The obvious and our blindness

 “We can be blind to the obvious, and we are also blind to our blindness.”

 ~ Daniel Kahneman, winner of the 2002 Nobel Memorial Prize in Economic Sciences and the professor emeritus of psychology at Princeton University in his breathtaking book “Thinking Fast and Slow” (page 24)

Here, the term ‘obvious’ can be explained as something like ~ “missing the woods by focusing on the trees”; and the word ‘blindness’ can be explained as something similar to the phrase ~ “We do not know what we do not know.”

As an internal auditor, one advice which I often receive from all quarters is ‘to keep my eyes and ears open always’. In other words, as an internal audit professional, I am expected ‘to be vigilant at all times’. I am expected to ‘smell the rat’ and raise the red flag in every prospective situation. Even the motto of ‘The Institute of Chartered Accountants of India’ (of which I am a member) goes like this: “a person who is awake in those that sleep”. For an auditor, there is neither any time out nor a margin for any error. Being alert and vigilant is considered to be one of the indispensable characteristics of an auditor. Therefore, it becomes vital for the internal auditors to understand about those aspects of human perception and cognitive biases that can lead them astray. Invariably, the internal audit professionals need to make the right decisions in every stage/phase of their audit assignment.

In his book ‘Thinking Fast and Slow’, Kahneman presents our thinking process as consisting of two systems. System 1 (Thinking Fast) operates automatically and quickly with little or no effort and no sense of voluntary control. It is unconscious, instinctive and effort-free. System 2 (Thinking Slow) allocates attention to the effortful mental activities that demand it including complex computations. It is conscious, requires deductive reasoning and is a dreadful lot of work. In fact, most of Kahneman’s book is spent on the mistakes made by System 1. Depending mostly on System 1 usually leads to overconfident/ biased/ mistaken decisions. It can be said with assertion that Kahneman’s book is a masterpiece in capturing the mistakes of our conscious and unconscious thinking. It is a clever and intellectually stimulating study of the dual process of model of the brain and our entrenched self delusions.

If we as internal auditors are intentional in overcoming the blindness to obvious and our blindness, we can go a long way in improving our audit efficiency.

Few of the ways could be —

1. When there is a reason for the auditor involved to be make errors or induced errors due to his/ her self-interest, it is good to prevent such circumstances by making all the auditors sign conflict of interest declaration at regular intervals. Self-deception and rationalization trap the auditors when the conflict of interest exists.

2. Diversity pays. Numerous researches have established that heterogeneous teams are more successful than homogenous teams in overcoming the ‘groupthink’. Groupthink is especially likely if there is little diversity of background in the team.

3. As Susan Webber, the founder of Aurora Advisors suggests, it is a good to establish a house skeptic. In my view, the personnel reviewing the work of internal auditors could play this role. As Kahneman puts it, an absence of dissent in a team trying to solve a complex issue should sound an alarm (irrespective of the reason).

4. While performing audits, internal auditors are often unduly swayed by the first evidence they see. However, all the alternative evidences must be fully evaluated in an objective and fact-based way for the audit process to be robust. When all the audit evidences are properly weighed, it helps us in overcoming the ‘conjunction fallacy’.

5. Maintaining status quo is often convenient. (Every now and then) Challenging and revisiting our assumptions we make in our work does help. It also aids in preventing us from getting derailed unconsciously.

I began this post with a quote. I would also wish to conclude it with a quote. I feel nobody can put it more succinctly that Tolstoy on what it takes to overcome being blind to the obvious and our own blindness.

“The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of doubt, what is laid before him.” ~ Leo Tolstoy, 19^th century Russian novelist.

I say unless you are prepared to be wrong, you can never learn.

Question: How can we overcome being blind to the obvious and our blindness in our audit work? Please share them by leaving a comment to this post. I welcome your thoughts.

Reference:

 [1] “Thinking Fast and Slow” by ‘Daniel Kahneman’, Farrar, Straus and Giroux, 2011.

[2] “The Big Idea: Before You Make That Big Decision” by ‘Daniel Kahneman’, ‘Dan Lovallo’, and ‘Olivier Sibony’, Harvard Business Review, 2011

[3] “The Dark Side of Optimism” by ‘Susan Webber’, The Conference Board Review, 2008

Foreign Aid – Does it work or not?

