ICAI wings clipped over Satyam scam

The finance committee will now clear spending on infrastructure

Sangeeta Singh

New Delhi: The fraud perpetrated by Satyam Computer Services Ltd’s founder B. Ramalinga Raju has claimed some collateral damage: the apex body of accountants in the country, and its current president Uttam Prakash Agarwal.

The government has, in recent weeks, tightened its control over the Institute of Chartered Accountants of India (Icai) diluting Agarwal’s own powers in the process.

The move comes ahead of crucial elections to the body founded in 1949 and which regulates the functioning of at least 150,000 chartered accountants who sign off on the financial statements of companies—a sort of first line of defence against any financial misconduct by management or promoters.

Some of the government’s actions are seen by two people, an Icai council member and an official at the ministry of corporate affairs (MCA), as a reaction to Agarwal’s handling of the Satyam scandal, an allegation Agarwal denies.

Icai’s council is the institute’s core decision-making unit.

One of the charges against Agarwal is that he has been “soft” on S. Gopalakrishnan, a partner at Price Waterhouse, which audited Satyam’s books, and now in jail as his role in the Satyam scandal is investigated. “The allegation that I have gone slow on Gopalakrishnan or produced a weak report is absolute rubbish,” Agarwal said.

investigated. “The allegation that I have gone slow on Gopalakrishnan or produced a weak report is absolute rubbish,” Agarwal said.

The most significant rule change, approved by Icai’s finance committee last week, requires all financial issues at Icai to be now cleared consensually by members of the panel, which has three government nominees. Previously, the president of Icai, the fourth member of the committee, used to take these decisions on his own without too much interference by government nominees. The fifth member of the panel is the body’s vice- president. “It has been decided that while (the) finance committee will not dig into expenditure that has been made in the past, in future, all finance-related matters of Icai will come to the finance committee; spending on infrastructure such as on Icai buildings across the country and events will also need to be cleared by the committee,” said a person familiar with the decision made by the finance committee who did not want to be identified.

This person also added that only a deviation of 20% from the proposed expenditure would be tolerated. Mint couldn’t independently ascertain whether there have been any significant infrastructural investments made by Icai in recent years and whether the projects concerned, if any, cost more than initial estimates.

The committee’s decision comes in the wake of an email sent by a government nominee on Icai’s council and Supreme Court lawyer O.P. Vaish to Agarwal on 18 August that suggested discussing the issue related to financial decisions and others at an Icai council meeting the following day. Mint has reviewed the mail, but couldn’t ascertain the status of the other points raised by Vaish.

Vaish himself couldn’t be reached for comment.

The finance committee controls the institute’s purse strings and oversees its expenditure. The audit committee is in charge of Icai’s reporting process and also recommends the appointment and removal of statutory auditors for companies.

There are eight government nominees in Icai’s council, besides 32 chartered accountants from across India who are elected to the council every three years. The government nominees include Krishna Kant, retired chief commissioner of customs and central excise; R. Sekar, commissioner of customs; K.P. Sasidharan, director general (commercial), office of CAG (Comptroller and Auditor General of India); Renuka Kumar, joint secretary, MCA; and Vaish. Sekar, Kant and Sasidharan are included in the reconstituted finance committee and the last named has been made chairman of the audit committee.

Happenings at Icai are related to the Satyam scandal that blew into the open after the company’s founder-chairman B. Ramalinga Raju confessed in January to having fudged the company’s books over the years by at least Rs7,136 crore.

“One of the key questions we sought to address after the Satyam scandal was ‘Who will regulate the regulator?’” said a second person familiar with the developments at Icai, who too did not want to be identified.

Meanwhile, Agarwal said at a Friday meeting of Icai’s council that MCA director Jaikant Singh had written a letter to the effect that Icai’s president, vice-president and council members should steer clear of all policy decisions and press statements under a code of conduct ahead of the institute’s elections due in December. Such powers have been vested with T. Karthikeyan, Icai’s secretary.

“This is unprecedented and shows lack of faith in the president by the ministry (in Agarwal),” said the Icai council member mentioned in the first instance, and who spoke on condition of anonymity.

In press statements issued immediately after he visited Gopalakrishnan of Price Waterhouse in jail in March, Agarwal had said that “prima facie Gopalakrishnan is not guilty”. Gopalakrishnan has served on the council of Icai.

“It was only last month that Gopalakrishnan was removed from several committees of the council and replaced by government nominees,” said the same council member.

Agarwal, however, would appear to have changed his stance on Gopalakrishnan. On Monday, he said the auditor was prima facie guilty. “The disciplinary committee (of Icai) also found four auditors from Price Waterhouse, Bangalore, S. Gopalakrishnan, Srinivas Talluri, P. Shiva Prasad and C.H. Ravindranath prima facie guilty of professional misconduct,” he told PTI. The council member also found fault with Agarwal’s report on how Icai was handling the issue. This report was submitted to MCA.

The report “is a mere reproduction of the charge sheet filed by CBI (Central Bureau of Investigation) and SFIO (Serious Frauds Investigation Office, part of MCA),” said the member. An MCA official who did not want to be identified declined to comment on the report itself because it is being reviewed, but said, “Agarwal has acted in an immature manner in many ways.” He added that the ministry would prefer to see “matters resolved within (Icai’s) council”.

Under the Chartered Accountants Act, 1949, the ministry has powers to direct the institute. The official claimed that minister of corporate affairs Salman Khursheed, too, was unhappy with the goings-on at Icai and had been giving its functions a miss.

Mint couldn’t independently verify this. Khursheed could not be reached for comment.

Some of Agarwal’s colleagues have also raised charges of financial impropriety against him.

In an open letter, a copy of which has been reviewed by Mint, Sunil Talati, president of Icai in 2007-08, has claimed that there have been large amounts spent unnecessarily.

Agarwal dismissed these allegations. “Since council elections are round the corner, people are trying to defame me,” he said. He added that the government had cleared the institute’s accounts till March without raising any objections. “It is easy to write open letters, but council members should prove where I went wrong.”

Source:- Live Mint

Who uses forensic accountants?

Who uses forensic accountants?

