Tech Afb Rrm Long

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T ralt rsk: cltr, bar andt rl accntants


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ABouT ACCA

ACCA (the Association o Chartered CertiedAccountants) is the global body or proessionalaccountants. We aim to oer business-relevant,

rst-choice qualications to people o application,ability and ambition around the world who seek arewarding career in accountancy, nance andmanagement.

Founded in 1904, ACCA has consistently held uniquecore values: opportunity, diversity, innovation, integrityand accountability. We believe that accountants bringvalue to economies at all stages o their development.We seek to develop capacity in the proession andencourage the adoption o global standards. Ourvalues are aligned to the needs o employers in allsectors and we ensure that, through our qualications,we prepare accountants or business. We seek to open

up the proession to people o all backgrounds andremove articial barriers, innovating our qualicationsand their delivery to meet the diverse needs o traineeproessionals and their employers.

We support our 140,000 members and 404,000students in 170 countries, helping them to developsuccessul careers in accounting and business, basedon the skills required by employers. We work through anetwork o 83 oces and centres and more than8,000 Approved Employers worldwide, who providehigh standards o employee learning and development.Through our public interest remit, we promote

appropriate regulation o accounting and conductrelevant research to ensure accountancy continues togrow in reputation and infuence.

The Association o Chartered Certied Accountants,January 2012

The reality o risk is that most ismanaged through everydaymanagement activities, not

separate activities ocused onlists o risks. Accountants play akey role in helping peoplemanage risk well.

The survey described in thisreport explored the risk-relatedpractices used by accountants,their willingness to use more,and the dysunctional behavioursthat can underminemanagement o risk.

The results reveal an opportunityto improve the way risk ismanaged by ocusing on howcore management activities are

done and the support providedby accountants.


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T Ralt Rsk: Cltr, Barand t Rl Accntants

Matthew Leitch

The Association o Chartered Certied Accountants (London), 2012


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The Council o the Association o Chartered Certied Accountants consider this study to be a worthwhile contribution to

discussion but do not necessarily share the views expressed, which are those o the author alone. No responsibility orloss occasioned to any person acting or reraining rom acting as a result o any material in this publication can beaccepted by the author or publisher. Published by the Association o Chartered Certied Accountants, 29 Lincolns InnFields, London WC2A 3EE.

ABouT The AuThoR

Matthew Leitch is an independent consultant, author, educator, and researcher specialising in risk and control. He hasserved on the risk management committee o the British Standards Institution and his contributions to the BritishStandards on risk management, BS 31100:2008 and BS 31100:2011, have led to his being awarded two DistinguishedService Certicates. Matthew is the author o two books about risk and control (Intelligent Internal Control and RiskManagementandA Pocket Guide to Risk Mathematics) and the website www.WorkingInUncertainty.co.uk.

ACKNoWLeDGeMeNTS

The author would like to thank the thousands of people who participated in the survey, the interviewees, and Paul Moxey of

ACCA who suggested a survey in this important area and provided valuable guidance and crit ique throughout.

The Association o Chartered Certied Accountants, 2012
http://www.workinginuncertainty.co.uk/http://www.workinginuncertainty.co.uk/


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The RealiTy o Risk: CulTuRe, BehaviouR and

The Role o aCCounTanTs

3

rwr 5

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1. itrct 9

2. vw r mgmt ctr 11

3. Mgmt cct 15

4. Rgr c rct 18

5. otr pprt r c mg 21

6. Rprtg prc qt 24

7. Ctrg tc g br 25

8. Cct 26

9. sr rpt rgt 30

10. Cc 32

Rrc 33

Cntnts


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FOREWORD 5

Risk and how not to all victim to it are probably more topical than ever beore.This is especially so or those who run organisations. Much attention, rightly, isbeing given to risk management and such things as risk appetite and tolerance,risk registers, and risk committees. But there is much more to managing riskand, to a great extent, anyone and everyone in an organisation is, or should be,a risk manager.

