Interview with Sanjay Hegde, Executive Director, PricewaterhouseCoopers India
Interview by Christine Fawaz
Marketing Communication Specialist
Morgan International

 
What is the Big Four’s and particularly PWC’s take on the adoption of IFRS 1. worldwide and 2. in India?    
    
PwC feels the need for a single set of globally accepted standards, as it brings in down the cost of compliance in the long run and at the same time provides a fundamentally strong set of reporting standards to be applied, understood and accepted by everyone. We have been enormously active in providing our comments to the IASB during the standard setting process, we have people who have been seconded to the IASB and also have IASB alumni joining us to enhance our service deliverables.
Globally we have always supported the acceptance of IFRS.
       
In India, we have echoed the same enthusiasm for acceptance of IFRS as the reporting GAAP for the country. The adoption of IFRS in India will not enhance the quality of financial reporting for Indian companies, but also would allow Indian companies to access international markets with much ease. The adoption of IFRS will provide a global platform to the Indian companies to showcase their achievements and help in boosting international investors’ confidence.

In short we support the adoption of IFRS as a global set of reporting standards both globally and in India.
 
The Institute of Chartered Accountants in India (ICAI) has recently announced that India’s convergence with IFRS would take effect in April 2011. What was this decision based on and why is India adopting IFRS?

There is a tremendous effort by regulators, standard setters and preparers of financial statements across the world to move towards a set of reporting standards which is globally accepted and understood, which would enhance reporting, bring in comparability and reduce compliance cost by reducing the requirement to report under different GAAPs for different jurisdictions. While entire European Union, Australia, New Zealand, Singapore and Hong Kong have already moved to IFRS, China, Korea, Canada and Japan are on their way to adopt IFRS in the near term. So much so that even the United States is contemplating adoption of IFRS by 2014.

India can no longer avoid this phenomenon, if they have to remain in the race to access global capital markets and if they wish to attract foreign investment. IFRS provides credibility to financial reporting and needless to say a growing economy like India needs that support to sustain the growth. The ICAI was quick to realise this and therefore decided to converge with IFRS.
 
What impact will the adoption of IFRS have on 1. listed (public) companies and 2. non-listed companies in India?

It will enhance financial reporting for public companies so much so that those financial statements could be compared with another set of financial statements on the other side of the globe. An advanced set of reporting standards like IFRS will bring in added measurement and disclosure requirements, which would require enhanced skill sets to comply with. Companies would have to manage investor/analyst expectations and ensure that all stakeholders are not adversely affected by the adoption.

While non-listed companies may not be directly affected by IFRS adoption, however in the near future one would expect that Indian GAAP would evolve significantly and bring in some of the complex recognition and measurement requirements of IFRS into Indian GAAP. If that be the case, there would be an effect in reporting by non-listed companies also, as these entities would need to comply with a more advanced Indian GAAP, as compared to the existing Indian GAAP.
 
How are Indian entities prepared for this type of transition?

This is something which is yet to be seen. Probably the short answer is that they are still a long way from the initial stages of transition. Management of companies' would have to invest time and effort to ensure that the process is not deferred until the eve of transition date and therefore have to act fast to ensure that they perform their diagnostic tests to ensure that all necessary steps are taken to ensure a smooth transition.
 
Can you tell us more about the actual process of implementation?

Implementation is a phased process stretching over a period of time, it usually begins with desktop reviews and training of staff and then moves on to a detailed analysis of the financial information to identify GAAP differences and quantifying them. There are significant project management requirements, as IFRS is not a change in accounting only, but it also requires significant changes in both internal and external reporting requirements, processes etc.
 
What are some of the major challenges that India will face during the adoption phase and full compliance phase of IFRS?

It will have to meet the challenges of adoption of advanced set of global reporting standards. Consequently, companies in India would have to enhance their existing systems and processes to generate the necessary information for IFRS reporting. Additionally, it would have to train professionals to achieve the desired level of proficiency to prepare, understand and interpret the IFRS standards. And finally key management would have to manage the expectations of stakeholders, to ensure that businesses are not affected adversely by the adoption of the standard.
 
What are the perceived benefits of adopting IFRS in India? And are these proven or are they based on experience from other countries who have adopted IFRS?

IFRS adoption enhances financial reporting practices, brings in comparability across geographies and therefore reduces cost of capital.
 
What is the short term and long term effect that IFRS adoption will have on 1. foreign direct investment and 2. local companies/multinationals?