Forensic accounting specialist financial investigators with financial information for transmission problems in a way that others can easily understand.

While some forensic accountants and forensic accounting specialists are included in the public practice of forensic examination, others work in the private sector for such companies such as banks and insurance companies or government agencies. Occupational fraud by employees in general, theft of property. Embezzlement, fraud is more widespread in the last 30 years. Employees can kick back schemes, identity theft, or conversion of company assets for personal use.

The forensic accountant couples observation of the suspected employees with physical examination of assets, invigilation, inspection of documents and interviews with stakeholders. Experience in this type of commitment enables the forensic accountant to offer suggestions for internal control that the owners could reduce the risk of fraud.

Sometimes, the police took accounting in May by lawyers to ensure the trail of persons suspected of involvement in criminal activities. The information provided by the police accounts may be the most effective way of belief.

The legal control may be even with the bankruptcy court, the financial information if they suspect or if employees (including managers) are suspected of activity.

Opportunities for qualified forensic accounting professionals are in private companies. CEOs must now certify that their budget is the true representation of financial position and earnings of businesses and focus more on internal controls to recognize that in these false otherwise Financials. In addition to these activities, forensic accountants may be asked to determine the amount of damages by victims, witnesses in court as witnesses and experts for the preparation of visual aids and written summaries for use in court.

Source: www.vaccountancy.com

Operational Risk Assessment - Advocates a 'more forensic' approach towards operational risk management and promotes transparency

By Brendon Young and Rodney Coleman

“Brendon Young and Rodney Coleman's book is extremely timely. There has never been a greater need for the financial industry to reassess the way it looks at risk. […] They are right to draw attention to the current widespread practices of risk management, which […] have allowed risk to become underpriced across the entire industry.”

Rt Hon John McFall MP, Chairman,
House of Commons Treasury Committee

Failure of the financial services sector to properly understand risk was clearly demonstrated by the recent 'credit crunch'. In its 2008 Global Stability Report, the IMF sharply criticised banks and other financial institutions for the failure of risk management systems, resulting in excessive risk-taking. Financial sector supervision and regulation was also criticised for lagging behind shifts in business models and rapid innovation.

This book provides investors with a sound understanding of the approaches used to assess the standing of firms and determine their true potential (identifying probable losers and potential longer-term winners). It advocates a 'more forensic' approach towards operational risk management and promotes transparency, which is seen as a facilitator of competition and efficiency as well as being a barrier to fraud, corruption and financial crime.

Risk assessment is an integral part of informed decision making, influencing strategic positioning and direction. It is fundamental to a company’s performance and a key differentiator between competing management teams. Increasing complexity is resulting in the need for more dynamic, responsive approaches to the assessment and management of risk. Not all risks can be quantified; however, it remains incumbent upon management to determine the impact of possible risk-events on financial statements and to indicate the level of variation in projected figures.

To begin, the book looks at traditional methods of risk assessment and shows how these have developed into the approaches currently being used. It then goes on to consider the more advanced forensic techniques being developed, which will undoubtedly increase understanding. The authors identify 'best practice' and address issues such as the importance of corporate governance, culture and ethics. Insurance as a mitigant for operational risk is also considered. Quantitative and qualitative risk assessment methodologies covered include: Loss-data analysis; extreme value theory; causal analysis including Bayesian Belief Networks; control risk self-assessment and key indicators; scenario analysis; and dynamic financial analysis.

Views of industry insiders, from organisations such as Standard & Poors, Fitch, Hermes, USS, UN-PRI, Deutsche Bank, and Alchemy Partners, are presented together with those from experts at the FSA, the International Accounting Standards Board (IASB), and the Financial Reporting Council.

In addition to investors, this book will be of interest to actuaries, rating agencies, regulators and legislators, as well as to the directors and risk managers of financial institutions in both the private and public sectors. Students requiring a comprehensive knowledge of operational risk management will also find the book of considerable value.

Fraud Management in the 21st Century

Fraud Management in the 21st Century

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Ten Ways to Tune Up Your Fraud Risk Management Approach

Ten Ways to Tune Up Your Fraud Risk Management Approach

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Occupational Fraud A Genuine Risk to Your Business | Hartford Business

Occupational Fraud A Genuine Risk to Your Business | Hartford Business

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Chuck The Cookbook - The Satyam Scam & After

Post-Satyam, India Inc is showing very low tolerance to fraud ...By Pragya Singh

Everyone was stunned this January when Satyam founder Ramalinga Raju confessed to cooking the company’s accounts for years. Apparently, India’s fourth largest IT firm barely existed except on paper, though thousands drew salaries from it and scores of multinational clients used its backoffice services. How could this happen, everyone asked, despite the relentless scrutiny of quarterly results and the high publicity an Indian multinational gets? Most of all, if this scam could escape shareholders’ attention in an internationally listed firm, could private firms be trusted?

Somewhere, through all the angry words and “high-level” government investigations, most know enough to be all-out cynics. India is not new to corporate scandal—bank collapses, stockmarket scams and numerous other frauds are easily forgotten, as decades after the event official investigations meander endlessly through red tape. “It’s true, public memory is short,” says Nishith Desai, corporate law expert and founder of an international tax firm. But there’s also a fundamental problem with crime in general (murders, after all, are not prevented even by the harshest punishment) but it doesn’t mean we do away with the law.
Truth is, “every time a fraud occurs in a mature society, organisational and regulatory changes do happen that have lasting impact”, avers Desai. Many in the legal and professional accounting services agree that while individuals can be deterred, companies and institutions need tougher regulatory controls. After months of consultations within businesses, professionals and government, the latest buzzword is early detection and prevention. Could this be the one big takeaway from the Satyam episode? Some say it is.

Union corporate affairs minister Salman Khurshid says the government “is setting up an early warning system to predict fraud before it actually happens. Pilot tests of this model are being done by market regulator sebi and we hope to have it up and running throughout the country if all goes well”.