This is particularly true o accountants. Many accountants have specicresponsibility or particular aspects o risk management and oten the companyrisk manager or head o risk is an accountant. But this report is not aboutthose with such specic responsibilities; instead, it looks at how accountantscontribute, as part o their normal work, to managing risk. Oten, anaccountants role is to provide the right nancial and other inormation so thatthe right decisions can be taken, and this includes avoiding taking decisionsthat would expose an organisation unnecessarily to risk.

This is a report o a survey on how accountants contribute to managing risk. Itlooks at management accounting, nancial orecasting, internal reporting andother things that support decision making. These activities do not advertise

themselves as risk management but specialists in risk management recognisethem as just that properly integrated into core activities, as they should be.The survey sought accountants views on the causes o strategic ailure, on riskmanagement and risk culture, and the extent to which they witness variousdysunctional and sel-interested behaviours, such as deliberateunderstatement o risks or overstatement o benets to get approval or aproposal. The survey ound that these behaviours are worryingly common andare oten at the root o unpleasant surprises.

Over 2,000 accountants rom around the world and in a variety o unctions,including board members and risk managers, took part in the survey. Theirresponses give a unique insight into what goes wrong in organisations and thevital contribution accountants make to sound decision making, and thus tomanaging risk and to their organisations sustainable success.

We are grateul to everyone who responded to the survey and to MatthewLeitch who designed it or us and analysed the results.

P Mx

Head o Corporate Governance and Risk Management, ACCA

Frwrd


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6

The reality o risk is that we are all risk managers. At workwe ace almost continual uncertainty around questions likeWhat is really going on?, Should we change our plans orapproaches?, What can we do now?, and Which is ourbest course o action? The uture remains stubbornlyunpredictable and hard to control. Sometimes we handlethis uncertainty well, but not always.

The survey on which this report is based looked at thepractices accountants use to help managers deal with thatuncertainty eectively. Risk specialists would call this riskmanagement that is integrated, as it should be, into coremanagement activities. The survey asked no questionsabout risk maps, risk models, or risk departments. Instead,the ocus was on how the core activities o accountantssupport the core activities o managers and the board insuch a way that risk is managed.

Many o the practices studied in the survey have been in

use or years, but may have become gradually morecommon as computer power has allowed accountants todo more. For example, where an accountant might oncehave laboured or hours to produce just one nancialorecast, now orecasts or several alternative scenarioscan be produced in a ew clicks. The ability to explorealternative utures eectively and eciently is theoundation o managing risk.

Leading guidance and regulations on risk managementhave been saying or years that risk management shouldbe integrated within management and most people agree.The survey results clariy what this looks like in practice,reveal that a lot is being done already, and show thataccountants think they should do more.

Sadly, the survey results also conrm that there is a greatneed or more progress. Dishonest and biased behaviourwas reported by nearly all respondents, oten o the sortthat has led to ailed strategies in the past.

The survey was sent to ACCA members around the worldin September 2011 and 2,121 responses were received.

CuLTuRAL pReFeReNCeS

Asked about the main causes o ailed strategies inorganisations over the past three years, respondents mostoten selected underestimating risks (68%), ollowed byoverestimating ability to predict and control the uture(59%), then bias by personal interests (41%). Only 4% orespondents put ailure down mainly to luck.

Asked what had led leaders to alse accounting, misleadingaccounting, and desperate risks, most respondentspreerred the idea that they had most oten oundthemselves in nancial diculty and taken increasinglydesperate steps to get out o it (55%). The next mostcommonly selected reason was opportunistic abuse opower (36%). Respondents who were non-executives were,however, much more likely than other respondents to thinkthat opportunistic or even pre-planned abuse o power wasthe main reason.

These rst two questions established that, or mostrespondents, misjudgement (especially o risks), possiblyleading to unexpected nancial diculty, is a crucialproblem.

Their responses to the next set o questions clariy howaccountants might address this challenge. Anoverwhelming 92% thought that where accountantssupport decision making they should help peopleunderstand the alternative possible utures rather than justdetail the most likely outcome. This crucial preerence isconsistent with good management o risk achieved in away that is integrated with management.