In the short and long term the effect would be same, IFRS would do more good than bad. It would help companies in avoiding reporting under multitude of GAAPs. It will bring in consistency and help in consolidation of businesses due to universal acceptability. Therefore, it would give more comfort to foreign investors and therefore help in attracting foreign investment.
 
Some studies have questioned the relevance of IFRS in ‘developing and emerging economies’, what are your comments on that?

I can only say that IFRS would be as relevant to ‘developing and emerging economies’, as it is to the developed economies. In a fast shrinking world reporting practices should cut-across economies and bring in consistency and reduce cost in the long run.
 
Who, in your opinion, should get trained for IFRS?

All stakeholders, preparers of financial statements, users like Board of Directors, Audit Committees, investors, analyst, CEOs, CFOs etc.
 
Are there any criteria that people need to fulfill before being able to attend IFRS training?

No
 
What is the importance of getting trained in IFRS for 1. professionals and 2. companies? And what are the benefits that IFRS training would offer Indian companies and professionals (locally and abroad)?

Besides the points already discussed above, Indian trained professionals could easily be accepted as a global resource and therefore exchange of such professionals would be a more common phenomenon.
 
What, in your opinion, does the future hold for IFRS?

In one word "bright". But that said, IFRS is a dynamic GAAP, it is not only constantly improving its existing standards, it is also looking towards bringing new reporting requirements to enhance quality or reporting. IFRS would soon become the global GAAP and bring in consistency across geographies and regions.
 
Is it worth the effort?
It is indeed worth the effort, the west is aleady seeing the benefit of the adoption and Asia should be no exception.
 

About Sanjay Hegde
Sanjay is an Executive Director with the Global Capital Markets Group (GCMG) at PwC Mumbai. He has over 25 years of professional experience in providing services to several multinational clients. He has worked with Coopers & Lybrand for 2 years in London.
He currently heads the GCMG practice in India and has been advising clients on international offerings, applying US GAAP and IFRS. He has advised many corporate clients seeking to enter the U. S. capital markets through public offerings or private placements including Satyam Computer, State Bank of India (SBI Group), Bharti Group, Hutchison Group, Kotak Group, United Breweries, Essar Steel, VSNL, Zee Telefilms, Nicholas Piramal, etc. 
Sanjay has authored a monograph published by PwC titled “Similarities and Differences – A Comparison of IFRS, US GAAP and Indian GAAP”.

Case Study: Lessons Learned from Alcatel-Lucent's IFRS Conversion

When French company Alcatel acquired Lucent Technologies in 2006, Robert Owens was forced into an accelerated convergence to International Financial Reporting Standards (IRFS). In nine months, this deputy chief accountant for the merged Alcatel-Lucent endured a quick assessment of the differences between IFRS and U.S. Generally Accepted Accounting Principles (GAAP) and figured out the best way to transition the balance sheet of the merged entity to a new accounting standard — all while meeting the usual merger challenges of integrating policies, procedures, cultures and staff.

"We were an airbus on a short runway," said Owens of the short transition. During a recent Ernst & Young-sponsored Webinar about IFRS, Owens spoke about lessons learned in the conversion process.

The merger involved two very dissimilar companies. Lucent was centralized and followed U.S. GAAP's rules-based accounting standards. Alcatel was decentralized and relied on the professional judgment permissions granted under IFRS's principle-based accounting standards. Owens wondered whether the merged entity could maintain the two accounting structures, while minimizing the differences in results when reconciling back to U.S. GAAP, as was required at the time by the U.S. Securities and Exchange Commission for all foreign private investors.

"As a preparer, it was extremely challenging with the frequency of some transactions to go from IFRS to U.S. GAAP," Owens said during the webinar. "I was pleased when reconciliation was no longer required. However, the bad news was my lifeline was cut off and I couldn't rely on U.S. GAAP as primary literature." (Owens added, however, that his company still considers U.S. GAAP relevant in cases where IFRS lacks specific guidance.)

What caught Owens by surprise during the assessment process was the breadth of external constituents he had to deal with, ranging from appraisers, actuaries and attorneys to auditors and a host of others to help establish fair value, assess retirement benefit obligations and more.

Managing the internal team was easier and enabled the construction of a well-planned conversion process, despite the time-crunch.

CONSTRUCTING A CONVERSION PLAN

Alcatel-Lucent first developed a steering committee that set guiding principles for conversion. High-powered executive support and buy-in across the entire organization was critical. Therefore, the chief financial officer and head of information technology were among those professionals who sat on this committee.