In my recent readings, I came across two extreme contradicting views on the issue of foreign aid and its efficiency. Here, I wish to list just two distinct examples which argue against and for foreign aid.

Leading economists Daren Acemoglu and James A. Robinson in their book, “Why Nations Fail?” write that —

“Many studies estimate that only about 10 or at most 20 percent of aid ever reaches its target. There are dozens of ongoing fraud investigations into charges of UN and local officials siphoning off aid money. But most of the waste resulting from foreign aid is not fraud, just incompetence or even worse: simply business as usual for aid organizations. Throughout the last five decades, hundreds of billions of dollars have been paid to governments around the world as ‘development’ aid. Much of it has been wasted in overhead and corruption. Worse, a lot of it went to dictators. And, of course, the cycle of the failure of foreign aid repeats itself over and over again. The idea that rich Western countries should provide large amounts of ‘developmental aid’ in order to solve the problem of poverty is based on an incorrect understanding of what causes poverty.”

In their “2014 Annual Letter”, Bill Gates and Melinda Gates explain three myths that block progress for the poor. One of those myths is ~ ‘Foreign aid is a big waste’. Bill asserts that —

“I worry about the myth that aid doesn’t work. Aid is only one of the tools for fighting poverty and disease. Aid is a fantastic investment, and we should be doing more. It saves and improves lives very effectively, laying the groundwork for the long term economic progress (which in turn helps countries stop depending on aid). Through foreign aid, taxpayers around the world invest in development organizations that are saving lives in the poorest countries. We do know that aid drives improvements in health, agriculture, and infrastructure that correlate strongly with growth in the long run.”

Being part of a Non Governmental Organization, I might be biased arriving at a conclusion in this debate of foreign aid. Before taking sides, I personally think that development aid (be it from the State or non-State funders) will become more demanding and conditional in the future. It will no longer blindly be – give, give, give, give, give and take, take, take, take, take between the partners without any concern for performance.

In this era of uncertain economic cycle, when the resources are becoming scarce, the donors will be more likely to ask for measurable results from the recipients. For example, the Global Fund uses the approach of ‘performance-based funding’ to disburse its grants to various recipient countries. This may become the norm in the future. Measuring the results through evaluation, performance review may no longer be a luxury. It will become a necessity. Assessment approaches adopted by the recipients will become more rigorous and analytical. The funders will start insisting that — every penny goes to “eradicate the poverty” through funding for programs; that – “overheads” do not water down their donation. Metrics closely tied to their vision and mission will be guiding the recipient organizations in their exercise of “assessment”, and “accountability”.

In today’s world, the combination of reduced funding and increased need will force every Not-for-Profits and Non Governmental Organizations to reinvent themselves literally. They will be compelled to foster performance culture as their way of functioning. It is no longer going to business as usual. It will be subject to the culture of – perform or perish.

I would like to share the thoughts of former CEO of Honeywell Larry Bossidy.  Bossidy explains that – ‘accountability is one of the real keys to effective transformation.’ Bossidy also espouses his deep-seated belief in measurement which played a decisive role in his success throughout his thirty four year career.

“Change can’t occur without laser-like accountability and metrics to measure how you are doing. I encourage organization to measure their performance against their plans.”

– Larry Bossidy

I believe that what Bossidy has prescribed for corporates will be the way forward for the Not-For-Profits too.

 

Question: How can we make recipients in the humanitarian industry like the State, Not-For-Profits, Non Governmental Organizations, etc using foreign aid more accountable and performing? Please share them by leaving a comment to this post. I welcome your thoughts.

 

References:

[1] “Why Nations Fail? The Origins of Power, Prosperity and Poverty” by ‘Daren Acemoglu’ and ‘James A. Robinson’, Profile Books, 2012.
[2] “2014 Gates Annual Letter: 3 Myths that Block Progress for the Poor” by ‘Bill Gates’ and ‘Melinda Gates’, Bill and Melinda Gates Foundation, January 2014.
[3] “Leap of Reason: Managing to Outcomes in an Era of Scarcity” by ‘Mario Morino’, Venture Philanthropy Partners, 2011.
[4] “Jack Welch and the 4 E’s of Leadership” by ‘Jeffrey A. Krames’, The McGraw-Hill Companies, 2005.