Respondents preerences or the eects accountantsshould have on decision making cultures were alsoconsistent with this. Respondents strongly endorsed itemsrelated to a culture o objective, evidence-driven,uncertainty-aware decision making (a risk-managementculture) and items related to a culture o honesty andairness (a morality culture). In contrast, they gave littlesupport to items related to baseless conviction, consensus,and advocacy (a conviction culture).

Women were particular negative towards a convictionculture while respondents rom North America were more

likely to endorse it (though even here conviction culturewas unpopular among respondents).

exct smmar


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EXECUTIVE SUMMARY 7

TeChNiCAL GooD pRACTiCeS

The survey included questions about 39 good practices orintegrated risk management that are used in the coreactivities o accountants in specic technical areas:

core management tasksmanagement accountsregular nancial orecastsother decision supportreporting process quality, and

nancial compliance and ethics.

All these practices were supported by a majority orespondents, and usually by a very large majority. Eitherthe practices were in use already and respondents thoughtthey should continue to be used, perhaps more, or thepractices were not already in use but respondents thoughtthey should be.

The least common practices involved Monte Carlosimulation, which is a simple technique or combininguncertainties, but 48% indicated they did not know i itwas used, suggesting that many respondents did not knowwhat Monte Carlo simulation is. Even here, once theserespondents were excluded, approval or the practices washigh.

The most common practices were related to budgetarycontrol. Additional questions showed that mostrespondents thought budgetary control contributedpositively or strongly positively to risk management,though 28% thought its contribution was neutral or worse.Risk managers were particularly likely to think budgetarycontrol had a negative contribution, while non-executiveswere particularly positive towards budgetary control.

Some 21% o respondents indicated that the numbers inbudgets were viewed in inconsistent ways within theirorganisation (eg as aspirational targets and as reasonableplanning assumptions).

Longer-range orecasting was more common amongorganisations under nancial pressure rom high gearingor low liquidity, but otherwise greater pressure andorganisation size were linked to orecasting only as ar as

the next nancial year end.

DySFuNCTioNAL BehAviouRS

The survey asked respondents about the requency o 14dysunctional behaviours and a large majority indicatedthat each o the behaviours happened sometimes, usually,or always. Out o 1,127 respondents who answered allrelevant questions only eight thought none o thedysunctional behaviours ever happened in theirorganisation.

Although all groups o respondents recognised thatdysunctional behaviours happened in their organisation,board-level respondents were more likely than others tothink the behaviours were inrequent, with non-executiveshaving the most rosy view.

Most respondents thought that the leaders o theirorganisation elt under nancial pressure that was intense(28%) or strong (46%). This pressure is related to the

requency o dysunctional behaviours, which was nearly17% higher where intense pressure was seen comparedto only moderate pressure. (Too ew respondentsreported low pressure or a reliable comparison.)However, this pressure is ar rom the only driver odysunctional behaviour, which remains common in allconditions o pressure and sizes o organisation.

The dysunctional behaviours include those thought to bethe cause o strategy ailures, such as deliberatelyunderstating risks or overstating benets to gain approvalor a proposal. Many o the behaviours involve dishonesty,while some are mere bias.

iMpACT oF GooD pRACTiCeS

A survey such as this cannot prove that good practiceslead to better behaviour or better outcomes. The data arethe perceptions o respondents, most o whom work asaccountants and are likely to have a positive view o theirown work. Also, the connections are statistical rather thancausal. However, the statistical connections areencouraging.

The number o good practices used in decision supportcorrelates highly with the extent to which the impact oaccountants on decision making is seen as positive on

three items related to good management o risk. The link isnot dramatic but it is clear.


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8

In general, the more good practices are in use, the lessoten dysunctional behaviours occur, according torespondents. Nearly all the good practices are linked tobetter overall behaviour.

