking systems in particular in these countries would collapse. But it is their existence which shall never help but in fact sustain and reinforce the evil practices from which this money is made; practices like money laundering, tax evasion, drugs and arms smuggling, looted funds of countries and proceeds from human trafficking to name a few.

Discrimination & Harassment
Finally, one must not ignore the instances of discrimination and harassment which occur in the financial world. Reported or not, they are an important aspect to how much what is ethical and moral is honoured by the financiers. The frequency of these instances and their gravity reflect the value systems of those belonging to the financial world.

In 2010, Goldman Sachs was in the limelight for sexual discrimination and harassment against its women employees in a suit filed by a group of female employees, led by Miss Cristina Chen-Oster-the initiator of the suit. The women plaintiffs recall absolutely horrific and disgusting treatment at the hands of their male colleagues and seniors and discrimination in pay, promotions and the terms and conditions of their jobs (vi).

Moreover, the Equality & Human Rights Commission in Britain initiated an inquiry into sex discrimination and unequal pay in the financial services sector in 2009 and later published its report. The detailed report examines the case for recruitment, pay, promotion and terms and conditions of jobs for women in particular in the financial services sector of Britain. According to the report the sector is prone to significant pay gaps between the two genders with full-time working women earning 55% less annual gross salary than their male colleagues (vii). Follow-ups on this report by the Commission continue to this day and the situation is still far from improved.

In addition, age discrimination among financial institutions is also a common practice worse than sexual discrimination at times. According to a study published in the Financial Times, in London, age discrimination is now seen as a more widespread problem than sex discrimination according to a survey of 1,600 finance sector workers (viii). In 2008, as businesses cut jobs to slash costs, in addition to women, it was the ageing workers who mostly lost their jobs owing to age discrimination in organisations. Thousands of petitions are still underway in US Courts for the same.

What are we lacking?
The reason why history has witnessed so many instances of ethical breaches in the financial world and these include only those ever discovered by the public eye; the reason why ethics are being breached even at this moment somewhere in the world of finance is because of a virtual inexistence of an ethical framework for finance. We are either not sure or try to turn a blind eye to its existence.

Ethical values are only what we publish every year in our annual reports, business plans, prospectuses and press releases. We may give lecture after lecture and speeches after speeches, we may have programs dedicated to educating future financiers to learn and respect ethics at work but still fail. In some cases, the whole cultures of organisations are flawed.

Recognition and adherence to ethical values should not be something individualistic. It ought to be streamlined and benchmarked, so that there is no room for individual perception because if there is, then as discussed earlier, ethics would be breached some way or the other. There has to be a framework restricting liberal thinking about following ethics. A framework which would enforce ethical values in the financial system and help restore public trust in financial institutions.

Way Forward

Going forward one must accept and take responsibility for the current state of ethics in finance. However, this picture can be improved with time. In the following sections, we will discuss a few measures, which might be radical and difficult to enforce at once but which if enforced in good faith and with the fist of law, will certainly improve the state of ethical following in financial institutions.

It must be noted that all breaches are undertaken because financiers think they have the ability to get away with it. It’s a simple fact nobody would risk their reputation and careers without preparing to cover up for it later. They might not initially sometimes but they have to eventually. Such is the case with financiers too.

Moreover, the financial information of any financial institution is not only its image to the world but also its most comprehensive cover. The financial information plays the role of a man’s clothes. Just as like the clothes project the status of a man or woman in the society, in addition to indicating a thousand other things about the person, they also cover the ills of the body and the evils within. Hence, even the most evil could be projected as angels.

Similarly, companies, in particular the financial institutions constantly manipulate their financial information in order to project a positive image. It is here where they try to hide all the breaches they were involved in, all the frauds, all the fake numbers, all the offshore dealings, all the questionable deals and transactions.

Therefore, a solution must address this vulnerability of financial information to ensure that they are prepared true and fair and are in no matter manipulated. The solution must also have the capacity to be able to bring to public knowledge the state of ethics in the organisation so that we have a bigger picture of all the affairs.

Surprise Audit
The concept is fairly comprehensible by its name, and is under practice in many places. However, what is being suggested is to set-up a body responsible for auditing financial institutions as well as their auditors, different than the quality control audits that follow. These surprise audits must focus only the vulnerable areas of the audit engagement.

For instance, auditors A, B & Co. audited M/s. X& Y Inc. in the year 2012. Now a surprise audit should be expected by both of them, but only one of them would get selected. The surprise auditors should either be another audit firm or a state-backed authority and their scope of engagement should focus components, off-shore vehicles and in particular prior year adjustments and adjustments and reversals made at period end.