Frauds tend to bubble up during a slowdown. In better times, companies focus on “creating shareholder value” and making the most of expansion and sales. When the going gets tough, costs are yanked under microscopes. It is even argued that this is why Satyam got caught out—shareholders refused to approve an expensive merger at a time when the slow phase in the global economy loomed close. Consulting major KPMG India, which has conducted 400-500 investigations of corporate fraud (including the Satyam case) in the last five years, has lately seen requests from companies wanting to ensure they are “above board”. It has conducted around 100 investigations in the last year.
After the Satyam episode, India Inc wants to eliminate typical malpractices, and is taking a good look under the hood of procurement, production, sales, distribution and recruitment operations. Says Deepankar Sanwalka, who leads KPMG’s corporate forensics work, “Functions where kickbacks and frauds happen are first under the scanner when things go wrong.” The slowdown feeds such overt caution. One interesting discovery: salary freezes have pushed some staff into committing fraud. Sadly for them, the post-Satyam corporate will not tolerate even a hint of wrongdoing. “There’s a very low tolerance to fraud these days,” says Sanwalka. KPMG’s 400-odd fraud investigators have been working “night and day” to meet this need.

The government hasn’t been sitting still either. Recently, income-tax rules were slightly amended and soon, for the first time, employees may no longer have to produce bills to claim LTA (leave travel allowance is often claimed on fake bills anyway). The removal of such institutional excuses to commit fraud is just a beginning. Even the professions want change. Company accountants are being asked to balance audit and non-audit work to ensure independence. Top lawyers no longer take up directorship on firms casually and institutional investors—who often missed shareholders’ meets—don’t act like mute spectators.
The impact is spilling over to professions such as auditing, accounting, lawyers, consultants and even managers. One inheritance from the early ’90s—quarterly result reports—is under fire for being reduced to a mere cliche. Since the early ’80s, the global standard for reporting results by the quarter has been adopted by Indian companies as well. Now some are beginning to question such bald reasoning. “Post Satyam, people want proof that their firms aren’t comprised solely of spreadsheets, number-charts,” says Prof Rajesh K. Aithal who teaches business ethics at IIM Lucknow.

The ICWAI, which sets cost and works accountancy standards in India, believes that segment-wise results also need to be recorded by companies more conscientiously. G.N. Venkataraman, president, ICWAI, says, “The accounting profession needs to move from compliance governance to business governance. The government should make this shift possible by allowing self-governance alongside independent oversight.”

It’s not surprising that the accounting profession wants a new governance system. “We have asked the government to set up a separate accounting oversight board. Why should a body like the ICAI or ICWAI take this responsibility alone?” asks Kunal Banerjee of Shome & Banerjee, a Calcutta-based accountancy firm.

As changing realities strike at the heart of how businesses will be run in the future, the very incubators are being criticised. Some are wondering if B-schools are responsible for the rise in bad ethics. Ajit Rangnekar, dean, Indian School of Business, Hyderabad, says that the fundamentals of management education are sound and relevant; the need is to sensitise management students to the importance of integrity in business. “Quite often, managers know what is right; they just don’t know how to do it. People don’t speak up because they believe that it is not feasible. There is a corrosive belief that if they decline a task, someone else will readily conform,” he says.
To counter this, ISB and other schools try to teach students how to stay true to values by using effective ‘scripts and skills’. ISB is evolving case studies on ‘giving voice to values’, while IIM Lucknow is setting up an exclusive centre for corporate governance education. Unlike other scams in the past, India Inc, right across the value chain, is not happy with suffixing the word “scandal” permanently to Satyam’s name and leaving it at that.

Source: www.outlookindia.com

With two more, US bank failures reach 94 in 2009: FDIC

WASHINGTON: Two more US banks have closed down -- including the sixth largest bank bankruptcy this year -- to bring the total number of bank
failures this year to 94, according to the government banking insurer.

The Indiana-based Irwin Union Bank was shuttered with a total of $2.7 billion in assets and total deposits of some $2.1 billion, the federal deposit insurance corporation (FDIC) said in a statement on Friday.

In the same group, the Kentucky-based Irwin Union Bank failed with assets of $493 million and total deposits of some $441 million.

The institutions were banking subsidiaries of the Columbus, Indiana-based Irwin Financial Corporation.

With 27 branch locations between them, the two banks are set to reopen under regular business hours on Saturday as branches of First Financial Bank, with deposits continuing to be insured by the FDIC.

After suffering no bank failures at all in 2005 and 2006, the US banking system saw three banks going under in 2007, followed by 25 in 2008.

With the bankruptcies on Friday, the institutions brought the number of bank failures this year to 94 -- highlighting the extreme stress that the global financial crisis has placed on US banking institutions.

The FDIC said it estimated the transactions would cost the government's deposit insurance fund $850 million.

Source: Times of India

RBI flashes Red Signals at MLM Companies

http://www.financialexpress.com/news/rbi-flashes-red-signal-at-mlm-companies/518020/

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RBI’s concern over rising instances of frauds in retail banking

The Reserve Bank of India (RBI) advised banks to — with the approval of their respective boards — frame internal policy for fraud risk management and fraud investigation function. It also stated that these must be owned by the bank’s chief executive officers (CEO), its audit committee and the special committee of the board.

In a notification to chairmen and chief executives of all scheduled commercial banks the RBI stated that the incidence of frauds in the banks has been showing an increasing trend over the recent years, both in terms of number of frauds and the amounts involved.

It has been observed that the trend is more disquieting in retail segment especially in housing and mortgage loans, credit card dues, internet banking and the like. Moreover, it is a matter of concern that instances of frauds in the traditional areas of banking such as cash credit, export finance, guarantees and letters of credit remain unabated.

Citing reasons for frauds in banks, the RBI stated that while certain structural factors in the banks’ operating environment could account for this rising trend in general, “adoption of aggressive business strategies and processes by the banks for quick growth and expansion without ensuring that adequate and appropriate internal controls are in place could, in specific, incentivise operating staff to lower the standards of control while attempting to meet business targets.”

Also, a continuously rising trend in the cases of frauds is indicative of the fact that the steps taken by banks in investigating the frauds and identifying the fraudsters for eventual criminal prosecution and appropriate internal punitive action for the staff members involved in the frauds have not been adequate.