However, there are some exceptions that cannot be ullyexplained by the data. Organisations using Monte Carlosimulations in regular nancial orecasting or decisionsupport, or using risk-adjusted perormance measures,tend to report slightly worse behaviour. Since the practicesthemselves are technically good and dysunctionalbehaviours were not higher on average in nancial servicesorganisations (typical users o these practices), this isanomalous.

These practices are unamiliar to many who are notspecialists in risk. Could it be that the organisationsreporting unusually requent dysunctional behaviours,given their high use o good practices, haveseparate risk

management unctions staed by risk specialists? Perhaps,like drivers who drive aster when they wear seatbelts,people are less careul themselves when they think arisk-management unction is taking care o risk. This is arrom the only possible explanation and more researchmight explore it in uture.

Another interesting connection is that seeing dysunctionalbehaviour requently was linked to thinking that the goodpractices should be used more.

Overall, the results show that accountants play animportant role in the management o risk through thepractices used in their core activities, and would like to domore, using practices such as those included in the survey.The results also show that there is a need or them, andothers, to do more because dangerous dysunctionalbehaviours are common in core management activities.


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1. INTRODUCTION 9

When is risk management natural, ecient, eective, andapplied when and where it really matters? What role doaccountants have in this, and do they understand theprinciples and practices needed? How prevalent are thebehaviours that can prevent good management o risk andhow are they linked to ethics?

eveRyDAy MANAGeMeNT oF RiSK

Risk management is important, most people agree, andaround the world eorts are continuing to understandwhat works and what does not when it comes to managingrisk.

One topical issue is how risk management can beintegrated into the core management processes oorganisations. Most people agree that this is preerable torisk management being a separate activity.1 Leadingguidance has been saying this or years. COSO (the

Committee o Sponsoring Organizations o the TreadwayCommission), in its rameworks or internal control (COSO1992) and or enterprise risk management (COSO 2004),describes their elements as being integrated with themanagement process.

More recently, ISO 31000:2009 Risk ManagementPrinciples and Guidelines, the international standard on riskmanagement, recommended that risk management shouldnot be a management system, but should be integratedinto the management processes o organisations.

It is becoming increasingly clear that this, oten (andperhaps typically), does not involve writing lists o risksand trying to manage them.2 The ocus is on monitoring,planning, and decision making more broadly. Mostdecisions aect the risk aced by an organisation in someway, but only a ew decisions primarily concern a specicresponse to a perceived risk.

1. For example, 82% o 45 respondents in Leitch 2011a and 87% o 100

respondents in Leitch 2008.

2. In an online survey with 111 participants, approaches to risk

management in common business situations that did not involve listing

risks were seen as more integrated and were preerred more requently.

Results are available in Leitch 2011b.

For example, a recent ACCA research study (McNulty et al.orthcoming), revealed some o the behaviours that seniorexecutives engage in when big decisions are to be made.In interviews they described considering the implicationso alternative scenarios and examining the possibleconsequences o events that might happen.

The RoLe oF ACCouNTANTS

Almost certainly accountants have an important role here.Most important decisions have at least a nancial aspectand it is accountants who most oten are asked to estimatethe nancial implications o alternative courses o action.Furthermore, accountants have importance through sheernumbers. Accountants outnumber those designated as riskmanagers, and chie nance ocers outnumber chie riskocers.

MANAGeMeNT CuLTuRe

The working practices o accountants may be crucial tosuccessul management o risk, and they may also have aninfuence on the management culture o organisations.

Are accountants instruments o the chie executive, usingtight budgetary control to enorce a strategy based onnothing more than conviction? Are they there to reportwhatever prot gure the chie executive would like toreport? Or are they more interested in promoting honesty,objectivity, and thoughtul use o evidence?

1. intrdctn


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10

BAD BehAviouR

Irrational, sel-interested, manipulative behaviour happensin organisations. This can undermine good management orisk and, indeed, all management.

