streetwise
B Y S T E P H E N B A R L A S , C H R I S T O P H E R D O W S E T T, E D S A F R A N , K A T H Y W I L L I A M S
[NEWS]
Employees Turn to “Informal
Organization” | K A T H Y W I L L I A M S
Informal relationships rather than formal management structures are where
work really gets done, problems are solved, and companies gain competitive advantage, particularly at large companies. These are some of the results of a new
survey of U.S. workers conducted by Katzenbach Partners, LLC, a management
consulting firm that works with leading global companies on organizational
performance.
The “informal organization” is also what keeps people upbeat about work,
the researchers said. It gives employees confidence that they can solve problems
and lets them know that they contribute to their company’s success. “The lesson
is that the informal organization—the way work gets done outside formal organizational charts and processes—is real and that employees recognize and value
it,” Zia Khan, a principal with Katzenbach Partners and coauthor of an upcoming report on the informal organization, explains. “The question is, does management also value it? The informal organization is a strategic asset executives
need to actively manage instead of leaving to chance.”
One of the reasons this kind of network works so well, the survey found, is
that 90% of big-company employees say they have someone at work to turn to
when they need to get something done, and they do so because they respect the
other person’s knowledge and experience. In fact, 52% say they turn to a
coworker, and 45% to a boss. And most (57%) say the best ideas for making the
company successful come from all levels of employees.
Workers say they get frustrated when managers don’t incorporate the informal networks in their planning and decision making. More than 25% say a major barrier is lack of value placed on employee input, and 23% say another
problem is inadequate organizational structure.
In other findings, those workers who believe management is aware of employees that coworkers turn to are significantly more likely to say change comes
easily to the organizations (and vice versa), 64% say that the most enjoyable
part of their job is the people they work with, 84% of the workers say they have
someone at work in whom they can confide, and nearly half socialize with
coworkers outside the workplace.
For more information and/or a copy of the report, “The Informal Organization,” contact Alexandra Corriveau at [email protected]. ■
REORGANIZING
IS KEY
Companies must constantly reorganize to stay competitive, a new report from The Conference Board
shows. This means that they need
to build an internal design capability that allows this continuous
reorganization.
Among the key warning signs that
suggest problems in corporate organization design are significant disagreement regarding the company
strategy and how it is executed; a
steady increase in bureaucracy, cost
structure, etc.; excessive layers of
management; investments in capital
but not people; absence of employee engagement; misalignment of
structure to strategy; and no set
process for continuous improvement.
The report, Designing Organizations That Execute New Strategies
and Create Capabilities for Change
(Executive Action No. 240), suggests
that companies need to make organization design a core competency
for their line managers. And they
need to encourage all stakeholders
to talk about how the elements of
an aligned, flexible design can improve the performance of the organization, teams, and individuals. ■
September 2007
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streetwise
[GOVERNMENT]
Letters to
the Editor
COMMENTS ARE
ON TARGET
Paul Sharman’s comments in “When
Worlds Collide” [July 2007] were
right on target. It is hard to believe
that the IMA doesn’t have the lead
role in the PCFRC. Are any of the
members of the committee IMA
members? Is it too late to do anything about this? What can we do as
individual members of the IMA?
I really liked his comment about
every great civilization beginning as
a theocracy and ending as a bureaucracy. I had not heard that one before. I think I will put that in my file
of sayings for future use.
Thanks again for a very thoughtprovoking article.
Ed Safran, CMA, CFM
We welcome all
opinions on articles
and departments
published in
Strategic Finance.
E-mail correspondence
to Kathy Williams at
[email protected].
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September 2007
SEC Discounts Concerns
about AS5 | S T E P H E N B A R L A S ,
EDITOR
When the SEC finally blessed the Public Company Accounting Oversight
Board’s (PCAOB) Auditing Standard No. 5 (AS5), “An Audit of Internal Control over Financial Reporting that Is Integrated with an Audit of Financial
Statements,” on July 25, it split the difference on the last remaining issue: how
to define the term “significant deficiency.” The SEC had sent out a notice in
late June, asking for comments on that, and business groups had asked the
agency to modify the PCAOB’s definition—which the SEC declined to do on
July 25. The Sarbanes-Oxley Act requires a company to report a significant
deficiency to its outside auditor and the audit committee, but not the shareholders, as is the case with a “material weakness.” The SEC has made it clear
that its management guidance on Section 404 would use whatever definition
of “significant deficiency” becomes final in AS5.
The auditing industry and financial executives pushed—unsuccessfully, it
seems—for the SEC to tweak the definition that the PCAOB had settled on
last May in the version of AS5 approved at that time, which defined a “significant deficiency” as “a deficiency, or a combination of deficiencies, in internal
control over financial reporting that is less severe than a material weakness, yet
important enough to merit attention by those responsible for oversight of a
registrant’s financial reporting.”