“While discussing certain cases of frauds of exceptionally large amounts, the Board for Financial Supervision (BFS) has expressed grave concern that fraudsters with the involvement of bank officials could engineer system wide break down of controls across months while putting through fraudulent transactions,” the RBI noted.

The board has observed that in terms of higher governance standards, the fraud risk management and fraud investigation function must be owned by the bank’s CEO, its audit committee of the board and the special committee of the board, at least in respect of high value frauds. And accordingly, they should own responsibility for systemic failure of controls or absence of key controls or severe weaknesses in existing controls which facilitate exceptionally large value frauds and sharp rises in frauds in specific business segments leading to large losses for the bank.

Source: The Hindu

RBI: Onus of fraud probe, management on banks

The Reserve Bank of India (RBI) has directed that the fraud risk management and fraud investigation function of a bank must be owned by the bank's chief executive officer, its audit committee and the special committee of the bank's board for high-value frauds.

Outlining the role of chairmen and chief executive officers in the fraud risk management system, the RBI further stated that the audit committee and special committee of the board should also own responsibility for systemic failure of controls or any absence of key controls or severe weaknesses in existing controls which facilitate exceptionally large-value frauds.

Towards this, the banks should set up dedicated and well-organised "special surveillance and investigation function", which would, on a continuous basis, exercise surveillance over potentially fraud-prone areas and investigate large-value frauds. This unit would also be responsible for mandatorily implementing the recommendations of the special committee of the bank's board, so that the monitoring and investigation of large-value frauds were recognised as a distinct function. These recommendations till date were optional.

To start with, banks have been advised to immediately set up "internal oversight framework," which can prevent wrongdoings and take punitive measures.

This has been done following the increasing incidents of banking frauds in recent years, both in terms of their numbers and the amount involved. It has been observed that the trend was more prevalent in the retail segment, especially in housing and mortgage loans, credit card dues, internet banking.

Banks, with the approval of their respective boards, may frame internal policy for fraud risk management and fraud investigation function, based on the above governance standard relating to the ownership of the function and accountability for malfunctioning of the fraud risk management process in their banks.

The function of the unit will have to be discharged in a centralised manner instead of leaving it to the regional offices of banks, where such specialisation may not be available. So the banks should own specialised fraud monitoring, investigation and follow-up function for large-value frauds or frauds which occur across the bank.

The banks should identify staff with proper aptitude and provide necessary training to them in forensic audit so that only such skilled personnel were deployed for investigation of large-value frauds.

The banks may build up a data/ information pool of large-value frauds and analyse them periodically, which may act as knowledge repository for policy responses.

Source: www.business-standard.com

A Year After Financial Crisis, a New World Order Emerges

By Kevin G. Hall, McClatchy Newspapers

Sep. 9--WASHINGTON -- One year after the near collapse of the global financial system, this much is clear: The financial world as we knew it is over, and something new is rising from its ashes.

Historians will look to September 2008 as a watershed for the U.S. economy.

On Sept. 7, the government seized mortgage titans Fannie Mae and Freddie Mac. Eight days later, investment bank Lehman Brothers filed for bankruptcy, sparking a global financial panic that threatened to topple blue-chip financial institutions around the world. In the several months that followed, governments from Washington to Beijing responded with unprecedented intervention into financial markets and across their economies, seeking to stop the wreckage and stem the damage.

One year later, the easy-money system that financed the boom era from the 1980s until a year ago is smashed. Once-ravenous U.S. consumers are saving money and paying down debt. Banks are building reserves and hoarding cash. And governments are fashioning a new global financial order.

Congress and the Obama administration have lost faith in self-regulated markets. Together, they're writing the most sweeping new regulations over finance since the Great Depression. And in this ever-more-connected global economy, Washington is working with its partners through the G-20 group of nations to develop worldwide rules to govern finance.

"Our objective is to design an economic framework where we're going to have a more balanced pattern of growth globally, less reliant on a buildup of unsustainable borrowing... and not just here, but around the world," said Treasury Secretary Timothy Geithner.

The first faint signs that the U.S. economy may be clawing its way back from the worst recession since the Great Depression are only now starting to appear, a year after the panic began. Similar indications are sprouting in Europe, China and Japan.

Still, economists concur that a quarter-century of economic growth fueled by cheap credit is over. Many analysts also think that an extended period of slow job growth and suppressed wage growth will keep consumers -- and the businesses that sell to them -- in the dumps for years.

"Those things are likely to be subpar for a long period of time," said Martin Regalia, the chief economist for the U.S. Chamber of Commerce. "I think it means that we probably see potential rates of growth that are in the 2-2.5 (percent) range, or maybe... 1.8-1.9 (percent)." A growth rate of 3 percent to 3.5 percent is considered average.

The unemployment rate rose to 9.7 percent in August and is expected to peak above 10 percent in the months ahead. It's already there in at least 15 states. Regalia thinks that it could be five years before the U.S. economy generates enough jobs to overcome those lost and to employ the new workers entering the labor force.

All this is likely to keep consumers on the sidelines.

"I think this financial panic and Great Recession is an inflection point for the financial system and the economy," said Mark Zandi, the chief economist for forecaster Moody's Economy.com. "It means much less risk-taking, at least for a number of years to come -- a decade or two. That will be evident in less credit and more costly credit. If you are a household or a business, it will cost you more, and it will be more difficult to get that credit."

The numbers bear him out. The Fed's most recent release of credit data showed that consumer credit decreased at an annual rate of 5.2 percent from April to June, after falling by a 3.6 percent annual rate from January to March. Revolving lines of credit, which include credit cards, fell by an annualized 8.9 percent in the first quarter, followed by an 8.2 percent drop in the second quarter.

That's a sea change. For much of the past two decades, strong U.S. growth has come largely through expanding credit. The global economy fed off this trend.

China became a manufacturing hub by selling attractively priced exports to U.S. consumers who were living beyond their means. China's Asian neighbors sent it components for final assembly; Africa and Latin America sold China their raw materials. All fed off U.S. consumers' bottomless appetite for more, bought on credit.

"That's over. Consumers can do their part -- spend at a rate consistent with their income growth, but not much beyond that," Zandi said.