Next, a core team was tasked with keeping the project on track, and engaging staff by defining what their roles would be and then communicating the importance associated with conversion and the expected benefits. Chosen to participate in this group were individuals with superior project management experience — those who understood process flows and could maintain the necessary documentation to keep the project on schedule.
IDENTIFYING DIFFERENCES
Alcatel-Lucent also created 24 separate project teams consisting of multiple subject matter experts who were assigned to hash out policy differences between IFRS and U.S. GAAP and set plans for how to move forward.
Alcatel had been filing under IFRS for a few months preceding the merger. The challenge for Owens and his team was to integrate Lucent's balance sheet, and still reconcile back to U.S. GAAP. The SEC has since lifted this requirement, but their decision came after the Alcatel-Lucent merger, leaving the company to face a myriad of IFRS-related issues, particularly in areas where U.S. GAAP had offered more precise rules and guidance.
Some of the challenges they faced included:

• Development costs: In U.S. GAAP, there are few costs that qualify for capitalization, but development is viewed more broadly beyond software under IFRS.
• Technological feasibility: Rules are more precise under U.S. GAAP, whereas IFRS offers no specific guidance.
• Retiree benefits: Lucent had large obligations and plan assets worth more than $30 billion. Upon conversion to IFRS, it faced the decision of whether to spread actuarial gains and losses over the remaining service period or recognize them immediately.
• Business combinations: Perhaps the biggest difference was that IFRS and U.S. GAAP each measured the date of acquisition differently meaning results were different.
• Fair value: Prescriptive fair value guidance is included in U.S. GAAP, which generally requires third-party evidence. By contrast, IFRS does not include the same specificity.

On the positive side, IFRS made things easier and brought consistency to some areas, including financial liabilities and the bifurcation of convertible securities.
Next, Alcatel-Lucent established a technical review committee that oversaw all the evaluations from the project teams and helped provide solutions as necessary. Outside advisors including auditors also offered input while maintaining their independence.

IT TAKES A VILLAGE

"Conversion runs across the whole organization and will impact other functions in the organization and in the value chain going forward," Owens remarked. "For example, Investor Relations [IR] was critical. IR needs to understand the differences and changes in order to explain them adequately to investors."

Individuals in the Tax, Human Resources and Information Technology areas also proved crucial to enabling a smooth transition. "By including everyone in the process from the starting line through to the finish, you help to ensure that you've covered all the ground you can to limit any harmful impacts from your decisions," Owens suggested.

When asked about the costs of conversion, Owens said it wasn't an issue. "We just had to do it, but the expense was nothing compared to what we spent on [Sarbanes-Oxley] 404 compliance."

He noted that costs would vary dramatically for each company based on the approach it took toward conversion. Alcatel-Lucent focused on minimizing the differences between IFRS and U.S. GAAP and subsequently developing one set of IFRS-compliance books. Others may choose a different path.

"We had to move quickly," Owens said. "I would have liked to have been able to take more time, but I didn't have any other alternative but to fit our systems into an existing framework. It would have been nice to change more things at the beginning."
ONGOING CHALLENGES

Embedding IFRS into Alcatel-Lucent's financial reporting and accounting system is an ongoing process. "We left a lot on the back end in terms of not embedding everything," Owens said.

Other issues Alcatel-Lucent continues to face are:

• Achieving consistency across multiple locations
• Learning to live with a minimal amount of precedence
• Balancing the most appropriate IFRS interpretations
• Documenting positions and applying more professional judgment
• Explaining the importance of enhanced disclosure
• Ongoing training

If he hadn't been forced into an IFRS conversion, Owens said he would now be spending time focusing on major differences between U.S. GAAP and IFRS and plotting a course for the future. He recommends that U.S. companies make preliminary assessments now and plan how they would mobilize a team to structure new accounting procedures and policies, etc.

"You need a fully dedicated project team to flush out these issues," Owens said. "IFRS can offer great efficiency and reporting standardization, but conversion is much more than just an accounting exercise. Take the time now to fully understand the issues at hand so that once the mandate comes down from the SEC, you'll be better positioned to be more decisive about how your future course of action."

Supply chains must be managed tightly by a skilled professional staff. The right leaders at the helm of the supply chain go beyond continuous improvement to foster real innovation. They make innovation a key part of the supply chain by investing in new ways of identifying and overcoming challenges. This innovation enables agile supply chains that decrease delivery time—even for customized or new products.

Those who lead innovative supply chains hire professionals from outside their particular industry. They look for team members who have experience creating supply chain value, no matter the product or customer. Leaders of successful supply chains also consider best practices from other industries. They must use every available resource in order to harness the power of their own company’s supply chain and leverage it for economic advantage.