The study distinguished between behaviour that is illegal(eg raud, money laundering, bribery) and behaviour thatis dysunctional in other ways. Some o this dysunctionalbehaviour is caused by unintentional bias, but a lot o it isdishonest and, thereore, unethical. For example, oering alow nancial orecast to reduce expectations is dishonestand unethical, even though it is so common we tend toaccept it so long as we eel we can detect it and makeallowances.

It seemed likely that dysunctional behaviour would berelated to the nancial pressure elt by leaders, so thestudy also asked about nancial pressure.

The SuRvey

The survey was designed to explore all these issues, with aocus on accountants. Over 2,000 ACCA membersresponded during September 2011, providing over162,000 data points. This massive body o data providesascinating insights.

The survey questions covered views about how riskmismanagement happens, and how accountants shouldsupport good management o risk and develop a healthydecision-making culture.

The questions then addressed technical areas withinaccountants core activities, each time asking aboutpractices that should help to support good managemento risk and about dysunctional behaviours that thosepractices might help to reduce. The results show theextent to which good practices are already in place, shouldbe (in the opinions o respondents), and how oten variousdysunctional behaviours are believed to occur.

The technical areas covered were management accounts,regular nancial orecasts, other decision support,reporting on process quality, and controlling unethical andillegal behaviour.


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2. VIEWS ON RISK MANAGEMENT AND CULTURE 11

The rst section o the survey asked respondentsquestions about their views on issues related to themanagement o risk. The answers show the extent to whichrespondents understand and support the principlesunderlying good management o risk. They also revealsome interesting dierences in perspective betweenpeople in dierent roles.

CAuSeS oF STRATeGiC FAiLuRe

What people think to be the main causes o strategicailure should infuence what they think they should do toavoid ailure. Dierences in opinion might be refected indiering priorities or managing risk.

The survey asked respondents to think about occasionswhere organisations strategies have ailed in the last threeyears and select up to three main causes rom a list. Thewording o the question, the explanations oered, and the

distribution o respondents answers are shown in Fig. 1.

Fgr 1: Man rasns r alr stratgs

Tg rgt w trtg t t 3 r,

t t w m bc? (P c mxmm 3 pt.)

The explanations ell into three groups: luck, personalinterests, and poor judgement. The least avouredexplanation was that such organisations were unlucky.That is, their judgement and motives may have beensatisactory, but events went against them. Just 4% orespondents selected this.

A much more requently selected explanation was thatdecisions were biased by personal interests. Perhapsindividuals stood to gain at the expense o theorganisations they were supposed to be serving. This wasselected by 41% o respondents.

The remaining our explanations ocus on judgement. Themost selected explanation was that organisationsunderestimated risks, and this was selected by 68% orespondents. Overestimating rewards was selected by just23%, though it is known that this is also a commonproblem, at least with decisions on large inrastructure

projects (Flyvbjerg et al. 2003).

The more subtle explanation, that people overestimatedtheir ability to orecast and control the uture, was selectedby 59% o respondents. This suggests an understandingthat in uncertain situations optimism combines withovercondence to produce poor judgements. This isconsistent with leading guidance on risk management,such as ISO 31000:2009, and with studies o thepsychology o judgement under uncertainty (Kahnemanetal. 1982).

Another subtle explanation oered was that, given theperceived risks and rewards, people were too willing totake risks, or not willing enough. This was selected by just31% o respondents. The idea that aulty attitudes to riskare a problem has inspired the recent interest in riskappetite, but it seems that most accountants are moreconcerned with the problem o correctly assessing risks.

In general, respondents in dierent roles showed similarviews, but there was one exception. Senior non-executiveswere more likely to select bias due to sel-interest and lesslikely to select explanations based on misjudgement. Asimilar pattern is visible in responses to the next question.