Richard D. Brounstein, chairman, Small Public Company Task Force, Financial Executives International, wanted the SEC to add a “likelihood” standard to
the May definition, and he endorsed a PricewaterhouseCoopers LLP suggestion that the SEC add a “reasonable possibility” qualification as the PCAOB
had included when it first proposed its version of AS5 in December 2006. Vincent Coleman, a PricewaterhouseCoopers LLP official, had wanted a “reasonableness” component because it “would enhance management’s ability to identify those deficiencies that should be communicated to the audit committee
and the auditor and align the definition of significant deficiency with the definition of material weakness without detracting from management’s opportunity to exercise appropriate judgment or establishing ‘bright lines.’”
But on July 25, the SEC refused to return the definition to where it was last
December, saying, “It is not necessary for the definition of significant deficiency to explicitly include a likelihood component (that is, reasonable possibility)
and that focusing on matters that are important enough to merit attention
will allow for sufficient and appropriate judgment for management to determine the deficiencies that should be reported to the auditor and the audit
committee.”
Some business groups also wanted the SEC to eliminate the requirement to
report on significant deficiencies. Michael J. Ryan, Jr., senior vice president
continued on page 21
and executive director,
streetwise
[B O O K S ]
The Emerging Ethics & Compliance Field
Enron. WorldCom. Tyco. Arthur Andersen. Reciting the list of
companies caught up in some form of corporate malfeasance or corruption scandal is now second nature for many
of us. Years after the actual events occurred, the names and
events still remain topics of conversation, only now the goal
is to avoid “another Enron.” That’s why many companies are
implementing internal ethics and compliance programs. As
such, there is a growing need for qualified
individuals to devise, implement, and
maintain these programs. As Joseph E.
Murphy and Joshua H. Leet say in Building
a Career in Compliance and Ethics, “It’s
time for more everyday heroes, the ones
who do this job so that the world does not
have to depend on frightened whistleblowers and outraged prosecutors.”
In the United States, the government
has tried to do its part with legislation
such as the Sarbanes-Oxley Act. But external efforts can only do so much. As
Murphy and Leet explain, “The size, number, and scope of
businesses and other organizations make it unrealistic to
rely on outside policing to assure compliance.” It’s up to
individual companies and organizations to ensure that
further harm and misconduct are avoided. Published by
the Society of Corporate Compliance and Ethics, Building
a Career in Compliance and Ethics is for anyone interested in pursuing a job in this area.
Still somewhat in its infancy, the compliance and ethics
field is influenced by the Federal Sentencing Guidelines
established in the early 1990s and revised in 2004.
These established a set of compliance program standards. If companies implement effective programs—based
on these standards—and respond appropriately when violations are discovered, federal prosecutors will keep that
in mind when considering whether to prosecute the company or to give more lenient treatment.
Murphy and Leet emphasize, however, that the field
isn’t the exclusive domain of lawyers. The purpose of a
compliance program is to guide and control a company to
keep it and its employees from doing wrong. The role of
lawyers is important, “but this field is much more about
how an organization is managed, and not about how laws
should be interpreted.” Potential compliance areas vary
widely. Risks that are addressed by compliance programs
fall into three general areas: legal, ethical, and reputational risks. These areas include accounting fraud, the treatment of confidential information, employment discrimination,
taxes, product safety, document
management/retention, embezzlement,
and many more. Knowledge in all these
areas isn’t required—indeed, it’s practically impossible. The goal of a compliance
program and those staffing it is to assess
the company’s risks and “determine how
best to prioritize and address them.”
Strong management techniques and an
element of transparency are essential.
There are many reasons to consider entering this field.
First, it is growing both domestically and internationally.
“Beyond the media attention for major criminal fraud cases…there lies a longer-term and unmistakable trend: a
push to create more reform and controls, and a greater
push to have organizations take steps to respond.” Also,
the field isn’t tied to economic cycles: Whether times are
good or bad, the potential for misconduct exists. Compliance and ethics also offer a lot of room for personal development because the areas they encompass are so varied, and getting involved in them exposes you to many different aspects of a business. Finally, there’s the knowledge that you are helping ensure that your company does
the right thing.
To provide a better picture of the field and help show
how to begin a career in compliance and ethics, the authors delve into many of the titles and roles that participate in a company’s compliance and ethics efforts. They
also discuss the topics
continued on next page
September 2007
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[ETHICS]
c o n t ’d f r o m p . 1 4
the Midwest, would release 54%
more ammonia and 35% more
“sludge” into Lake Michigan.
The Great Lakes are the world’s
largest source of fresh surface water.
Ammonia promotes algae blooms
that can kill fish and trigger beach
closings, while sludge contains concentrated heavy metals like lead,
nickel, and vanadium. Part of what
prompted Congress to pass the
Clean Water Act during the early
1970s was the release into the lakes
of oil, grease, and chemicals from
steel mills, refineries, and other factories in this Indiana area.