If U.S. consumers no longer drive the global economy, then consumers in big emerging economies such as China and Brazil will have to take up some of the slack. Trade among nations will take on greater importance.

In the emerging "new normal," U.S. companies will have to be more competitive. They must sell into big developing markets; yet as the recent Cash for Clunkers effort underscored, the competitive hurdles are high: Foreign-owned automakers, led by Toyota, reaped the most benefit from the U.S. tax breaks for new car purchases, not GM and Chrysler.

Need a loan? Tough luck: Many U.S. banks are in no condition to lend. Around 416 banks are now on a "problem list" and at risk of insolvency. Regulators already have shuttered 81 banks and thrifts this year.

The Federal Deposit Insurance Corp. reported on Aug. 27 that rising loan losses are depleting bank capital. The ratio of bank reserves to bad loans was 63.5 percent from April to June, the lowest it's been since the savings-and-loan crisis in 1991.

For all that, the U.S. economy does seem to be rising off its sickbed. The latest manufacturing data for August point to a return to growth, and home sales are rising. Indeed, there are many encouraging signs emerging in the global economy.

It's all growth from a low starting point, however, and many economists think that there'll be a lower baseline for U.S. and global growth if the new financial order means less risk-taking by lenders and less indebtedness by companies and consumers.

That seems evident now in the U.S. personal savings rate. It fell steadily from 9.59 percent in the 1970s to 2.68 percent in the easy-money era from 2000 to 2008; from 2005 to 2007, it averaged 1.83 percent.

Today, that trend is in reverse. From April to June, Americans' personal savings rate was 5 percent, and it could go higher if the unemployment rate keeps rising. Almost 15 million Americans are unemployed -- and countless others are underemployed or uncertain about their job security, so they're spending less and saving more.

A few years ago, banks fell all over themselves to offer cheap home equity loans and lines of consumer credit. No more. Even billions in government bailout dollars to spur lending haven't changed that.

"The strategy that was stated at the beginning of the year -- which is that you would sustain the banking system in order that it would resume lending -- hasn't worked, and it isn't going to work," said James K. Galbraith, an economist at the University of Texas at Austin.

Over the course of 2008, the nation's five largest banks reduced their consumer loans by 79 percent, real estate loans by 66 percent and commercial loans by 19 percent, according to FDIC data. A wide range of credit measures, including recent FDIC data, show that lending remains depressed.

Why? The foundation of U.S. credit expansion for the past 20 years is in ruin. Since the 1980s, banks haven't kept loans on their balance sheets; instead, they sold them into a secondary market, where they were pooled for sale to investors as securities. The process, called securitization, fueled a rapid expansion of credit to consumers and businesses. By passing their loans on to investors, banks were freed to lend more.

Today, securitization is all but dead. Investors have little appetite for risky securities. Few buyers want a security based on pools of mortgages, car loans, student loans and the like.

"The basis of revival of the system along the line of what previously existed doesn't exist. The foundation that was supposed to be there for the revival (of the economy)... got washed away," Galbraith said.

Unless and until securitization rebounds, it will be hard for banks to resume robust lending because they're stuck with loans on their books.

"We've just been scared," said Robert C. Pozen, the chairman of Boston-based MFS Investment Management. He thinks that the freeze in securitization reflects a lack of trust in Wall Street and its products and remains a huge obstacle to the resumption of lending that's vital to an economic recovery.

Enter the Federal Reserve. It now props up the secondary market for pooled loans that are vital to the functioning of the U.S. financial system. The Fed is lending money to investors who're willing to buy the safest pools of loans, called asset-backed securities.

Through Sept. 3, the Fed had funded purchases of $817.6 billion in mortgage-backed securities. These securities were pooled mostly by mortgage finance giants Fannie Mae, Freddie Mac and Ginnie Mae. In recent months, the Fed also has moved aggressively to lend for purchase of pools of other consumer-based loans.

Today, there's little private-sector demand for new loan-based securities; government is virtually the only game in town. That's why on Aug. 17, the Fed announced that it would extend its program to finance the purchase of pools of loans until mid-2010. That suggests there's still a long way to go before a functioning securitization market -- the backbone of consumer lending -- returns to a semblance of normalcy.

Source: GARP

The Lehman 'Undertaker' Who Takes a Real Delight in His Work

Tony Lomas laughs. "From a very early age, you know, I always wanted to be an accountant. It's true. My mother worked for the tax office and she always said: 'If you want to be a businessman you should first train to be an accountant." And she suggested Price Waterhouse because she said she dealt with them more than any other firm."

Her boy went on to be an accountant alright. Today, Lomas is the lead partner for what is now PricewaterhouseCoopers on the mightiest financial collapse of all, the administration of Lehman Brothers. He's already got the debacles at Maxwell, Polly Peck, Enron and MG Rover to his bow but Lehman, which went down almost exactly a year ago, dwarfs them in terms of its detail and scale. "I'm 52 and I will work until I'm 60," says Lomas. "Will this case outlive me? Yes it will."

We're sitting in what used to be the Lehman European boardroom on the 30th floor of what was the Lehman tower at Canary Wharf. The place is nothing like it used to be. I remember going there for lunch with Lehman when we were treated to a meal that would have done Le Gavroche proud. That was after we'd admired the fine art on display and sipped the superb wine. That's all gone. The walls are completely bare and there is no sign of anything that could remotely smack of high living.

Lomas, too, is very different from those investment bankers. He's tall, lean, ascetic in appearance. He earns a handsome living from what he does but there's no danger of his buying a luxury yacht or a grand villa. Oh no. "I live in Loughton and I like to spend time with my family when I'm not working [he has two sons]. I've got an old Mercedes AMG that I like to drive round the country lanes. For holidays we go to a log cabin in Canada."

Even then, you just know, he's thinking about his work. "I can talk about it for hours," he says, chuckling. Its miserable nature, sweeping up the pieces of a shattered business, doesn't perturb him either -- "If somebody needs an undertaker it might as well be me," he says, laughing again.

On Monday, 15 September last year, he was appointed to sort out the bloated corpse that was Lehman Brothers International (LBI).

