Rising gas prices, a declining housing market, the weakening of the dollar and fear of a recession — today’s economic conditions continue to point south, with no light at the end of the tunnel. Critical to these issues is the role of internal accounting and finance professionals, who in large part are responsible for making decisions that contribute to the success or downfall of an organization. For our economy to remain competitive, there needs to be a renewed emphasis on proper regulation and guidance within the profession. The demise of financial institutions over the years (the collapse of Bear Stearns, as an example) continues to validate why fundamental changes should be made to help ensure that financial reporting and internal control standards shift to a globally accepted method of risk management.
As president and chief executive of the Institute of Management Accountants, a professional trade association dedicated to the career-long training and development of accountants who work inside organizations, I’m well aware of the importance of educating today’s young and seasoned professionals to support good decision-making, planning and control functions. More and more new accounting graduates are entering the workforce, yet they aren’t equipped with the skills they need on the job.
Management at a number of large corporations over the years failed to put into place adequate risk management systems, and simultaneously, investors were largely unaware of the high risks of banks’ lending practices. To avoid financial disasters, it’s become increasingly important for the board of every public company to adopt best practices in risk management and inform investors about significant risks and how they are managed. Honesty and transparency in financial reporting are the keys to avoiding mistakes and being in a position to fix the errors before they become fatal to the company’s future.
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The Securities and Exchange Commission should play a more vital role in reform as well, and take the much-needed regulatory steps to improve risk management and public disclosure. The SEC, the Public Company Accounting Oversight Board and standards/guidance-setters are well-intentioned, but should shift from the old paradigm that emphasized audit, controls and compliance, which are functions that take place at the end of the financial reporting supply chain.
Today, what is needed is a new paradigm that emphasizes risk and quality management principles much earlier in the process: at the very beginning of the supply chain.
JUDGMENT NEEDED
Risk management, however, is only one part of the solution to preventing financial and accounting problems before they occur. Understanding and applying globally accepted risk principles is an integral part of professional judgment, which should also be applied. Professional judgment is the ability of leaders within an organization to make sound business decisions based on expertise, rather than by binary compliance processes. Proper training, education and certification are necessary to render professional judgment utilizing the appropriate global body of knowledge in risk, quality and performance management.