In case of the company, the auditors must evaluate the authenticity and ethical soundness of their actions and practices. Whereas, in case of A, B & Co. the auditors must evaluate the work performed to verify such transactions by the auditor, the auditor’s professional judgement and his audit risk coverage. This exercise would certainly not eliminate fraudulent financial reporting but would ensure that those who still go for it take a mighty risk.

This scheme would also restrict collusion and any circumvention of laws by the company and the auditor. If the company does it, the auditor must prove his case to allow so without qualifying or mentioning the facts in his audit report, and if he does not then he risks his reputation and the reputation of the whole profession. As for the auditor alone, he has no motive to commence such a practice in the first place. The impetus plus incentive always comes from the management.

The results of such audits must be published publically and those audited must be assigned ratings just like credit ratings. Even though the scope of such surprise audits is targeted, auditing every corporation each year is not practicable. Hence, a surprise audit must be undertaken at least once every three years but a subsequent audit should also be expected next year. The idea is to establish unpredictability so as to enhance the quality of preparation of financial statements and their subsequent audit increasing integrity and ethical compliance.

Ethical Audit
Just as like corporations are required to have their financial information audited by an independent auditor, companies should also be required to have an ethical audit done once every two years. This concept is quite novel and in its early stages. It may be argued that financial audit suffices for ethical compliances and that audit of financial statements does not only have to do with audit of financial statements alone but the auditors also look into other aspects of the company including any ethical malpractices. There is also a so-called review report issued to shareholders in addition to the audit report for compliance with Ethics and Code of Corporate Governance.

However, it is important that we understand that even though today’s audits are multi-dimensional and a product of thorough planning and risk coverage; for the sake of efficiency and in order to avoid costly audits, only areas which may affect the preparation of financial statements are looked into. The International Standards on Auditing pronounce quite clearly that an auditor’s job is to identify material misstatements in financial statements of a company whether it may be due to fraud or error.

They further state that it is not the job of an auditor to detect fraud but he must be aware of the circumstances which might indicate existence of fraud and hence, the repercussions on the preparation of financial statements (ix). An audit to check the ethical side of a company would focus completely on ethics in the company. Such an audit would be planned to specifically audit the Ethics Department of the company, to audit the dealings with clients, how the company dealt with any statutory non-compliances and dealings with its employees.

By commissioning the need for ethical audit of companies worldwide, at least in the developed world, we are also encouraging growth of a whole new profession, an industry, an institution and opening gates to a future where there will be specialist ethical auditors with specialist certifications, improving the quality of ethical audits for future.
A typical Ethical Audit Engagement would comprise five basic components:

• Engagement Acceptance
• Scope of Engagement
• Methodology
• Time
• Reporting

Engagement Acceptance/Continuance: 

An engagement for Ethical Audit shall be accepted taking into account that the audit to be performed is being performed based on an acceptable framework .i.e. the auditor agrees to the ethical compliance requirements in the same manner as required of the company he is about to audit. Further, the management of the company being audited shall also agree to provide complete access to premises, information and personnel to the auditors for the purposes of audit.

The auditors undertaking the engagement must also be competent in terms of education, experience and resources and adequately licensed to perform ethical audits. It would be preferable if they belong to an autonomous body of professionals chartered for the purpose. The auditors must also be independent of all interests in the client by virtue of exercising professional and organisational safeguards. Further, they need to be more cautious in their acceptance and approach specially in relation to clients which have had a history of ethical breaches.

Scope of Engagement:

The scope of engagement should focus on the activities of the Ethics Department in the company. It should also focus the controls and procedures and processes defined by the company to protect ethics and for whistle blowers and how whistle blowers are dealt with. They must also examine the cases reported during the year, any litigations and their likely outcome, involvement of senior executives and the consequences for the victims.

Further the engagement must examine the protocols followed in selling products to clients, internal correspondence among front-office staff and team leaders, the outcome of bets prescribed and the ethical standards of gains made by the company on sale of such products.

Methodology: 

The methodology for the engagement should follow a risk based approach. Controls on business processes should be evaluated for their ability to safeguard ethics and if they qualify for the same and are also being implemented effectively, be a reliable source of evidence. Where controls do not exist and/or the area under question is more prone to encounter breach of ethics, detailed substantive testing should be performed.

Time: 

The timing of the audit must coincide the timing for financial audit so that it is efficient and convenient for the client to prepare for it. The engagement must be planned and have a deadline before the deadline for financial audit so that the findings could be presented in time to the Board of Directors and shareholders along with the audited financial information.

Reporting: 

All ethical audits must end with the objective to deliver a report on the findings. The report must state a rating like benchmark ratings used by Credit Rating Agencies. Any significant matters which ought to be disclosed to the public for their better understanding, and significant matters affecting the engagement must also be disclosed in the report.

