Internal controls: the balancing act

Internal controls: the balancing act

Corporate legislation and the advent of globalisation have made it difficult for company bosses to juggle performance and risk management

In association with KPMG

How can a business thrive in today’s global world? Why do some seemingly
well-managed companies hit the corporate buffers? Why do others outperform all
expectations and then implode – often in very high-profile and spectacular
fashion? Striving for extraordinary performance while at the same time
controlling regulation and risk can be difficult. In order to survive, today’s
business executives must maintain a healthy balance between the two.

Consider the Formula One race team, which invests many millions of pounds to
improve their car’s aerodynamic and engine performance just to gain that crucial
tenth of a second. This investment is ultimately pointless if compliance with
the sport’s governing body’s regulations is not properly managed and the car is
disqualified. But staying comfortably within the regulations and not pushing the
performance envelope will not lead to many podium finishes. The dilemma is the
same for today’s corporate executives.

Even without regulation, improving performance has never been easy. Examples
of failure abound. A KPMG study on global IT, Project Management Survey
, reveals that 49% of companies have experienced at least one project
failure. Another survey, Mergers & Acquisitions Survey 2006, shows
that more than two-thirds of deals fail to enhance value. In addition, according
to figures released by the National Outsourcing Association, 50% of outsourcing
projects fail within five years.

At the same time, there is more opportunity to ratchet up corporate
performance. The deal pipeline is booming, cheap debt is thriving and both
private equity and investment houses are looking for opportunities. Coupled with
this, there is no shortage of companies looking to cash in their chips, spinning
off part or all of their businesses and moving on to new ventures. And then
there is the ever-present issue of globalisation. Finance and accounts, product
development, human resources management, technology services,
manufacturing/operations, customer services – the list goes on.

These are the kind of processes and functions that are being offshored and
outsourced to firms that specialise in each function. The shift in this context
is almost exclusively from west to east and north to south. However disturbing
tales of past failure may be, it is unwise to sit on your hands.

At the same time, litigation and regulation are booming markets. Corporate
governance has never been higher on the agenda for the business media,
regulators, governments and corporate stakeholders. Maintaining trust in
business is dependent on the ability of leaders to demonstrate that their
companies are meeting recognised standards for board composition and competence,
business planning and performance measurement, risk management across a
comprehensive range of activities, compliance with law, regulation and accepted
ethical standards, and transparency of reporting.

Failure to balance this side of the equation can result in serious
consequences. We all know the usual suspects – Enron, Worldcom, Global Crossing,
Tyco International. Their downfalls can all be traced back to a failure to
balance risk and opportunity.

This is not simply a Western phenomenon, either. Executives are charged with
responsibility across their global business footprint for a comprehensive
catalogue of areas, business practices, financial control and so on. While
regulation in developing countries appears loose, those countries don’t take
kindly to non-compliance and can act decisively when rules are broken.

So, can you have your corporate cake and eat it? To survive in today’s global
world, companies strive for extraordinary business performance, but also
high-level controls to manage the risk. They want to offshore and outsource
functions but somehow keep them under control. They want to reduce costs,
simplify and streamline systems and processes globally, yet still comply with an
increasingly complex global regulatory environment.

Each January, gyms around the world are filled with people who have
overindulged over the holidays and now need to rebalance. How much better to
maintain personal and corporate self-control while benefiting fully from the
opportunities on offer.

Alan Buckle is head of
KPMG ’s advisory business
in the UK

Managing change

A company seeking to improve performance will need to implement and manage a
change programme. But how can a company manage it effectively and reduce its
exposure to the risk of adverse reactions?

Achieving any sort of change in business requires cultural change throughout
the organisation – the most difficult sort of change. Here, companies should
take a look at findings from psychologists about how adults adapt and learn.

It is generally recognised that there are four requirements for successful

• a vision of a better, post-change world (motivation)
• structures that support this change (reward)
• skills to enable the change
• consistent examples from senior management

It is important that senior managers articulate the case for change and what
the changed business will look and feel like. People prefer to work for an
organisation they feel is going somewhere. It should be possible for managers to
write this story on a single sheet of paper.

Employees should understand why they should change – in what way will their
jobs be more interesting? They should also understand the consequences of a
failure to change, whether it’s a failure of the business or individual job

It is not enough for senior managers to articulate the case for change. The
structures, systems and processes must reinforce that message. If customer
service is meant to be important, for example, then it should be measured in
performance reviews, promotion and other forms of recognition, and rewarded at
bonus time.

But even these factors will not be enough if employees do not have the right
skills to operate in a new way. Therefore, companies should hold training
programmes and workshops, offering the skills to empower employees.

Finally, senior managers must behave according to the principles underlying
the new vision. If they are demanding cutbacks from workers, then higher bonuses
for them will induce cynicism and resistance.

It is vital that boards understand the scale of the task they are undertaking
when they embark on major change. There is a reason why people resist change:
because it’s hard.

Moreover, change programmes that go wrong will cause disruption and could
make the situation worse than before.

Plenty of companies have been through transformational change programmes, and
there are hosts of others that have implemented continuous improvement
programmes. Not all have been successful, but both the failures and the
successes offer plenty of lessons to those about to embark on their own
performance improvement strategy. Boards would be wise to take note of this

Quentin Maxwell-Jackson is a partner in risk advisory
services at KPMG

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