So how does it work, I say, do you suddenly drop everything, and the next decade of your life is sorted? He shakes his head, smiling. "There had been discussions with the Lehman board. In theory, there is competition for this type of work but Ernst & Young couldn't do it because they were the audit firm and any others that could conceivably do it also had material interests with Lehman around the world. We'd checked our relationships with Lehman and we were fine. I knew on the Friday it was likely to go down but I still didn't head home expecting a phone call. I was shocked to get it; shocked to hear the news there was no deal in New York."

Since then PwC has run up a bill that currently stands at a staggering £77 million. "We have 230 full-time PwC staff working on Lehman, plus 400 original Lehman employees still working with us. Then Linklaters have 50 to 75 lawyers at helping us."

Even so, isn't PwC milking the disaster? "No, it's costing so much because of the complexity of what we're dealing with. Lehman Brothers International deployed 4000-odd bankers. It covered the full range of investment banking activities."

PwC, says Lomas, "has just settled with a big investment bank [he won't identify the bank] which was a counter-party of Lehman, for it to pay more than $500 million (£307.9 million). That's half a billion from one party. Their team and ours had to look at 10,000 line items. That's 10,000 sets of calculations and valuations that took months to do. The other bank still operates -- it's got the infrastructure, the staff. It knows where to find things. We're not in the same position -- we don't have that advantage."

There were thousands of such counterparties and millions of transactions -- at the moment the plug was pulled, Lehman in London was involved in 2.5<26>million trades, in derivatives and other financial instruments, that were simply frozen. They all have to be unwound and appraised.

Often, says Lomas, PwC's progress is hindered by the other side not being specific as to which part of the Lehman empire it was dealing with. Incredibly, despite a year having passed, some investment banks are still unable to reconcile their books so that they can make a claim. And until they do, nothing can begin to be resolved. "One counterparty owes Lehman more than $1 billion but they're not at the stage where they've reconciled any possible claim against us," says Lomas, shrugging at the madness of it all.

Then there's the former parent in New York. Lomas and his colleagues are putting the finishing touches to lawsuits against the old Wall Street operation for $100 billion. The US bankruptcy court has set a deadline of 22 September for all creditors to file their claims.

More than 100 separate units of Lehman came under the London banner and now fall under Lomas's remit. Their obligations were guaranteed by New York, so "we are going to be filing claims in the many tens of billions. It will be close to $100 billion".

Lomas was knocked back in the English court last month when he tried to gain acceptance for a single scheme of arrangement under which LBI could repay its creditors. It would have speeded up the administration but the judge would not give approval.

"It was a setback," he admits. "We disagree with the judge on the legal aspects. We'll appeal it and we will also work on modifying the proposal."

Look, he says, "there are three types of creditor we're having to deal with. There's the guy who has got an asset inside Lehman and he wants it back. But we can't give it back until we're satisfied there isn't someone with a better right to it. Then there's the guy with an unsecured claim, who was a counterparty, for example on a derivatives trade. But we can't pay them until we know how many such claimants there are and how much they're claiming. Then there are the employees. LBI employed people in 15 foreign countries where the labour legislation may be different from here -- in Italy and France for example, an employee has greater rights and is able to make a claim against the estate".

He expects the bulk of the administration to be dealt with in the first two years of the bank's fall -- "although a lot rests on us achieving an alternative outcome from the court to our scheme of arrangement." But there will be cases that drag on and if past form is a guide, for longer than 10 years.

One way of avoiding something as convoluted as the Lehman fallout in future is to prevent banks becoming so large. But that is unlikely to happen. However, it would help, says Lomas, if there was a greater understanding of risk and a bank had a greater knowledge of its relationships across all its activities. "At Lehman, the risk officer wasn't on the main board, which says something about the culture of the place. And the bank had 1500 different operating platforms, many of which didn't take account of each other."

He was also involved in the Northern Rock crisis and saw at first hand what a loss of confidence can do to a bank and how suddenly it can drain away. There ought to be a method, he suggests, of accountants and lawyers going in at the first sign of trouble -- at Lehman that could have been six months prior to last September -- and working to ensure that if the end does arrive, everything is in some sort of order.

There was another solution to Lehman's woes, one which he is in no doubt would have been better for all concerned. "Lehman should have been taken over," he says. "Bank of America took over Merrill Lynch, JP Morgan took over Bear Stearns. Lehman should have been absorbed into another entity and the balance sheet unwound."

But there was no takeover and, to his obvious pleasure, Lomas got that phone call.

LIFE AND TIMES OF TONY LOMAS

--Born: 1957

--Education: St Michael's Comprehensive School, Stevenage; University College London (degree in geography)

--First job: trainee accountant, Price Waterhouse

--Key moves: auditor for six years; worked for firm's "intensive care unit", dealing with businesses in trouble; involved in cleaning up Maxwell, Polly Peck, Enron and MG Rover collapses; lead partner on Lehman administration

--Hobbies: Spending time with his family, cars

Source: The Evening Standard, London

Opportunities for Improvement: Take Your Risk Management System to the Next Level

EXECUTIVE SUMMARY

* Expectations for improvements in how boards and senior executives oversee enterprisewide risks are on the rise. The authors surveyed more than 700 organizations in September 2008 to better understand the current state of enterprise risk oversight. This article provides a brief overview of key findings from that research and identifies potential opportunities to strengthen risk oversight.

* Organizations have traditionally tackled risk oversight by managing individual "risk buckets" or silos. The survey found that 44% of the respondents have no enterprisewide risk management process in place and they have no plans to implement one. An additional 18% of respondents without ERM processes in place indicated that they are currently investigating the concept, but they have made no decisions to implement an ERM approach to risk oversight at this time.

* The two most common perceived barriers to ERM implementation were the existence of competing priorities within the organization and insufficient resources to devote to an ERM implementation. Despite the barriers, 75% of the organizations indicated the board of directors is asking senior executives to increase their involvement in risk oversight at least moderately.

* A majority of organizations who delegated risk oversight to a committee of the full board assigned that responsibility to the audit committee (55%). Other committees that were reported with some frequency were the executive committee of the board (21% of responses) or a separately established risk committee (18%).