Critical Thinking and Internal Audit: A KPMG Study

A recent research paper from KPMG, “Transforming Internal Audit Through Critical Thinking” caught my attention as I have been exploring about the relevance of analytical and critical thinking skills for internal auditors (for some time now). I recommend a read of the full report and have selected a few important points from the report for brief sharing here:

 

Critical thinking is defined as an open-minded approach to analyzing a situation or task for the development of supportable conclusions and conveying the assessed results in a logical manner.

 Organizations want internal audits that are insightful, forward looking, and go beyond preserving value to creating value on a departmental, divisional, or organization-wide level.

 Critical thinking as a core approach for internal audit establishes a strategic partner within the business, focused on achieving balance between risk management and business performance.

 Critical Thinking vs. Thinking Critically — In many instances, the term “critical” takes on negative connotations such as stubborn, judgmental, or opinionated; therefore, it is imperative that internal audit functions do not desire a critical “result”, but rather apply a critical “approach” to thinking that is holistic, skeptical, analytical, and evaluative to develop well-rounded conclusions.

 Critical thinking audit results must create measurable value to an organization, through highly effective data analytics, and cost-benefit considerations. The audits need to be geared toward identifying revenue opportunities, cost recovery, discovering cost avoidance opportunities, measuring hours of efficiency opportunity and direct redeployed monetary savings, quantified or untapped growth opportunity, or determinable risk reduction.

 In order to create value to the organization, internal audit must apply a critical thinking approach to internal audit, a level beyond operational auditing and this should result in opening more doors for internal audit to sit on steering committees, task forces, and other strategic initiatives.

 Some of the traits which serve as the basis for enabling critical thinking in audits – open mindedness; situational analysis; providing context; brainstorming; constructive questioning; detail orientation; being resourceful, agile, and able to quickly react in creative ways to develop a solution.

 Internal audit must develop deep organizational and business understanding to apply judgment, and challenge the business on a broad range of topics. In addition, internal audit must invest the time to understand the business strategy and transformational changes occurring throughout the organization.

 Internal audit must be characterized by a culture of challenge, probing, and continuous improvement. Internal auditors must remain solution focused; investigative in scenarios or solutions for issue resolution; and persistent in having a seat at the table for the key discussions.

 Key benefits to critical thinking in audits are –strategic alignment, critical thinking scope, and quantifying value drivers. With critical thinking being embedded in it, internal audit is viewed as a business advisor rather than the policy enforcer.

 A critical thinking audit should bear the hallmarks like (i) audit results will be set and measured in creating value for the organization; (ii) audit results will be limited to the key tangible findings that the business should address as a matter of priority; (iii) minor issues are reported outside of the final report to the business leaders; (iv) The business actually makes meaningful improvements due to internal audit findings.

 

The paper by KPMG is both exciting and practical. It shares valuable insights on the subject of ‘critical thinking’. Ahh! I feel it’s time for us to think to critically about developing ‘critical thinking skill’ in every member of our audit team.

 

Reference:

 “Transforming Internal Audit Through Critical Thinking”, © KPMG LLP, 2014.

Audit quality and the IAASB Framework

 

Recently, the International Auditing and Assurance Standards Board (IAASB) has released its “Framework for Audit Quality: Key Elements that Create an Environment for Audit Quality” (the Framework) describing the factors that it thinks are essential to maintain audit quality at all levels of auditing profession. Though the framework is aimed at external auditing profession, it has some great takeaways for the profession of internal auditing too. In fact, many indicators and factors remind us of the various provisions from the Institute of Internal Auditors’ (IIA) International Professional Practices Framework (IPPF).

 

I believe that if the Chief Audit Executives (CAEs) of various internal audit functions are able to focus and achieve these indicators, it will go a long way in ensuring the audit quality of assignments they undertake on a consistent basis. Though the Framework is very broad in its content, I would like to focus specifically on some of the ideas promulgated under input and process factors that contribute to achieving audit quality and customize them to the internal auditing profession in this post.

 

A quality audit is likely to have been achieved by an internal audit team that: [1]   Exhibited appropriate values, ethics and attitudes; (Input factor)  [2]   Was sufficiently knowledgeable, skilled, and experienced and had sufficient time allocated to perform the audit work; (Input factor) [3]   Applied a rigorous audit process and quality control procedures that complied with law, regulation and applicable standards; (Process factor) [4]   Provided useful and timely reports; and [5]   Interacted appropriately with relevant stakeholders.

