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Is Regulation Destined to be Behind Corporate Change?

Posted By Charlotte Aguilar-Millan, Monday, September 2, 2019

Charlotte Aguilar-Millan inspects the relationship between corporate change and regulation in her ninth blog post for our Emerging Fellows program. The views expressed are those of the author and not necessarily those of the APF or its other members.

 

The purpose of regulation is to enable the transparent and trustworthy operation of businesses. This includes the regulation of how employees are treated, regulation on where goods are received from and also regulation of the figures reported to shareholders. It is this last example which has come under a great deal of scrutiny in the past few years: the external auditing of accounts.

 

The purpose of an external audit is to provide an independent opinion to the shareholders on the truth and fairness of the financial statements. It provides accountability to the stakeholders the company about how the directors operate the company. The standards to which an audit is completed were first introduced nearly 100 years ago; the 1930s for America and 1940s for the UK. Since then, regulations have been tacking on new requirements but not overhauling old requirements to reflect how businesses operate in an age of very different technology.

 

Carillion, previously the UK’s second largest building company, collapsed in January 2018 as a result of soaring debt and cashflow issues. KPMG, Carillion’s former auditors, gave Carillion a clean audit opinion up until it’s collapse. According to the regulations, it would appear that Carillion did not raise any red flags. As the Financial Times points out “auditors who want to work for and retain a client — and its fees — may be less inclined to scrutinise”. All auditors are reliant upon the client to pay their fees, yet they must also retain objectivity and independence.

 

During 2018, the year Carillion collapsed, KPMG were fined £3 million and £4.5 million for the inadequate audits of Ted Baker and Quindell respectively. Yet no Partner in firm was fired, demoted or even struck off. This means that those involved are still able to provide an opinion on whether companies are operating appropriately. In the same year, KPMG’s divisions expanded (including audit by 8%) leading to a Partner profit share jump to over £600K per person.

 

Where the Partners are reliant upon their client’s long standing, it is little wonder that levels of scrutiny by auditors is put into question. Further, as demonstrated in the previous few years, there are no material consequences if they do not. The fines auditors have received represent a ripple in the ocean when compared to the profits they are generating. Public trust is at a loss. The private sector is not willing to be held accountable by their actions.

 

True independence should be demonstrated through a regulating body used to allocate audit clients to auditors. This should be based on experience, risk profile of the client and the resources the audit firm have available. Once an auditor is appointed, this should be fixed for a set number of years.

 

Currently the private sector can select an accommodating opinion and ditch those who do not align with their methodology. Further, the Big Four would no longer be able to cherry pick their clients. This was demonstrated in August 2019 with Sports Direct seeking new auditors with the largest 5 audit firms declining to tender.

 

By using an allocating intermediary, the private sector could make transparent their resource available, whilst also demonstrating objectivity where their fees are not reliant upon keeping the subject of audit placated. Reform from within the corporate sector has proven to be ineffectual. Only once external oversight is placed on corporates will they change. The only form of change that will boost corporate change is a true reform of regulation.

 

© Charlotte Aguilar-Millan 2019

Tags:  corporate  organization  regulation 

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From High Reliability Organizations and Foresight

Posted By Administration, Monday, May 11, 2015
Updated: Thursday, March 28, 2019

Julian Valkieser shares his thoughts about High Reliability Organizations and Foresight in this blog post for our Emerging Fellows program. The views expressed are those of the author and not necessarily those of the APF or its other members.

My past articles were more and more related to Big Data and Foresight. In this article I want to demonstrate the concept of High Reliability Organizations (HRO).

The world is a very complex system. That’s no question. You can’t understand it as a whole. It is impossible. But on macro level, some organizations and companies try to make complexity highly reliable by preparing for the unexpected as much as possible. I was fascinated by this idea and the underlying approach. I believe that you can submit projects with better risk management. Conversely, the procedure of HROs would be exciting for Foresight.

Let me introduce the definition of an HRO, which states that those organizations have a particular behavior regulation and organizational structure. It is characterized to operate at a high percentage of reliability, despite the fact that these organizations act continuously under changing or difficult conditions. Statistically, one would expect a much higher error rate compared to traditional organizations.

HROs are usually structured very complex. When you think of a hospital or an aircraft carrier, there are diverse professional groups in many hierarchies and groupings. If a patient comes to a hospital, he meets doctors, nurses, medical technicians, traditional technicians, employees of the service or management, and certainly more people who contribute in any manner to the smooth workflow in the hospital.

Accompanied by complex team constellations, clear structures and hierarchies are needed. We know it, especially from the military, and here in accordance with aircraft carriers in the extremes. Where responsibilities prevail and decisions must be made in short periods of time, it requires a clear and transparent decision-making process.

One of the essential characteristics of a HRO

Sensitivity for operational processes: The personal sensitivity to the patient and the colleagues is more important than the pure control of data, such as patient records, prescribed medications or recorded data to physical circumstances. Environmental information must also be made available. So you can see new developments that need to be noticed also. But how to get information that have an impact on a particular situation. Environmental factors can be seen, among other things under the description of a "Vuja De".

A Vuja De would be a realization of a previously known routine, you didn’t have before. You were sensitive to this factor in the routine situation and discovered an anomaly, which is previously not noticed. (Sutton, 2001) This observation and a possible recommendation should be added to a manual or guideline to improve knowledge management and the common experience. Additionally, it is also an element of an HRO to adapt policies, practices and specifications constantly.

I'm very interested in the concept of Vuja De and I do not want to see it only as a buzzword, even though it describes what we already applies to many Foresight methods. In my mind, have a look inside HROs and their circumstances, you will certainly derive new insights for Foresight methods from short-term methods like them used in HROs.

Source:

Sutton, R. I. (2001): Weird Ideas That Work: 11 ½ Practices for Promoting, Managing, and Sustaining Innovation.

© Julian Valkieser 2015

Tags:  foresight  high reliability organization  organization 

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