Corporate Reporting Changes 

Since the beginning of the new millennium there has been a surge towards improved corporate reporting. Competition and regulatory requirements have forced companies to report more and report better. Today corporations go a step further each year in order to enhance their reports and also to improve the picture their investors get about the company. In relation to helping ethics in finance, corporate reporting can play an important role.

In addition to the system of mandatory Special and Ethical Audits, it ought to be stipulated under law and stock exchange listing regulations, that all incorporated entities having a certain amount of capital and number of employees, are to have a dedicated Ethics Department separate from the Human Resource Function. This department would be responsible for ensuring sustenance and carrying out of the ethical values of the company, addressing employee grievances, be responsible to deal with whistle blowers, take note of any ethical breaches including fraud and investigating them objectively.

Also corporate reporting must make provision for a dedicated section about Ethics and their Standards in the company for the period. This section must highlight the findings of special audits, ethical audits as well as the activities of the dedicated Ethics Department of the company. The section should further disclose the number of ethical breaches reported to the Ethics department, summarize how significant complaints were dealt with, any litigations brought against the company, whether senior management was involved in any instances, how were these personnel dealt with.

The same section must also disclose the initiatives taken by the company to promote intolerance of discrimination against age, sex and race of its employees and business partners. The section should include testimonies by representatives of different age groups, sex and race regarding their treatment at the company. The idea is to disclose as much so that companies are forced to change!

The Outcome

Companies with unclean reports for either Special or Ethical audit or both, and/or non-compliance with corporate reporting disclosure requirements for ethics, shall be made answerable in front of the regulators. They must be given an opportunity to justify their case, failing which, they may be subject to fines, penalties and even criminal prosecution, and any further investigations if needed.

Action shall also be determined as per the ethical standards for the respective jurisdiction, industry and profession. The damage to the entity and its representatives’ reputations will be much intense with punitive spill-over effects extending into future.

A Final Word 

If the ideas discussed are implemented in the spirit that they have been discussed here, the problem of abuse of ethics should cease to aggravate and the situation should improve to a greater extent. As said in the beginning of this paper, abuse of ethics is the outcome of more than one cause and most of the causes relate to greed, pressure to perform, or an opportunity to abuse and get away and in the more miserable cases, an acceptable attitude towards such abuse. All of them are natural. 

Therefore, no matter what we do to improve the situation, nothing will work unless it has the element of virtually forcing people to respect and maintain ethical standards in everything they do. The paper only tries to put forward what, if stipulated, would at least force corporations, especially financial corporations towards improving their ethical scale, and this is what we all want today. Despite better law enforcement agencies than in the past crime still exists. 

However, it is more difficult to commit today than the past, there is a better chance of investigation and the perpetrators being punished and certainly, in some societies people feel safer than ever. They trust the law enforcement agencies with their security. The ideas here will help people trust financiers with their money. This paper will restore trust.

Today we find the issue of ethics almost in turmoil. But in a future where companies would be subject to Special Audits and Ethical Audits, and corporate reporting changes, ethics will get promoted naturally and the picture would be clearer and hopeful than today. Financial institutions would be at least forced to adhere to ethical values and respect social welfare in the wake of  safeguarding their own interests. This would help restore public trust and make financial institutions better places to work and do business with. These institutions are sacred because they are the blood of the modern economy. Finance breathes life into human endeavours from economics to politics to civics to science. The state of ethics in finance has to be improved for a better world. It is a change we need!

Bibliography 

i ‘Madoff Scheme Kept Rippling Outward, Crossing Borders.’- The New York Times (New York Edition), page A1, December 20, 2008.
ii CFA, CFP, CPA, CIM, CHP, RHU, CAIA, CIIA, MFC-The letters are all registered trademarks and property of the respective professional institutes.
iii ‘Banks Paid $32.6 Billion in Bonuses Amid US Bailout (Update 4)’-Bloomberg News by Karen Freifeld, July 30, 2009-Mr. Andrew Cuomo is the former Attorney General of New York from 2007 to 2010.
iv ‘Madoff Says From Prison That Banks ‘Had to Know’’-The New York Times (New York Edition), page A1, February 16, 2011.
v The Price of Offshore Revisited-Tax Justice Network, July 22, 2012.
vi ‘Goldman Sachs sex discrimination case: court papers reveal the inside story’-by Philip Sherwell, New York-The Telegraph, September 19, 2010.
vii Financial Services Inquiry Report, commissioned by the Equality & Human Rights Commission UK, 2009.
viii ‘Ageism more widespread than sexism’ by Brian Groom, Business &
Employment Editor-Financial Times (UK), March 31, 2013.
ix Refer the Handbook of International Quality Control, Auditing, Review, Other Assurance, and Related Services Pronouncements-PART I (2010 Edition-Pakistan), International Standard on Auditing 240, ‘Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements’, Paragraphs 3-8 and Explanations, (Latest on or after December 15, 2009) published by the International Federation of Accountants (IFAC), USA.