Surveys indicate customers evaluate many other factors in addition to price when choosing a product. These factors include quality, consistency, and the level of difficulty in dealing with a company. In short, customers are willing to pay more for a better experience. An effective supply chain can deliver that value. After all, your competition is working to gain marketshare; you must constantly strive to deliver a higher-quality product less expensively and more efficiently.

Driving value isn’t the task of the supply chain team alone. Flourishing supply chains are those that are integrated within every part of a company.  From sales to customer support, the supply chain must assess products from a global perspective. To be resilient and ready to meet the market’s future requirements as well as its current needs, supply chain leaders should encourage meaningful information sharing with colleagues within the organization and partners outside the organization. Global processes rarely involve just one department or organization. Collaboration is essential.

Finally, keep in mind that, in order for supply chain partnerships to bring about truly innovative collaboration, all partners must benefit from the relationship. If the partnership is one-sided, it may improve the supply chain as a whole, but it will not be sustainable or successful over time. In our ever-changing marketplace, supply chain professionals must not allow themselves to become complacent. Rather, it’s essential to take risks, innovate, and work together to achieve the best possible future

Abe Eshkenazi, CSCP, CPA, CAE, is the CEO of APICS The Association for Operations Management. For more information, visit www.apics.org.

Management and control of the payments that flow into and out of the company’s accounts at financial institutions are an important treasury responsibility. Well-thought-out policies and procedures governing payments enable treasury to effectively manage the company’s liquidity, ensure compliance with Sarbanes-Oxley and defend against fraud.
Treasury’s responsibility extends beyond managing the disbursement and collection of funds. It encompasses authority over all payments-related activity, the design of a bank account structure that reflects the company’s payments strategy and the negotiation of agreements with financial institutions, including liability for fraud. It is critical that staff responsible for account reconciliation be familiar with the liability provisions of bank agreements. Failure to report fraudulent or erroneous transactions on a timely basis can shift liability from the bank to the company. And all staff members benefit by effective communication of policies and procedures within and among departments involved in the payments process—including legal, treasury, accounting, purchasing and sales. To ensure continuing compliance and control, periodic review and update of bank documentation and of the personnel responsible for authorizing payments is essential.
Payments policies and procedures should reflect the types of payments that the company makes and receives, their volume, value and frequency. They should also be based on a strategic selection of payment methods used—checks, ACH, wires and cards. Payment methods may vary by industry and company size, but all companies should consider plans to migrate to electronic payments.
Increasing levels of payments fraud, check scams and hacker attacks underline the importance of building strong online security and defenses against attempted fraud. Payments policies and procedures should incorporate security measures and mandate fraud control provisions such as positive pay or reverse positive pay to protect against check fraud.
The AFP Payments Advisory Group has developed a list of best practices to help companies establish their own controls, policies and procedures. Each company or organization should adapt these best practices to meet its own specific needs. The list covers treasury authority, bank account control and agreements, payments policies and procedures, security and reconciliation. These are followed by best practices for outgoing and incoming transactions by payment method: checks, ACH, wire transfers and corporate cards. Finally, a brief summary of relevant laws and regulations governing payments is accompanied by selected Web sites for further information. The list of best practices is posted at http://www.afponline.org/mbr/pdf/bestpractfinal.pdf

Part of Abbie Gail Parham’s job entails talking about being a Certified Management Accountant (CMA). As an assistant professor of accounting at Georgia Southern University, as well as faculty advisor for IMA’s student chapter on campus, Parham often speaks with students about their career options – including the pros and cons of different certifications. Being a CMA herself, Parham is somewhat biased, but with good reason.

“I think students who get their CMA have more to offer than others who are applying for the same positions,” she says. “To me, their skills are on par with managers, because of the training they’ve received in areas such as leadership, communication, and organizational behavior.”

Parham began her career as a CPA, which she became right after graduating college. After spending three years in public accounting, and then another three years as a cost accountant at a manufacturing company, Parham decided in 1990 to join Georgia Southern as an accounting instructor. It is then that she decided taking the CMA might be a good idea, for two distinct reasons: “I knew I was going to teach intro accounting courses and thought that taking the CMA would give me an excellent refresher. In addition, I thought that having the additional certification would help to differentiate me from the other faculty.” At the time, there was only one other CMA on the teaching staff; since then, Parham says, they have hired several others.