BP’s plans to expand the Whiting
facility and discharge more waste into Lake Michigan is against a provision of the Clean Water Act that prohibits any downgrade in water quality near a pollution source even if
discharge limits aren’t exceeded. To
let BP violate that rule, state regulators are allowing the company to install equipment that mixes toxic
waste with clean lake water about
200 feet offshore. Known as a mixing
zone, meeting pollution standards
through this method is banned in
Lake Michigan, but regulators granted BP the first-ever exemption.
The Environmental Protection
Agency also looked the other way so
long as the total amount of wastewater discharge into the lake remains
below its current level of 21 million
gallons a day. The argument that apparently convinced both federal and
state regulators to allow BP’s plans
was that there wasn’t enough room
at the 1,400 acre Whiting site to upgrade water treatment facilities to
keep more pollution out of the lake.
As a result, the refinery expansion
will allow BP to dump an average of
1,584 pounds of ammonia and 4,925
pounds of sludge into Lake Michi20
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September 2007
gan every day. It appears the idea of
requiring BP to purchase additional
land for a new waste treatment facility wasn’t considered.
BP has responded to the outcries
by placing full-page color ads that
include the yellow sun and green
surrounding petals and unveiling a
website at http://whiting.bp.com. BP
states that its wastewater discharges
don’t contain “sludge” but rather
only “suspended solids” that are
nontoxic and consist of 99.9% water. In regard to the fact that the
amount of mercury discharges
won’t be decreased to comply with
existing law, BP states that about
90% of the mercury in the Great
Lakes comes from burning coal and
that existing technology doesn’t remove mercury to the current standard level. BP believes its expansion
permit “complies with federal and
state regulations.”
But what about all of BP’s objectives to act as a leader by exceeding
legal and regulatory requirements?
And what about the increased air pollution that will result from the more
intense process necessary to refine the
heavy Canadian crude? Should persons concerned with protecting the
environment for future generations
follow the lead of the Chicago City
Council, which directed all city government departments—including the
police and fire departments—to boycott the green fuel pumps? ■
Curtis C. Verschoor is the Ledger &
Quill Research Professor, School of
Accountancy and MIS, and Wicklander Research Fellow in the Institute
for Business and Professional Ethics,
both at DePaul University, Chicago.
He is also a Research Scholar in the
Center for Business Ethics at Bentley
College, Waltham, MA. His e-mail address is [email protected].
[BOOKS]
c o n t ’d f r o m p . 1 9
and subjects that could be studied to
prepare someone for entering the field.
Finally, the biggest—and most interesting—section of the book involves advice
from people already in the field—what
they do, how they got started, the benefits and satisfaction they receive from
their work, and so forth.
Murphy and Leet state, “The future of
the compliance and ethics field is assured, not just because it is a good
idea, but because no other rational
alternative exists.” In their book, they
show how you can make a positive
difference.—Christopher Dowsett
[GOV’T]
c o n t ’d f r o m p . 1 8
U.S. Chamber of Commerce’s Center
for Capital Markets Competitiveness, says the requirement “has given
rise to another set of required procedures and conclusions on significant
deficiencies, in addition to the inquiries that are required for material
weaknesses. This results in unnecessary duplication and confusion.” The
SEC didn’t take that suggestion,
either.
Convergence Proposal Elicits Views
along Wide Spectrum
The SEC issued a concept release on
July 25 asking for opinions on
whether U.S. companies should be
able to prepare their financial statements using International Financial
Reporting Standards (IFRS) as published by the International Accounting Standards Board (IASB). This
came a month after the SEC proposed allowing foreign issuers to use
IFRS, thereby axing the current requirement that they reconcile their
financial statements with U.S. generally accepted accounting principles
(GAAP)—which are, essentially,
FASB standards. But already the earlier proposal to allow foreign companies to use IFRS has generated
opposition for reasons that may
have even more resonance when applied to the potential use of IFRS by
American companies.
Lawrence Cunningham, a law
professor at George Washington
University, says the proposal ignores the fact that the SarbanesOxley Act requires the Financial
Accounting Standards Board
(FASB) to be funded from public
fees while the IASB depends on
funding from a small number of
private donors. “These differences
pose for the two bodies different
incentives during standard-setting
processes that raise convergence issues,” Cunningham says. William
Craven, an accountant, suggests
IFRS are fungible and cites a recent
story in The Economist that cited
the continuing propensity of certain European countries to be selective and imaginative in how they
apply any IFRS. “It appears that
IFRS are becoming more of a suggestion than a standard,” Craven
states. On the other hand, Greg
Taylor, CFO, Fairfax Financial
Holdings in Toronto, says a “no
reconciliation” dictate would “help
to level the playing field between
U.S. and non-U.S. issuers and
would eliminate the incentive that
foreign private issuers currently
have to avoid the U.S. capital markets and move to jurisdictions with
less costly compliance and disclosure requirements. ■
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