Word Count: 4,866 words or 29,990 characters (with spaces), excluding bibliography.

This was my submission for the 2013 Robin Cosgrove Prize to the Robin Cosgrove Foundation. Please provide me your valuable feedback. You can contact me by commenting here and I will get back to you! 

Mustafa!

  

Detect It!

Detect it!

“Often the difference between a successful person and a failure is not one has better abilities or ideas, but the courage that one has to bet on one’s ideas, to take a calculated risk – and to act.”

-Andre Malraux-

Introduction

In an effort to face risk, risk detection is perhaps the most important element, addressing it contributes to enhancing prospects for all the others. Effective risk detection would result in timely detection of emerging risks. It should also enhance risk management and further, lead to increasing confidence among the individuals and societies to be ready to take on risk, undermining the growing risk aversion.

The current economic turmoil is a consequence of malfunctioned risk detection on part of policy makers and those playing at the expense of such faulty risk detection. It cannot be denied that the 2008 financial crunch triggered by the US sub-prime market, led to the so-called ‘inevitable recession’ (economic cycles are a characteristic of capitalism). Given the sphere of influence of the United States, it spread more rapidly than a fire, and remains prominent still, moving from one part to another of the global economy, creating crisis after crisis. Effective risk detection could have spared the world its current plight.

However, it is often argued that a risk of downturn had been detected and forecasted by several individuals and entities long before it actually occurred. Hence, the economic crisis was a result of gross-negligence on part of the regulators. But my answer to them is that the cause of such negligence was again faulty risk detection. This is so because whatever risks had been detected, detection failed to portray the intensity of the germinating crisis. The regulators would certainly have listened to these independent pleas-had they been shown, then, a trailer of the current global economic state. But again, the question, ‘Did we have the ability then to detect risk that way? If no, then have we acquired it now?’ and if the answer is a ‘No!’ again, then, ‘What needs to be done and what are we doing to take risk detection to that level?’  

What is risk detection?

Risk can be defined as a situation involving exposure to a danger or loss. While detection can be defined as the action or process of identifying the presence of something concealed.[1] Hence, together, risk detection can be defined as the action or process of identifying the presence of something concealed, where such something refers to situations involving exposure to a danger or loss. Risk detection is performed at various levels of the society by diverse groups, to varying extents and at different time intervals. Within organisations, scenario planning and a vast range of forecasting methods and support systems and structures, define the level, extent and time of risk detection.

What is the role of scenario planning and forecasting methods? Who is or should be responsible for these aspects in the organisation?

Scenario planning helps organisations formulate long-term plans based on known assumptions and helps identify possible future performance, taking account of perceived uncertainties and risks. It provides for an extremely useful method to enable the application of a proactive approach to any unwelcomed circumstances likely to occur in future.

Forecasting methods on the other hand, compliment scenario planning by providing the planners with data analysis techniques and enabling interpretations and deductions for future events based on results generated by processing the available data. Their roles are as significant to risk detection as a calculator to performing calculations. Deciding whose responsible for these aspects in organisations varies from case to case.

However, in my opinion, the primary responsibility for detecting risks shall lie with the strategy formulators in the organisation and with decision makers at junior levels. A common and more structured way is to have risk detection delegated to a separate risk management team reporting directly to the top leaders. But such a practice needs revision.

Risk management should be an enterprise wide exercise and engrained in the business culture of the organisation.[2] An organisation today needs to add risk detection to the job roles of every team member, and train them to be able to perform it at intervals expedient to their operations. This would result in timely detection of risks at the lowest of levels possible, where at times the top management cannot reach.

In some cases, risk could be managed by junior team members at the point of detection, reducing significant costs annually and empowering them too. Significant preliminary findings, requiring more sophisticated solutions, ought to be reported to the risk-management team, and thereafter, dealt with appropriately.  

Moreover, organisations should ensure that their employees see risk as a threat which exists everywhere. The key to successful enterprise risk management practices depends on the behavioural attributes of the organisation at all levels.[3] They need to invest in providing for the right behavioural attributes across the organisation, advocating standard detection and reporting procedures to be followed. This will widen the scope of risk detection internally and to an extent externally, beyond the perceived scope of the risk detection teams.   

Perceived risks should be seen as traditional risks only and those beyond, should be identified by incorporating risk detection as part of the organisations’ overall and specific strategies. Often organisations fail to respect specific strategic risks. Risk is a function of how poorly a strategy will perform if the ‘wrong’ scenario occurs.[4] The what-if analysis and management information systems need to have the dimensions to deal with situations where scenario planning might fail altogether.