During the 15 years that Parham has taught at Georgia Southern, she has witnessed many shifts in the professional aspirations of students. One thing that has remained constant, of course, is the desire for a lucrative salary. In her discussions as a faculty advisor, Parham frequently points students to the fact that certified professionals usually earn higher salaries – about 22 percent more, according to industry surveys – than their uncertified counterparts.

Parham touts not only the financial advantages of taking the CMA exam, but also the professional advantages as well. “One of the great benefits of the CMA is that you learn communication skills, which are needed when you’re working with CEOs and other senior managers. To me, the CMA exam goes way beyond providing you with accounting knowledge; it furnishes you with skills that help you to communicate your knowledge to senior management so that they have the information they need to make informed business decisions.”

In fact, Parham believes that such communication skills are increasingly necessary in today’s changing regulatory environment. She is especially encouraged that IMA is boosting its emphasis on ethics and internal controls. “It has to be a team effort between management and the accounting staff to ensure that financial statements are accurate and internal controls are in place. Those with a CMA have the critical skills and knowledge to work one-on-one with management,” she says.

No organization is exempt from fraud risks. Large frauds have led to the downfall of entire organizations, massive investment losses, significant legal costs, incarceration of key individuals, and erosion of confidence in capital markets. Publicized fraudulent behavior by key executives has negatively impacted the reputations, brands, and images of many organizations around the globe.

Regulations such as the 1977 U.S. Foreign Corrupt Practices Act, the 1997 Organization for Economic Cooperation and Development Anti-Bribery Convention, the U.S. Sarbanes-Oxley Act of 2002, the 2005 U.S. Federal Sentencing Guidelines and similar legislation throughout the world have increased management’s responsibility of fraud risk management.

Reactions to recent corporate scandals have led the public and stakeholders to expect organizations to take a “no-fraud-tolerance” attitude. Good governance principles demand that an organization’s board or equivalent oversight body ensure ethical behavior regardless of its status, sector, size, or industry. Surprisingly enough, historical records indicate that most major frauds are perpetrated by senior management in collusion with other employees. Vigilant handling of fraud cases within an organization sends clear signals to the public, stakeholders, and regulators about the attitude of those at the top — management and the board — toward fraud risks.

All levels of personnel throughout the organization, including management, staff, internal auditors, and external auditors have responsibility for dealing with fraud risk. Based on its size and circumstances, each organization should assess the degree of emphasis to place on fraud risk management. However, everyone in the organization should understand and be able to answer these questions:

• How is the organization responding to heightened regulations and close scrutiny by the public and the stakeholders?
• What form of fraud risk management program does the organization have in place?
• How does the organization identify fraud risks?
• What is being done within the company to better prevent fraud, or at least detect it sooner?
• What process is in place to investigate fraud and take corrective action?

Only through diligent and ongoing efforts can an organization protect itself against significant acts of fraud. Recently, The Institute of Internal Auditors (IIA), the American Institute of Certified Public Accountants (AICPA), and the Association of Certified Fraud Examiners (ACFE) produced “Managing the Business Risk of Fraud: A Practical Guide,” which delineates five principles for boards and management to consider as they attempt to protect their organizations from fraud.

Principle 1: As part of an organization’s governance structure, a fraud risk management program should be in place, including a written policy or policies to convey the expectations of the board of directors and senior management regarding managing fraud risk.

Stakeholders clearly have raised expectations for ethical organizational behavior, while regulators worldwide have increased criminal penalties that can be levied against organizations and individuals who participate in committing fraud. Organizations should respond to such expectations, by ensuring that effective governance processes — the  foundation of fraud risk management — are in place. Lack of effective corporate governance seriously undermines any fraud risk management program. The overall tone at the top sets the organization’s tolerance of fraud.

The board of directors should ensure that its own governance practices set the standard for managing the risks of fraud, and that management implements policies that encourage ethical behavior. These policies should include a process that employees, customers, and vendors can follow to report fraudulent or unethical behavior. The board also should monitor the organization’s fraud risk management effectiveness, making the topic a regular item on its agenda. To this end, the board should appoint one executive-level member of management to be responsible for coordinating fraud risk management and reporting those activities to the board.

Most organizations have activities and some form of written policies and procedures to manage fraud risks. However, few have developed a concise summary of activities or documents designed for communicating and evaluating these activities. While each organization needs to consider its size and complexity when determining appropriate formal documentation, a fraud risk management program should comprise the following:

• Board and organization wide commitment to fraud risk management.
• Fraud awareness.
• Periodic affirmation process.
• Conflict disclosure.
• Fraud risk assessment.
• Reporting procedures and whistleblower protection.
• Investigation process.
• Corrective action.
• Quality assurance.
• Continuous monitoring.
• Roles and responsibilities.