 

I. Key attributes of ‘Values, ethics and attitudes’:

• The internal auditor exhibits objectivity and integrity;
• The internal auditor exhibits professional competence and due care;
• The internal auditor exhibits professional skepticism; (Professional skepticism is an attitude that includes the application of a questioning mindset in the context of an appropriate understanding of the entity, its business and the environment in which it operates. It is an important aspect of internal auditor judgment related to planning, performing and evaluating the results of an internal audit. It involves all the team members [a] having a questioning mindset and a willingness to challenge management assertions; [b] assessing critically the information and explanations obtained in the course of their work; [c] seeking to understand management motivations for possible misstatements/ fraudulent activities; [d] keeping an open mind; [e] challenging the judgments of other members of the team; [f] having the confidence to challenge management and the persistence to follow things through to a conclusion; and [g] being alert for evidence that is inconsistent with other evidence obtained or calls into question the reliability of documents and responses to inquiries.)
• The internal audit function is independent;
• The internal audit function promotes a culture of consultation on difficult issues; (Since internal auditing often requires difficult decisions and judgments to be made, it is crucial for internal audit functions to promote a culture of consultation both within the team and with technical specialists wherever necessary. This would go a long way in enhancing the credibility by mitigating the risk of making mistakes while arriving at difficult decisions and judgments.)
• Necessary personal characteristics are promoted through appraisal and reward systems supporting audit quality;
• The internal audit function emphasizes the importance of providing its members with continuing professional development opportunities and access to high-quality technical support.

 

II. Key attributes of ‘Knowledge, Skills, Experience and Time’:

• Each internal audit team member have the necessary competences;
• Internal auditors understand the entity’s business;
• Internal auditors make reasonable judgments;
• The audit supervisor is actively involved in risk assessment, planning, supervising, directing and reviewing the work performed;
• Internal auditors have sufficient time to undertake the audit in an effective manner;
• Internal audit teams are properly structured;
• CAE and audit supervisors provide less experienced auditors with timely appraisals, appropriate coaching and “on-the-job” training.

 

III. Key attributes of ‘Audit Process and Quality Control Procedures’:

• The internal audit team complies with internal auditing standards, relevant laws and regulations, and its quality control procedures;
• The internal audit team makes appropriate use of information technology;
• There is effective interaction with second line of defense (so that there is no overlap of work);
• There are appropriate arrangements with management so as to achieve an effective and efficient audit process;
• The internal audit methodology is adapted to developments in professional standards and to findings from internal and external quality assurance reviews and appropriate consequential action is taken from such reviews;
• The methodology requires effective supervision and review of audit work;
• The methodology requires appropriate audit documentation;
• Where required, effective external quality assurance reviews are undertaken.

 

Though these factors and indicators identified in the framework are not new to the internal auditing profession, they act as a timely reminder to us in the journey of achieving and maintaining our audit quality.

 

Reference:

 “A Framework for Audit Quality: Key Elements that Create an Environment for Audit Quality”, The International Auditing and Assurance Standards Board (IAASB), The International Federation of Accountants (IFAC), February 2014.

Akio Morita and his message for internal audit

In his book “Made in Japan: Akio Morita and Sony”, Akio Morita, Co-founder of Sony describes vividly about the efforts to establish Sony in USA during its initial years.

He writes —

“I began to feel that to establish our company more firmly in the USA I had to get to know the country better and ….. I felt I needed to know more about how Americans lived and how they thought; ……..to understand Americans would be more difficult.”

 “If I were really to understand what life was like in America ………, I would have to move my family to the US and experience the life of an American.”

 “I commuted to the office by bus every day, mingling with New Yorkers, listening to them talk, observing their habits almost like a sociologist.”

In his quest to establish his company in a foreign soil, Morita provides some excellent and awesome practical tips to internal audit function striving to get hold of the business which the organization is into.