Plus, organisations should also evaluate their dealings on a regular basis at different levels so that timely risk detection is ensured. Better management of decision-making processes within British Petroleum (BP) and other companies, better communication within and between BP and its contractors and effective training of key engineering and rig personnel would have prevented the Macondo incident[5] (Deepwater Horizon Oil Spill 2010). Organisations should therefore, keep assessing their activities not only in terms of numbers but quality as well. Organisation wide support systems should be equipped to handle such anomalies on a timely basis before it gets worse.

How should the detection of risks be addressed in an increasingly complex and interconnected global landscape?

Effective risk detection in the current global landscape is achievable by virtue of a comprehensive and meaningful coverage. Organisations and leaders need to be tactful of not only what’s on paper but also of what might be or may have an influence on the organisation due to their positions. Competitors who might innovate better substitutes and steal away your market or greed which might force you to touch the depth of the ocean by two feet, are all potent sources of risk. Hence, anything beyond the usual need not be ignored.

My efforts after school on risk detection helped me find a model approach to get full coverage of the scenarios. Accordingly, organisations should address risk detection using a Troika Approach, breaking the process of risk detection into three phases:

a.       Internal

b.      External Sphere of Influence

c.       Beyond Sphere of Influence

In phase A, organisations apply risk detection procedures on areas specifically vulnerable in the organisation and at the overall organisation level. The risk-management teams in addition to addressing risk-detection at different levels and managing it must also undertake researching the likely sources of risks internally. This phase includes the points I have discussed earlier, under the role of scenario planning and forecasting methods and those responsible for them.

In phase B, organisations should extend risk detection to areas which are outside it but which the organisation’s actions could influence (depending upon the significance of such influence). These would include the local community and the environment etc. 

In phase C, risk detection should focus events and circumstances beyond the organisation’s control but which have an influence (depending upon the significance of such influence) on the organisation and the achievement of its goals (short-term or long-term).  They would normally include government policies, legislative changes, political changes, national security and competitor practices etc.

Furthermore, the Troika Approach should also be applicable in politics and the state. Phase A should then refer to the government or the state depending on the case, while Phase B should refer to international influence or national influence outside the government machinery and Phase C shall certainly refer to the international forces and influences brought-in from outside.

Moreover, organisations like the United Nations, International Monetary Fund, the European Commission and interest groups, should make collective efforts for establishing a global board for risk detection standards and procedures. The board should frame standards and procedures which the organisations and governments must follow to achieve adequate and timely risk detection. Legislative support to such standards should ensure proper compliance around the world and reduce economic disasters, in particular.

Inherent Limitations

Risk is chemistry, it’s not particle physics. You cannot separate the risks.[6]  Risk detection is mostly based upon perceived practices and procedures. It is impracticable to know all the risks and be able to separate one from another. Even though risk detection is not necessarily sample-based, it still cannot provide for complete relief. The most we can do is to ensure a maximum scope of risk detection as possible within the given resources. Still undetected risks may lead to material consequences.

Also, risk detection is extremely expensive because it requires employing highly-sophisticated and technical personnel and systems, and also requires extensive research activity. All of them carry a significant cost burden. Large organisations with sufficient resources may afford it, smaller ones cannot!

Consequently, often detectable risks lead to their failure because these organisations could not detect them owing to the cost and technicalities involved.  This could be devastating in such crunch times because I believe that smaller entities are significant to growth in the society by virtue of their adaptability and the potential to grow into larger organisations in future. They are also seen as being that part of the economy which adds the most jobs every year on in some of the major economies of the world.

Moreover, awareness about risk is another limitation. In countries like Pakistan with low literacy rates and improper business practices, organisations, at times, with millions worth of turnovers run without any risk detection processes at all! Therefore, policy makers in such countries must initiate and manage risk detection facilities, funded by public-private partnership for the benefit of such vulnerable but significant groups of the economy, making it accessible and affordable for all groups to face risk.

Such facilities should also run risk awareness programs and workshops to educate the business classes of the significance of risk detection to their businesses. Enterprise risk management is no panacea, and I know some people who question whether it really exists. But anything that gets people and the institutions they’ve built to look at risk from multiple angles, with an eye to building value, is a most welcome thing.[7]

Politically, risk detection (in terms of the state) is subject to the integrity of the politicians driven by self-interest. They might at times go away with detected risks, at the expense of national interest as well. Countries like Pakistan, Bangladesh, and India where good governance is still a luxury and where the people lack empowerment, politics and the governments are dominated by personal and support group ambitions. They are extremely negligent about risk detection of any sorts let alone be relied to face risk proactively.