Principle 2: Fraud risk exposure should be assessed by the organization to identify potentially fraudulent schemes and events.

To effectively and efficiently protect itself and its stakeholders from fraud, an organization should understand fraud risk and the specific risks that directly or indirectly apply to the organization. A structured fraud risk assessment — tailored to the organization’s size, complexity, industry, and goals — should be performed and updated periodically. The assessment may be integrated with an overall organizational risk assessment or a stand-alone exercise. It should, at a minimum, include risk identification, risk likelihood and significance assessment, and risk response.

Fraud risk identification may include gathering external information from regulatory bodies, industry sources, key guidance-setting groups, and professional organizations. Internal sources for identifying fraud risks should include interviews and brainstorming with personnel representing a broad spectrum of activities within the organization, review of whistleblower complaints, and analytical procedures.

An effective fraud risk identification process includes an assessment of the incentives, pressures, and opportunities to commit fraud. Employee incentive programs and the metrics on which they are based can provide a blueprint for where fraud is most likely to occur. Fraud risk assessment should consider when management might potentially override controls, which controls are weak, and where duties are not segregated.

The speed, functionality, and accessibility that created the enormous benefits of the information age also have increased an organization’s exposure to fraud. Therefore, any fraud risk assessment should consider access and override of system controls, as well as internal and external threats to data integrity, system security, and theft of financial and sensitive business information.

Assessing the likelihood and significance of each potential fraud risk is a subjective process that should consider not only monetary significance, but also significance to an organization’s financial reporting, operations, reputation, and legal and regulatory compliance requirements. An initial assessment of fraud risk should consider the inherent risk of a particular fraud in the absence of any known controls that may address the risk.

Individual organizations have different risk tolerances. Fraud risks can be addressed by establishing practices and controls to mitigate the risks, accepting the risks — but monitoring actual exposure — or designing ongoing or specific fraud evaluation procedures to deal with individual fraud risks. An organization should strive toward taking a structured approach versus a haphazard approach. The benefit an implemented fraud risk management program provides should exceed its cost.  Board members should ensure the organization has the appropriate “control mix” in place, recognizing their oversight duties and responsibilities in terms of the organization’s sustainability and their fiduciary role to stakeholders. Management is responsible for developing and executing mitigating controls to address fraud risks while ensuring controls are executed efficiently by competent and objective individuals.

Principle 3: Prevention techniques to avoid potential key fraud risk events should be established as feasible to mitigate possible impacts on the organization.

Fraud prevention and detection are related, but not the same. Prevention encompasses policies, procedures, training, and communication activities that stop fraud from occurring. Detection, however, focuses on activities and techniques that recognize, in a timely manner, whether fraud has occurred or is occurring.

While preventive techniques do not ensure an organization is exempt from fraud, they are the first line of defense in minimizing fraud risk.  One key to prevention is building throughout the organization and its governance structure an awareness of the fraud risk management program and the types of fraud that could potentially occur.

Principle 4: Detection techniques should be established to uncover fraud events when preventive measures fail or unmitigated risks are realized.

One of the strongest fraud deterrents is the awareness that effective detective controls are in place. Combined with preventive controls, detective controls enhance the effectiveness of a fraud risk management program by showing that preventive controls are working as intended to identify fraud if it occurs. Although detective controls may provide evidence that fraud has occurred or is occurring, they are not intended to prevent fraud. 

Again, every organization is susceptible to fraud. However, all fraud can not be prevented, nor is it cost-effective to try. An organization may determine it is more cost-effective to design its controls to detect, rather than prevent, certain fraud schemes.

Principle 5: A reporting process should be in place to solicit inputs on potential fraud and a coordinated approach to investigation and corrective action should be used to help ensure potential fraud is appropriately dealt with in a timely manner.

No system of internal control can provide absolute assurance against fraud. As a result, the board should ensure the organization develops a system for prompt, competent, and confidential review, investigation, and resolution of allegations involving potential fraud. The board also should define its own role in the investigation process. An organization can improve its chances of loss recovery, while minimizing exposure to litigation and damage to reputation, by establishing and preplanning investigation and corrective action processes.

The board and the organization should establish a process to evaluate allegations. Individuals assigned to investigations should have the necessary authority and skills to evaluate the allegation and determine the appropriate course of action. The process should include a tracking or case management system where all allegations of fraud are logged. Clearly, the board should actively be involved with respect to allegations involving senior management.