As internal auditor, one thing which I hear often from our audit clients is –“Internal auditors do not understand the business!!!” The question of adding value loses focus at that point. Drawing from the analogy of Morita’s advice, internal audit functions can try the following in its quest to become the trusted advisers of the organization:

1. Internal audit function can never restrict itself to cocoon of accounting and auditing parlance alone. It must be deliberate in getting to know the organization better through whatever (ethical) means it has in its hand.
2. It is equally important to understand the motives and logic behind strategic business decisions and the ethos of decision making by organization’s management. (This becomes a reality when the Chief Audit Executive is able to ‘have a seat at the table’.)
3.  Without compromising, it is imperative to maintain a fine balance between assurance and consulting assignments by the IA function. Independence does not mean that there should be outright rejection of consulting engagements. (Sometimes, consulting assignments provide immense opportunity to auditors to understand the business.)
4.   Where appropriate, short term sabbatical to other business functions could be pursued by the IA function.
5.  In the busyness and seriousness of internal auditing, auditors could become frantic and restless. In order to overcome this slippage, it is crucial for auditors to start being a person who can connect with the people. There can be differences of opinion between management and IA function. It is not necessary that both need to meet eye to eye on each and every issue. But, internal auditor can always ‘walk slowly though the crowd’ to know their pulse.
6.  When auditors are able to listen more intently to people, many benefits fructify. What’s up with people bubbles to the surface rapidly. This enables auditors to be more aware of what they were dealing with. This will ultimately help auditors provide audit recommendation that makes business sense. 

Though the above suggestions may not be very scientific, I am convinced that the IA function should leave no stone unturned when it comes to understanding the business and adding value through its work.

‘Total immersion technique’ is one of the several techniques used in foreign language pedagogy. Under this approach, the student is ‘immersed’/ ‘submerged’ directly and immediately into the target language from the first opening day or hour of class.  It can be painful or unpleasant to the students initially but they learn words faster over a period of time. Similarly, internal audit function should use its earliest possible opportunity to learn and understand about the intricacies of business of the organization.  There will never be a perfect or sacred timing!!!

Question: Can the internal audit’s efforts to understand the business be made easy with any other practices? Please share them by leaving a comment to this post. I welcome your thoughts.

YUMMY or YUCKY?

“A thing of beauty is a joy forever,” wrote the English poet John Keats. Conversely, managing internal audit function may not be a joy forever (with the little knowledge from my personal experience!!!). At times, it becomes indispensable to develop a thick skin to overcome the resistance to internal audit function. In this professional journey, many auditors put forth the below question in different forms to me:

“Can the internal auditor function work independently?”

As we know, the IIA’s Attribute Standard 1100 “Independence and Objectivity” stipulates that — “The internal audit activity must be independent and internal auditors must be objective in performing their work.”

There can be great debates and discussions over this. But before arriving at a conclusion, let us prod to find out what can be done to uphold the independence of internal audit function in every organization.

I acknowledge that being an internal auditor is a tough (and unpopular) job when there is no proper support from various stakeholders. Killing the messengers — getting the heads chopped off — do happen everywhere. However, all is not gloomy as we tend to think. There is a ray of hope beyond this doom. If and only if internal auditors are able to ‘stand up and speak truth with knack and candor’. In order to make this a reality, I believe we can try the following:

• First and foremost, it is important not to go on defensive to avoid the trouble. As auditors, it is comfortable to generate boring and predictable reports which will make the management yawn. (It will neither threaten the survival of internal audit function nor create a sour relationship with management.)

• Secondly, it is essential for internal audit function to avoid engaging in negative tactics like trying to shield itself under the Audit Committee by treating the senior management as the ‘baddie’ or intimidating to trumpet to external stakeholders (like media, regulator, statutory auditors, etc) even when it is unwarranted.

• Though I agree that certain dose of legal protection to the profession of internal audit is desirable, it will alone not make the internal audit completely independent. To be really independent, it is crucial to develop an atmosphere of mutual respect. Without sensationalizing or exaggerating the issues, internal auditors must learn to strike the balance by arriving at measured judgements.

• Internal auditors must focus on things that matter. Materiality counts. Going overboard, auditors fall into trap of diluting their report (like water) with too much information rather making it concentrated (like sulphuric acid). It is imperative to prune lumbering and lengthy reports into concise and crisp ones with ruthless editing.