Finally, the current era being an era of technological influence on decision makers, neither will reliance on technology yield the useful results always nor would it, in my opinion, lead to greater improvement of detection methodologies. Improvement by virtue of technology will remain limited because technology requires certain parameters within which it can be effective and efficient, whereas risk detection is something far more abstract, diverse, open, and complicated.  In order to make technology’s role more effective one needs to develop such parameters, to be more dynamic by innovating more effective techniques for risk detection and striving to increase our understanding of the scenario. 

“This awful catastrophe is not the end but the beginning. History does not end so. It is the way its chapters open.” -St. Augustine-

---

[1] Oxford English Dictionary

[2] OSFI Superintendent Julie Dickson, June 1, 2011

[3] RIMS-The Risk Management Society

[4] Michael Porter, Competitive Advantage

[5] Broder, John M. (January 5, 2011). "Blunders Abounded Before Gulf Spill, Panel Says", New York Times

[6] Enterprise Risk Management, (Chapter 5, Becoming the Lamp Bearer by Annette Mikes)

[7] Mark A Hofmann

5 Min Reading pt 2

Hi folks,

Its strange how sometimes in life one comes across people who are complete aliens and they turn out to be the best part of your life. Its quite a norm actually. My friend Francois met an old man in the tube sometime ago. He certainly didn't know him but he took a seat next to him. The old man introduced himself as Pascal, and told him that he ran a bakery in Paris city center. Francois told him about himself.

He asked Pascal where was he headed, and he replied that he was headed for a funeral. Francois asked, whose funeral was he going to, and he replied calmly that he was going to the funeral of his daughter. She'd been fired from her job, and had been unemployed since six months. She'd committed a suicide.

Francois was amazed to see his pleasant reaction and a generous smile on his face. He couldn't keep it and asked, "Why is it that you're smiling? Aren't you sorry about your daughter's demise?" The old man replied, "I am sorry about her death. But I cannot afford to cry or feel sad for even a moment. Because, my sorrow won't bring her back. She gave up to life, and killed herself. I can't afford to fall weak against life and be sad or sorry. I will remain defiant!"

Francois was stunned at his passionate reply. He'd just been fired from his job too, and was thinking of killing himself somehow. But he would not do it now. He disembarked the train on the next station, and went home by bus. Two weeks later, he started a cleaning business, which now employs over 500 people!

Thanks!

5 Minute Reading Series-pt.1

Hi folks,

Indeed one has come alone and so shall he leave this world on his own. Every relation is as worthless as a particle of dust rather even more worthless. A man experiences two types of relationships over the span of his life: 1. Relationships contingent on purpose and 2. Relationships contingent on priority. Let us examine each in detail.

1. Relationships contingent on purpose: These kinds of relationships are mostly the strongest in one's life i.e. parents, spouse etc. But the strength and all together, the existence of such relationships is all based on some purpose. A purpose which connects the parties to the relationship, unifying them to such an extent, that the parties begin to ignore the existence of a purpose for which they are sharing the relationship. At times they may find themselves so engulfed and taken by it, that nothing else seems more important then satisfying the needs of such relationships. But are they really that important?

2. Relationships contingent on priority: These are the next strongest relationships a person has in life and they include his friends, the extended family, work partners etc. The basis of such relationships is superficial, and gradually, as time moves on,the existence and the effectiveness and the satisfaction derived from such relationships is decided by one factor. That factor is 'priority'. To what extent the parties to the relationship see it to be a priority in their lives, will determine its strength. This calls for equal contribution from all sides, in order to create and sustain the equilibrium, unlike in (1), where the purpose supersedes individual priorities.

-To be continued-

Success-Briefly defined and understood

The philosophy of success varies from one successful person to another. The more you'd look for, the more and the more different interpretations and explanations of success you would come across. Some say success is all about winning while some say success is all about winning consistently. Some also say that success is all about the number of times you get up once you fall; some say success is about thinking you can and you will. So what is the best definition and the best interpretation and explanation of success? What is the most appropriate philosophy of success?

If a person has all the resources he needs to achieve his goal and he achieves it, this is what I called ordinary success. i.e. if an athlete steps on the race track with a desire and belief to win and he is in fact the fittest and the fastest among others, and if he wins, that's ordinary success.

Now if a person who has inadequate or insufficient resources all together for achieving his goal and if he is able to achieve it still, then this is what I call extra-ordinary success. i.e. if an underdog boxer comes out as the winner in a heavyweight bout, then its success is extra-ordinary. (remember Rocky?)

So what makes a person achieve extra-ordinary success? The following should help us understand:

1. Desire:

For a person to achieve something, he ought to have a desire for it. The desire forces thinking and regulates his efforts towards achieving that goal. To be precise desire is what pushes a person to work hard and go that one step further. Desire instills persistence, resistance to distractions and ensures a flow of energy all the time. It is the impetus for everything in the direction of achievement.