If further investigation, beyond evaluation, is deemed the appropriate next course of action, the board should ensure that the organization has an effective process to investigate cases and maintain confidentiality over the process. A consistent process for conducting investigations can help the organization mitigate losses and manage risk associated with the investigation. In accordance with policies approved by the board, the investigation team should report its findings to the appropriate party, such as senior management, directors, legal counsel, and oversight bodies. Public disclosure also may need to be made to law enforcement, regulatory bodies, investors, shareholders, the media, and others.

If certain actions are required to preserve evidence, maintain confidence, or mitigate losses before the investigation is complete, those responsible for such decisions should ensure there is sufficient basis for those actions. When access to computerized information is required, specialists trained in computer file preservation should be used. Actions taken should be appropriate under the circumstances and applied consistently to all levels of employees, including senior management. They should be taken only after consultation with individuals responsible for such decisions and human resources. Consulting legal counsel also is strongly recommended before undertaking an investigation and is critical before taking disciplinary, civil, or criminal action.

As a matter of good governance, the board should ensure that appropriate risk fraud management measures are in place. After all, fraud is risky business that can bring an organization to its knees.

“Managing the Business Risk of Fraud: A Practical Guide” is available for free download at www.theiia.org.

The purpose of this article is to provide HR professionals with a close-up view of current research from the academic community on different topics of interest in human resource management and to present “golden nuggets” that are thought-provoking and applicable to organizations both today and in the future.

Introduction
Organization culture influences the development of organization identity.  Through the company’s culture, leaders define and shape the organization’s identity.  Organization stakeholders, both employees and customers, form a connection to the organization based on its identity.  This concept is known as organizational identification.  The sense of organization identification can affect both customer and employee behavior by their displaying increased loyalty and commitment when strong identification is present.  HR leaders and other company leaders can help drive this identification through the internal and external image of the organization.

Responding to Organizational Identity Threats:  Exploring the Role of Organizational Culture
By Davide Ravasi and Majken Schultz1

This study investigates how organization culture (i.e., norms, tradition and history) can help shape the organization’s identity during times of identity threats, such as business climate changes.  Over a period of 25 years, the researchers studied a multi-national Danish based audio-video manufacturer. During this time, the firm faced three different periods of competition threats and business climate changes that forced the organization to re-evaluate its organization identity.

The researchers analyzed data from semi-structured interviews with organization members as well as internal communications.  They also looked at the annual reports and external communications during the periods of change and specifically looked for evidence of the formation and communication of the organizational identity.  The analysis showed that the organization leaders first looked to the external image of the organization as well as the existing internal organization culture when trying to define the organization’s identity.   After assessing the existing internal and external cues for identity, leaders used their role to present a revised organization identity.  Leaders also sought to embed the new identity in the culture of the organization.  The revised identity was never presented as a “new identity” but rather as the traditions of the organization refined. 

This article offers an empirical look at how organization leaders use culture to revise and articulate an organization’s identity during times of external threats and business climate changes.  It is important for organizations to have a strong shared identity during times of change.  With the help of HR, company leaders can work to embed that identity into the culture of the organization.

Organizational Identity Strength, Identification, and Commitment and their Relationships to Turnover Intention:  Does Organizational Hierarchy Matter?
By Michael Cole and Heike Bruch2

The strength of the organization identity is related to the employees’ shared beliefs and feelings towards the image of the organization. As a result of a strong identity, organizational identification is the psychological connection that a person feels with the identity of an organization.  A related dimension, commitment, is defined as an individual’s strength of advocacy and connection with the organization.

The researchers studied how organizational identification, organizational strength and organizational commitment predicted turnover intent (the likelihood of employees leaving) in a manufacturing plant.  Over 10,000 employees completed the survey, including officers, middle managers and plant workers.  The results showed that for all levels of employees, the strength of organization identity—that is, the strength of shared beliefs--was directly related to the turnover intent.  Interestingly, organization identification (the connection between the employee and the organization) related strongly with turnover intent for plant workers but not for managers.  For managers, organizational commitment was more strongly linked with turnover intentions. 

By fostering feelings of organization identification and commitment, HR professionals can influence the turnover intent of employees.  Specifically, the researchers suggest that strengthening the shared culture (i.e., norms and history) and values of the organization can support a strong shared organization identity among employees. 

Antecedents and Consequences of Customer-Company Identification:  Expanding the Role of Relationship Marketing
By Michael Ahearne, C.B. Bhattacharya and Thomas Gruen3

Organization identification is an important concept when it comes to other key stakeholders, such as customers.  Customers, through their interaction with an organization, will connect with the values, beliefs and behaviors of the organization, as will employees.   With positive organization identification, customers are thought to show greater loyalty and customer support (sharing positive accolades with others).