* Steps for improvement include: information gathering to identify the top five-to-10 risk exposures the organization is likely to face in the next three to five years; reconciling the top risk exposures with existing risk management activities already ongoing within the organization; and prioritizing any newly identified unmanaged risks.

**********

As the result of fallout from the ongoing economic crisis, failures associated with existing risk management processes are already generating calls for reform and increased regulatory scrutiny

SEC Chairman Mary Schapiro said in an April 2009 speech to the Council of Institutional Investors that "the Commission will be considering whether greater disclosure is needed about how a company--and the company's board in particular--manages risks, both generally and in the context of setting compensation." In July 2009, the SEC issued its first response through proposed rules that expand proxy disclosure information about the overall impact of compensation policies on the registrant's risk taking and the role of the board in the company's risk management practices. Proposals in Congress call for the establishment of board risk committees composed of independent directors, among other reforms.

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Credit rating agencies such as Standard & Poor's have also focused on an organization's risk management processes, providing an additional incentive for organizations to consider further enhancement of existing risk oversight infrastructure. Without a doubt, expectations for improvements in how boards and senior executives oversee enterprisewide risks are significantly on the rise. The question is whether organizations are currently in a position to respond with more robust, enterprisewide risk oversight.

To provide answers to this question, in September 2008 the authors surveyed more than 700 organizations whose 2008 revenues ranged from $14,950 to $115 billion--with a median for the sample of $50 million--to better understand the current state of enterprise risk oversight. This article provides a brief overview of key findings from that research, Report on the Current State of Enterprise Risk Oversight, and identifies potential opportunities to strengthen risk oversight.

EXPECTATIONS FOR TOP-DOWN, HOLISTIC VIEW OF RISK

While organizations have managed risks for centuries, most have traditionally tackled risk oversight by managing individual "risk buckets" or silos. For example, chief technology officers manage the information technology infrastructure to ensure that IT risks are minimized while general counsels manage legal and regulatory risks. However, only rarely do the individuals charged with risk management responsibilities come together to share risk oversight information.

Much of the shift in thinking about risk oversight has centered on ever-growing calls for boards and senior executives to embrace the business paradigm widely known as enterprise risk management (ERM). ERM is championed as an effective approach to identifying, assessing and monitoring risks across organizations and establishing communication protocols to efficiently share this risk information quickly across the entity The ERM approach emphasizes a top-down, holistic view of the inventory of key risk exposures potentially affecting an enterprise's ability to achieve its objectives. Proponents argue that a comprehensive ERM process helps to ensure that significant risks are given adequate consideration by senior management and boards of directors in the strategic planning process. Boards and senior executives use this inventory of risks with the goal of preserving and enhancing stakeholder value.

The survey sought information about various aspects of risk oversight within their organizations. It asked respondents to consider the Committee of Sponsoring Organizations of the Treadway Commission (COSO) definition of ERM as they responded to a series of questions about the state of risk oversight in their organizations. The questionnaire emphasized to respondents key aspects of this definition by noting that ERM is a formal process; that it is enterprisewide; and that it addresses risks in a portfolio manner, where interactions among risks are considered.

To learn more about factors related to the embrace of ERM in organizations surveyed, the research instrument asked a series of questions about the status of ERM implementation in these companies. The survey found that 44% of the respondents have no enterprisewide risk management process in place and they have no plans to implement one. An additional 18% of respondents without ERM processes in place indicated that they are investigating the concept, but they have made no decisions to implement an ERM approach to risk oversight at this time. Thus, on a combined basis, more than 60% of respondents had no formal enterprisewide approach to risk oversight. Only a small number (9%) of respondents believe they possess a complete formal enterprisewide risk management process. An additional 22% noted that they have partially implemented an ERM process, but not all risk areas are being addressed by that process.

Particularly revealing was the finding that in 74% of the organizations responding to the survey, management does not provide a report to the board of directors describing the entity's top risk exposures. These responses indicate that the level of enterprisewide risk oversight sophistication in the organizations surveyed is fairly immature and not based on a top-down, holistic approach to risk management. The respondents largely agreed with this assessment as 67% admitted that their risk oversight process is very immature or minimally mature.

These results are especially surprising when almost overwhelming numbers of respondents indicated that the volume and complexity of risks encountered by their companies had increased in the past five years. Ninety-one percent of respondents indicated that the increase in volume and complexity of risks they have faced was greater than minimal. Sixty-nine percent of respondents had experienced at least a moderate operational surprise in that same time frame--with 36% reporting the surprise as at least extensive.

The questionnaire also asked about the risk culture in their organizations. The results showed that more than half of the firms would describe themselves as risk-averse (41%) or strongly risk-averse (10%). Ironically, 47% indicated that they are unsatisfied with the nature and extent of reporting to senior management about the entity's top risk exposures. Hence, while a significant majority of organizations have experienced a risk climate growing increasingly more complex and featuring more frequent and significant operational surprises, extant risk management programs remain fairly immature and not up to the task of providing timely, comprehensive data to inform senior management and the board of directors of potentially disastrous near-horizon events.

PERCEIVED BARRIERS TO ERM

Given the apparent disconnect between a need for a more robust risk management process and the lack of embrace of ERM as an approach to develop rigorous and disciplined risk oversight, we asked respondents about perceived barriers to ERM implementation. The two most common responses were the existence of competing priorities within the organization and insufficient resources to devote to an ERM implementation. Other barriers frequently noted included a lack of perceived value (for an ERM program), lack of board or senior management leadership for ERM, and the perception that ERM translates into added bureaucracy for the organization. Exhibit 1 provides additional data on these responses.

CALLS FOR CHANGE

Despite these perceived barriers, the research indicates that expectations for improving risk oversight in these organizations are on the rise. For 75% of the organizations surveyed, the board of directors is asking senior executives to increase their involvement in risk oversight at least moderately (45% are asking extensively for increased oversight). The data indicate that much of the board's interest in strengthening risk oversight is being funneled through the audit committee. For respondents in organizations that have an audit committee in place, 86% of the audit committees are asking executives to increase their risk oversight at least moderately (58% are making that request extensively).