2. Belief:

It could be said that desire and belief are indeed one and the same thing. But they are grossly different. A desire is a longing while a belief is a feeling of being able to achieve what one has a desire for. Indeed many would tell you that they have a desire to be a professional soccer player or a cricketer or someone like Bill Gates etc, but ask them if they believe they can? Belief is what sustains a desire throughout one's pursuit of achievement. Without belief all desire is worthless. It also helps us release positive energy and attract the same.


3. Skill:

Skill is the ability not a capability. Capability is one's potential. Potential when polished becomes skill. Skill is what come in use when working for your goal. It has to be relevant to your aim otherwise your efforts will never bear fruit. One can turn his potential into his skill by practice only. This practice is a combination of working with inherited as well as acquired knowledge about a particular characteristic and applying the same again and again, till one becomes experienced and a master at it.

4. Timing:

Every dog has his day, as we say, but its quite true. Time can play a major role in one achieving and one failing to achieve. Time is a quantity which has a direct link with energy that surrounds us. We are all made up of energy and attract different types of energy at different times. Hence, the timing of the kind of energy we release will determine the kind of energy we attract from our surroundings. So, its advisable that we remain positive at all times, no matter what the circumstances.

5. Natural Law:

This is something perhaps beyond one's control. It is something knitted in the fabric of universe. Like no one thing remains the same or should I say, change is the only constant, so are success and failure prone to change. An individual in life can become no.1 and stay no.1 but not forever. Similarly, what is a zero today may climb up the ladder one day but how much, depends upon the aforesaid factors also.

6. Planning:
Failing to plan is like planning to fail, and yes, we know this by heart, and why shouldn't we? Planning provides a system for you to follow to achieve your goal. The whole universe runs according to a system, so how can you do without it? Planning has the quality of providing for you even if it's the eleventh hour. It helps you become efficient and effective and also keep a track of your performance in achieving your target.

Moreover, when a successful process of extra-ordinary success is repeated once it has achieved the desired goal, any further achievement will no more be extra-ordinary but ordinary. And the many times ordinary success is achieved, the more consistently one shall remain successful. And if one is at the bottom, then each cycle shall help him rise toward the top gradually.

This is how success can be defined and understood, perhaps.

Thank you very much for your patient reading.

Mustafa Mustansir, CFC

If you want me to write more on this, please request so in your comments. Your feedback is warmly welcomed and highly appreciated.

Find out more about me on www.greenspotservices.com

I want to be an Accountant!

I want to be an Accountant!

                                

Accountancy refers to the practice of recording and reporting changes in an entity’s assets, liabilities, revenues and expenses, over a period of time. Accountants worldwide prepare financial statements of companies and other organizations, file tax returns or work as independent or employed auditors and even as consultants and advisers on financial planning and management, taxation and financial decision making. Accountants are mostly employed by audit firms. But they are also employed by almost every organization and sector of the economy i.e. banks, governments, insurance firms etc.

The profession has been one of the most lucrative since the 20^th Century, and day by day as economies expand into newer dimensions, and public reporting and the need for compliance with the corporate laws increases, and as the states make smarter tax laws, the need for accountants is set to keep growing in the future too.  According to the US Bureau of Labor Statistics, job prospects for accountants and auditors are expected to grow by 22 percent between 2008 and 2018.

Accountants all over the world, especially those with notable certifications earn well beyond their respective countries’ Per Capita Income, and enjoy a more than modest lifestyle. Estimates suggest, that entry-level accountants in most countries, earn in the range of USD$ 55,000-USD$ 70,000, annually, which jumps to USD$ 70,000-USD$ 80,000 after four to five years of experience and exceeds USD$ 100,000, in case of partners of audit firms.

Moreover, Pakistani accountants are in a relatively high demand, mostly in the Middle-Eastern economies, like the United Arab Emirates, Saudi Arabia, Qatar, Kuwait and Bahrain. This is mostly due to the dynamic and rigorous accountancy courses like the Chartered Accountancy course offered by the Institute of Chartered Accountants of Pakistan (ICAP) and the extensive internship, which the students must go through to earn their certification.

These courses not only meet international standards and requirements, but surpass them as they are supposed to-primarily-meet the requirements of the Corporate Laws of Pakistan, which are some of the toughest and smartest laws, in world. An evidence of the effectiveness of these laws is the ever-resilient banking, financial and corporate sector of Pakistan, under the supervision of the State Bank of Pakistan and the Securities and Exchange Commission of Pakistan.    

However, today accountants are mostly certified by the respective worldwide accountancy bodies chartered by the State. Other than these, some independent private institutes and professional associations worldwide, also offer credible certification programs in accounting. The pursuers are mostly required to clear mandatory examinations and fulfill experience requirements, to be eligible for a Certificate of Practice.