• As internal auditors, we can easily lose the big picture when we are not intentional about it. We need to be creative and innovative by donning the ‘six thinking hats’ (as suggested by E.D. Bono) whenever necessary. There is a great synergy when we are able to combine impartiality with empathy.

• Internal audit function must understand which of the stakeholders really call the shots. It is good to know the culture of the organization and be aware of (without getting involved in) office politics. We need to convey the message to the right people in the right form. Auditors can be nice but it is also important to stand our ground. In other words, we can be gentle but we must also learn to be assertive.

• As July 2012 research report from EY suggests, internal audit function must be run like a business. It must hold itself accountable for operating excellence, continuous improvement and tracking impact. It must evaluate successes and monitor Key Performance Indicators (KPIs) defined on its value scorecard.

I have given some of my thoughts here. Though it is not comprehensive, I feel that these could be a starting point in helping us achieve the objective of independence. As we began with the poetic words, let me try to conclude in metaphoric words:

“Internal audit function is like chicken. Chicken is either YUMMY or YUCKY depending on how we cook it. Similarly internal audit internal audit function is either INDEPENDENT or DEPENDENT depending on how we build and maintain it.”

Now when someone asks you — “Can the internal auditor function work independently?”, you can confidently give the answer —

“It depends.”

 

 

Question: There could several other ways to promote independence of internal audit function. Please share them by leaving a comment to this post. I welcome your thoughts.

Risk-Based Integrated Auditing and the journey so far….

It has been almost one year since my country office started transitioning to ‘risk-based integrated auditing’ (RBIA) approach from the ‘traditional internal auditing’ approach focusing on finance. Similar to any other change process, this journey of transition was not a smooth or comfortable one for our function. (In a sense, it was a humpty-dumpty ride). However, out of this transition to RBIA approach, I have learnt some good lessons both personally and functionally (which I feel worth sharing with my readers):

On the individual front —

• I have understood the importance of flexibility and creativity for producing the best value adding audit reports. (Structured approach alone does not suffice.)
• As an internal auditor, most often, it is good to be direct with audit clients rather than being diplomatic. Being direct have helped me gain credibility in the eyes of my clients.
• Being part of the internal audit profession, I have now learnt to experiment and take reasonable risks within professional boundaries (rather than always being over-defensive and extra-cautious).
• I have learnt the art of collaboration and negotiation better now. Now, I can empathize with the challenges faced by my audit clients. This has led me to hold more constructive conversations with my stakeholders.

As the internal audit function, some of our important learnings —

• The success of the RBIA approach is primarily dependent on identifying the correct risks to review from the start.
• It is important to ensure that both the senior management and the respective departments/ functions share the same view of risk. As a third line of defense, we ensured that they both are on same page when it comes to risk.
• One of our initial tasks was to review our country office’s risk register and see if it is complete and accurate. Subsequently we also learnt to rank the risk by considering which of those risks would have the most serious impact. By doing so, internal audit’s prioritized areas of focus matched those posing greatest risk to the organization.
• As skeptics, normally internal audit functions are good at pointing out what might go wrong. But under RBIA approach, (while proposing the corrective action to clients) we also learnt to imagine thinking what needs to go right so as to ensure management focus are aligned to achieve successful outcomes.
• Our internal audit function has started emphasizing top-down risk-based planning consistent with the country office’s objectives. For this, we took into consideration the input of senior management and the Board.
• We understood that it is important to induce the senior management to leverage on first and second line of defense when internal audit started moving towards RBIA approach.
• We learnt that when internal audit aligns its focus with organization’s top high risks, the organizations will be deriving the maximum value.
• Under the RBIA approach, our internal audit function has become intentional in learning about the business of our organization.
• RBIA approach is assisting our function to understand the issue by seeing the larger picture in a holistic way rather than having a skewed perspective. As a result, our team is now able to have a more pragmatic view of materiality while stratifying the audit observation.
• RBIA approach have underscored the importance of findings from internal audits to be commercial, strategic, cost-effective and making business sense.

 

Question: From your experience and expertise, do you think risk based integrated auditing is a better approach? Please share them by leaving a comment to this post. I welcome your thoughts.