Collectively, these results tell that requests for more senior management involvement in risk oversight are pervasive. Internal audit also appears to be placing additional risk management expectations on executives. For those entities with an internal audit function, 83% of the respondents indicated that internal audit is making at least moderate requests for more senior management involvement in risk oversight. Exhibit 2 provides details on these responses. These results indicate that pressures on senior executives to strengthen risk oversight appear to be significantly increasing among the organizations represented.

ROLE OF BOARD IN RISK OVERSIGHT

For organizations that have already delegated risk oversight responsibility to a specific board committee, we were interested in which committee had received that charge and the types of risks regularly monitored by that committee. As might be expected, a majority of respondents who delegated risk oversight to a committee of the full board assigned that responsibility to the audit committee (55%). Other committees that were reported with some frequency were the executive committee of the board (21% of responses) or a separately established risk committee (18%).

For those organizations where the audit committee had primary risk oversight responsibility, in 19% of the cases only financial risks were being monitored. For an additional 63% of these organizations, operational and compliance risks were also being monitored (in addition to financial risks). Surprisingly, in only 18% of the responses was the committee charged with risk oversight responsibility actively monitoring all entity risks (defined as including strategic risks in addition to the risks named above). Hence, broad oversight of all types of risks does not appear to be a widespread practice for audit committees--the committee most commonly charged with risk oversight.

On the positive side, emerging trends demonstrate that some of the best practices for developing effective board and senior management risk oversight are in place for some organizations. Boards of directors, especially through their audit committees, are increasing their focus on risk issues. When boards are explicitly focusing on risk, they are working with their audit committees, risk committees and executive committees to tackle the complex challenges of top-down risk oversight. Management is also demonstrating a growing interest in creating a more structured approach to risk oversight. Some are responding by establishing senior executive risk leadership positions in their organizations. When they do, those positions are reporting directly to the top of the organization, either through the board or CEO.

CRITICAL FIRST STEPS FOR IMPROVEMENT

Given the growing pressures for more effective risk oversight that are emerging from the recent financial crisis, and the relative immaturity of enterprisewide risk oversight across a wide spectrum of organizations, organizations have a significant opportunity to embrace a top-down, enterprisewide perspective of risk oversight. Results from this survey suggest that there is an urgent need to evaluate existing risk management processes in light of perceived increases in the volume and complexity of risks and operational surprises being experienced by management. That, coupled with a self-described aversion to risk, is likely to spawn greater focus on improving existing risk oversight procedures in organizations today.

CPAs have significant opportunities to contribute to the development of ERM programs in organizations where they may be employed, serve as members of the board of directors, or provide advisory services. CFOs are often charged with the overall responsibility for developing an ERM infrastructure--and persons serving in that role can powerfully influence the scope and breadth of the risk management function.

A starting point for individuals in those positions may be the facilitation of a relatively simple information gathering process (either through interviews, surveys, workshops, table-tops or other information gathering tools) whereby key management personnel consider and describe their views of the top five-to-10 risk exposures the organization is likely to face in a defined time horizon, such as the next three to five years.

An effective approach to generate this kind of thinking is for these individuals to first review the organization's strategic plan or business unit objectives currently used to drive the organization's performance to identify specific risk events that might positively or negatively affect the achievement of those plans or objectives. Compilations of these individual views of key risk exposures are likely to highlight differences in views that can then be the focus of subsequent discussions and examinations by executive management and the board.

Once the list of top risk exposures is compiled, it can then be reconciled to existing risk management activities already ongoing within the organization. A basic mapping of risk exposures with existing risk management efforts may quickly reveal gaps in risk oversight capabilities that should be considered by management and the board. Likely to be revealed are key strategic risks that are not currently the focus of any existing risk management activities within the organization.

Board members serving on audit committees are often delegated the responsibility to provide direct oversight of management's process of overseeing risks and to report on the completeness and effectiveness of that process to the full board. In both these roles (as CFO or as a member of the audit committee of the board), a solid understanding of ERM and general risk management principles is a core requirement in the current environment.

For those working within the internal audit function of their organizations, a major opportunity exists to contribute to the development of an enhanced risk management infrastructure. In 2008, PricewaterhouseCoopers released a survey-based research report titled Internal Audit 2012, which included this statement:

"Throughout the next five years, the value of the controls-focused approach that has dominated internal audit is expected to diminish. As this occurs, internal audit leaders must redefine the function's value proposition and adopt risk centric mindsets if they expect to remain key players in assurance and risk management.... Study results indicate that five identifiable trends--globalization, changes in risk management, advances in technology, talent and organizational issues, and changing internal audit roles--will have the greatest impact on internal audit in the coming years. By understanding these trends and their implications, internal audit leaders can help senior management identify and manage risk, thereby providing added value from the internal audit function."

As risk management processes become increasingly embedded within organizations, the internal audit function will likely be tapped to ensure that the ERM process is functioning within design parameters and to serve as an independent source of key risk information to be benchmarked against the outputs from the ERM process itself. Many organizations are also asking for assistance from external advisers in developing and refining their risk management efforts. The use of an external consultant to help them with this process can lend objectivity and knowledge of best practices to that effort.

ERM DEFINED

COSO's Enterprise Risk Management--Integrated Framework, defines enterprise risk management as follows:

"Enterprise risk management is a process, effected by an entity's board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risks to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives." --Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2004)

ABOUT THE RESEARCH STUDY

This article describes insights gleaned from a September 2008 survey of CFOs or persons in equivalent positions conducted by North Carolina State University ERM Initiative faculty and supported by a management accounting research grant from the AICPA Business, Industry, and Government group. Survey responses were received from 701 individuals representing organizations that span numerous industries and company sizes.

The most highly represented industry (based on two-digit SIC codes) was manufacturing (22%), closely followed by services (21%), finance, insurance, and real estate (19%), not-for-profit (14%), and wholesale/distribution (9%). Reported 2008 revenues ranged from $14,950 to $115 billion--with a median for the sample of $50 million.

Because the term ERM is used often, but not necessarily consistently understood, respondents were provided the definition of enterprise risk management that is included in COSO's Enterprise Risk Management--Integrated Framework.

Source: GARP, By Bonnie V Hancock