In some cases, a Masters in Accounting or a related field is a pre-requisite for a certification. Notable designations remain the FCA, ACCA, ICAEW, IAT, CPA etc.  Alternatively, students can enter the profession with either a degree in Applied Accounting or a Masters in Accounting, or any other relevant field, with sufficient experience. It could take one, three to five years, depending on the program on an average, to become a recognized accountant.

If you are good at crunching numbers, keeping records, remembering laws and practices and applying them appropriately, time and time again, and have enough motivation and are a diligent worker with a mind for good social status and a top-notch salary, accountancy is a career you could go for.

But becoming an account with a notable certification was never an easy game. It still isn’t! Some of the certifying institutes are well notorious for their unexpected, insufficient release of information to the students about the curriculum and a constant mismatch between the syllabus content and areas which are ultimately examined. This is further exacerbated by outrageous demands on the students’ intellectual capacity, with syllabi that are highly versatile and advance and vast in their approach, along with severe time constraints.

Nevertheless, the esteem and benefits a coveted certification brings, is worth it all! Hence, the number of students opting to be accountants, especially Chartered Accountants, has trebled in the last decade. The traditional charm and the fact that economic recession has left lesser opportunity for other career professionals or made competition tougher for them, more and more students want to be accountants and hopefully, get a highly rewarding job in Pakistan or preferably, abroad!

This has turned this profession into a millions of rupees worth industry. Heavy-weight certification bodies like the Institute of Chartered Accountants of Pakistan and the Institute of Cost and Management Accountants of Pakistan; are also engaged in scuffles (locally and internationally), in order to protect and increase their supplies to the job market and enhancing the credibility and worth of their respective certifications, by virtue of continuously upgrading their syllabi to align with the local and international industrial needs.

In addition, where there were no formal teaching centers two decades ago, there are more than one could count on fingers, today. Each institute battling it out with others to get hold of the best teachers and attract the most students. Not to forget the neighborhood coaching centers and the self-employed house tuitions providers.

Surging demand has made room for hundreds of new and inexperienced teachers, to make good and easy money. Some well-off and experienced players, with a mind for business, are also setting up training institutes effortlessly. In all the drama, students are the major sufferers.

No institute is perfect! Some have the facilities while some have the faculty. Some have results while others have even better results. Some are new, while others have been around for some time and enjoy a good reputation. Each of them is bombarding students with their cheap promotion, scholarship offers and faculty and just about anything they can to sell themselves. And when teachers switch institutes or set-up their own, they use their influence and name, to attract prospective students.

This is confusing for the students, as they must now choose between the teacher and other training centers in the market. Not only this, in an effort to make the right choice, they must research about the background of each subject teacher, because there are just so many of them now! Should I go to a place that boasts high-achievers or should I join a place that has the most renowned teacher on their faculty? Do I have a rational answer to all this penetrating promotion? All this to follow after the grueling process of career selection!

 However, the key to selecting the best training institute is a combination of everything. That is to say, a preferable choice would not only possess a reasonable faculty but an equally good management and experience, along with good results or pass rates, complemented by the caliber of audit or training firms their students land in. As for a preferable certification or degree, it shall be discussed some other time. 

All the same, competition has led to making accountancy one of the most cost-effective programs to choose in Pakistan. Medicine, Business Administration and Engineering, and programs in Arts, if undertaken at private universities, are considerably expensive to be within an easy reach of the common man. On the contrary, state funded institutes are affordable, but are equally deficient in their curriculums as compared to private universities, in most of the cases. 

Plus, a career in accounting is a rewarding career in terms of salary and benefits, with a much significant substantial assurance of job security, and an ever growing number of positions for accountants in the industry. On the other hand, being an accountant still limits the prospects of climbing the organizational ladder in years to come unlike an MBA. Most accountants remain in the same organizations with little or almost no promotions, for their entire careers. This is changing!

Accounting programs are being modified to meet this deficiency, integrating in knowledge from other core areas of business, like management, human resource, marketing, and leadership.  Each addition or alteration makes the course more difficult, the demand for accountants to widen, and the competition in the training industry, crueler.

In any case, be it any profession, it’s the student’s ability, hard-work and commitment, which ultimately make the difference in end. Teachers and institutes are only stepping stones. Solid stepping stones will make the journey to the top, pleasant. Weaker stones or incorrect ones altogether, shall lead to a shaky and bumpy ride, a ride that could cause an accident as well! The war is on and it’s the survival of the fittest. The profession has been among the fittest for decades, but are we prepared to meet its standards?

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Thank you very much for your reading. Your valuable feedback is awaited.

Mustafa Mustansir, CFC