In this study, researchers investigated how physicians perceived a major pharmaceutical company and the sales representative of the organization.  The researchers were interested in how customer identification with the organization could lead to increased customer usage of the product and greater extra-role behaviors (i.e., recommending the product to others).  The results showed that a more positive perception of the characteristics of the company, as well as the sales person, led to higher customer identification.  Consequently, higher levels of identification on the part of the customer were linked to greater utilization of the product and greater customer support.  The results indicated that identification is influenced by the image and characteristics of the organization. 

This study also shows how positive organizational identification can support the bottom line of an organization.  Thus, HR can contribute to business performance by ensuring that a positive organization identity is portrayed throughout the company and through employees that have interactions with customers.

HR Insights
Leaders look to the organization culture as well as the external image of the organization to revise and strengthen the organization identity. The strength of organization identification can have positive outcomes for employees (i.e., reduced turnover) and for customers (i.e., product recommendations).  Consequently, organization identification is an important concept for leaders to develop in the employment relationship.  HR professionals should work with leaders to help strengthen the organization identity for both internal and external stakeholders.

Endnotes
Ravasi, D., & Schultz, M.  (2006).  Responding to organizational identity threats:  Exploring the role of organizational culture.  Academy of Management Journal, 49(3), 433-458.
2 Cole, M., & Bruch, H.  (2006).  Organizational identity strength, identification, and commitment and their relationships to turnover intention:  Does organizational hierarchy matter?  Journal of Organizational Behavior, 27, 585-605.
3 Aherne, M., Bhattacharya, C.B., & Gruen, Thomas.  (2005).  Antecedents and consequences of customer-company identification:  Expanding the role of relationship marketing.  Journal of Applied Psychology, 90(3), 574-585.

Project Team
Project Leaders:          Courtney Ledford, SHRM Research Intern
Nancy R. Lockwood, MA, SPHR, GPHR, Manager, HR Content Program
Project Contributor:    Steve Williams, Ph.D., SPHR, Director, Research
Editor:                         Nicole Gray, Copy Editor

Disclaimer
This article is published by the Society for Human Resource Management (SHRM). All content is for informational purposes only and is not to be construed as a guaranteed outcome. The Society for Human Resource Management cannot accept responsibility for any errors or omissions or any liability resulting from the use or misuse of any such information.

OAKBROOK TERRACE, Ill. – August 13, 2008 – Becker Professional Review, a subsidiary of DeVry Inc. (NYSE: DV), announced that all ten of the most recent Elijah Watt Sells Award winners, the highest scoring students for the multi-part Uniform CPA (Certified Public Accountant) Examination, prepared for the exam with Becker CPA Review, the global leader in CPA Exam preparation.

The Elijah Watt Sells Award, first awarded by the American Institute of Certified Public Accountants (AICPA) in 1923 to honor CPA pioneer Elijah Watt Sells, is presented to the ten CPA candidates, who on their first attempt, achieve the highest cumulative scores for all four sections of Uniform CPA Examination within a calendar year.  More than 76,000 candidates took the examination in 2007.

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Steven J. Alden is employed by KPMG in Boston, MA and is a graduate of the University of Massachusetts-Amherst.

John G. Berger Jr. is a graduate of the University of Notre Dame and is currently enrolled in Notre Dame Law School.

Jason J. Brancazio is employed by Bruce L. Ross and Company in Rolling Hills Estates, CA and is a graduate of UCLA.

Bryan E. Dean is employed by Clark Nuber PS in Bellevue, WS and is a graduate of the University of Washington.

John Briscoe Escosa III is employed by Deloitte & Touche in Indianapolis, IN and is a graduate of Bellarmine University.

Rapheal Joseph Hamilton is currently serving in the United States Army and is a graduate of Emporia State University.

Wenxin Li is employed by Energy Future Holdings in Dallas, TX and is a graduate of Shanghai Jiao Tong University (China) and Tulane University.

Barri Alexandra Litt is employed by Score at the Top Learning Centers in Coral Springs, FL and is a graduate of the University of Florida-Gainesville.

Walker Fleming Saik is employed by Ernst & Young in New Orleans, LA and is a graduate of Wake Forest University.

Bryce A. Schonberger is employed by PricewaterhouseCoopers in Denver, CO and is a graduate of the University of Colorado-Boulder.

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