Gifts-in-kind: Contributions and valuation

In the August 2013 Journal of Accountancy, the AICPA published this article on Gifts-in-kind: What are they worth?   It summarizes many challenges an NFP faces valuing GIK.  It touches on GIK valuation considerations (ASC 820), GIK contribution considerations (ASC 958), and management considerations, and it provides insight into how an organization may navigate these GIK challenges.

Are you a continuous learner?

What are you doing to challenge yourself to learn today, to grow and become more equipped?  How are you identifying new tools, new responses, new approaches so that you have more to offer today then you did yesterday?

It is certainly possible to attend 40 hours of CPE a year without learning.  That’s not the “learning” I’m talking about.  What has changed or transformed you lately?  Anything?

I found several blogs about continuous learning I want to share with you.  One is about where continuous learning fits within a model to prepare you for the next stage in your career.  Another is about learning to equip yourself.  Don’t stagnate with what you learned in school, or the tasks you were trained on the job.   The technical standards side of accounting is in constant change, just go to the FASB project roster to see evidence of that.  The technology we leverage advances before its even implemented – what is your approach to stay ahead?

Benjamin Franklin said “Tell me and I forget.  Teach me and I remember.  Involve me and I learn.”  I know I learn best from actively engaging in a discussion.  How do you learn best? If its by being involved, how are you involved?  Are you reading books, periodicals or blogs?  Are you taking a class online or are you teaching a class for others?  Are you speaking at an event?  Commit yourself to learn in whatever way is most effective for you.   Be disciplined to following through.

COSO’s Internal Control – Integrated Framework: Updated 2013 Edition

After its initial release of the framework 20 years ago, COSO has now come out with an updated edition in May 2013.  The updated Framework has considered changes in business and operating environment and accordingly expanded the operations and reporting objectives. What is more interesting (and the most prominent / significant one!!!) is that the updated Framework has articulated 17 principles of effective internal control.

I. Control Environment: The organization demonstrates a commitment to integrity and ethical values. The board of directors demonstrates independence from management and exercises oversight of the development and performance of internal control. Management establishes, with board oversight, structures, reporting lines, and appropriate authorities and responsibilities in the pursuit of objectives. The organization demonstrates a commitment to attract, develop, and retain competent individuals in alignment with objectives. The organization holds individuals accountable for their internal control responsibilities in the pursuit of objectives.   II. Risk Assessment: The organization specifies objectives with sufficient clarity to enable the identification and assessment of risks relating to objectives. The organization identifies risks to the achievement of its objectives across the entity and analyzes risks as a basis for determining how the risks should be managed. The organization considers the potential for fraud in assessing risks to the achievement of objectives. The organization identifies and assesses changes that could significantly impact the system of internal control.   III. Control Activities: The organization selects and develops control activities that contribute to the mitigation of risks to the achievement of objectives to acceptable levels. The organization selects and develops general control activities over technology to support the achievement of objectives. The organization deploys control activities through policies that establish what is expected and procedures that put policies into action.   IV. Information and Communication: The organization obtains or generates and uses relevant, quality information to support the functioning of internal control. The organization internally communicates information, including objectives and responsibilities for internal control, necessary to support the functioning of internal control. The organization communicates with external parties regarding matters affecting the functioning of internal control.   V. Monitoring Activities: The organization selects, develops, and performs ongoing and/or separate evaluations to ascertain whether the components of internal control are present and functioning. The organization evaluates and communicates internal control deficiencies in a timely manner to those parties responsible for taking corrective action, including senior management and the board of directors, as appropriate.

Apart from listing these 17 principles, the updated Framework has also described important characteristics of these principles though ‘points of focus’ aimed at clarifying requirements for effective internal control. ‘Points of focus’ are anticipated to provide helpful guidance to assist organization in designing, implementing and conducting internal control and in assessing whether relevant principles are present and functioning.

The updated Framework is expected to increase the ease of use and broaden application by expanding operations and reporting objectives. It seems that the updated Framework is intending to create a more formal structure for designing and evaluating the effectiveness of internal control. In my view, it is also reflecting the increased relevance of technology.(Principle 11) Considering the Enron, WorldCom saga, 2008 global financial crisis, etc, the updated Framework has given specific consideration to anti-fraud subject in relation to internal control.

Organizations currently using the original 1992 Framework should be able to establish their transition plan to move to updated 2013 Framework. The onus is on these organizations to apply the updated Framework by December 2014 for external reporting.