2. vws n rsk managmnt and cltr

0% 10% 20% 30% 40% 50% 60% 70%

they underestimated risks

they overestimated their ability to predict and

control future events

their decisions were biased by personal interests

given the risks and rewards they expected, theirwillingness to take risks was too high or too low

they overestimated rewards

other (please explain)

they were unlucky

dont know


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12

Overall risk needs to be considered; you cannot view anyone risk in isolation as combined they may be enough to

put the business in serious diculty, tempting those withshaky ethics to tr y to nd a way around the ethicalexpectations people should have or those in control/

power and those advising them, to maintain the businessposition or bonus level they expect to achieve.Financial accountant, corporate sector, England, UK3

BAD CoRpoRATe BehAviouR

The next question also sought to understand whatrespondents saw as the main challenges to good riskmanagement and a healthy management culture generally.It asked respondents to think o past corporate scandalsand select the explanation or them that they thought wasmost typical. The results are shown in Fig. 2.

Fgr 2: Rasns r crrat scandals

The most selected explanation was that people oundthemselves in unexpected nancial diculty and triedincreasingly desperate actions in an attempt to keep theircompanies going and save their jobs. This was particularlytrue or respondents in Canada. This is the patternidentied in COSOs report on nancial raud back in 1999(COSO 1999).

3. This and other comments made in survey responses have been used to

illustrate ndings o the survey.

The next most selected explanation was the idea thatleaders had spotted opportunities to make easy gainsonce in a position o power, and had taken them. This wasparticularly common or respondents in the Republic oIreland, the USA, China, Malaysia, and the Rest o theWorld. With the exception o Ireland these broadly seem inline with scores on the Corruption Perceptions Index(Transparency International 2010).

Just 1% o respondents selected the explanation that theleaders had planned their misdeeds rom the start.

However, once again senior non-executives took amarkedly dierent view rom others, seeing deliberate,planned dishonesty and opportunistic abuse o power asbigger problems. Either they know something others donot or perhaps non-executives see their role as one oprotecting against dishonest executives and thereoreemphasise the risks in this area.

Corporate decisions tend to be made reecting the selshambitions o the decision makers rather than the

legitimate interests o the organisations stakeholders.This is tantamount to deliberate attempts to cheat, hidingbehind the cloak o respectability.Consultant, public practice, Malaysia

The CRiTiCAL queSTioN

Risk assessment is, in eect, prediction, but done in such away that alternative possible outcomes are explored ratherthan just one best guess at the uture. The extent to whichaccountants perceive the value o exploring alternativeutures is critical to their ability and willingness to supportgood management o risk.

The question in Fig. 3 and the responses given show thatnearly all accountants recognise the value o helpingpeople think more widely about the uture. A reassuring92% o respondents selected this approach. Thispreerence was ound regardless o age, sex, role, industrysector, size o organisation, and country. It was slightlymore emphatic where organisations elt higher nancialpressure and slightly less so in public practice rms andamong those who thought luck was a main actor instrategic ailure.

0% 10% 20% 30% 40% 50% 60%

they found their organisations in unexpected

financial difficulty and tried increasingly desperate

actions to stay in business or keep their jobs

once in a position of power they saw an opportunity

to make easy gains and took it

other (please explain)

dont know

they planned to when they became leaders


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2. VIEWS ON RISK MANAGEMENT AND CULTURE 13

This nding is explored in more detail in the later sectiono this report on decision support, which gives details othe practices that are used and should be used more toprovide better understanding o potential outcomes.

Fgr 3: Sw altrnat tcms r jst n?

Wr cctt pprt c mg, wc mr

mprtt r tm t pr?

There is considerable danger in single-point estimates.Financial controller, nancial services, USA

There will always be uncertainty around decisions to

enter new markets or to try new ideas, but the accountantshould be able to highlight the potential risks and rewardso various actions, and to seek ways to mitigate the

impact o any risks, in order that inormed decisions canbe made.Financial controller, corporate sector, England, UK

DeCiSioN-MAKiNG CuLTuRe

The culture o risk management is one o thoughtulness,evidence, and objectivity, combined with some creativity.The principles o risk management as stated in ISO31000:2009, the international standard on riskmanagement, emphasise this style o management.

Is this also the culture o accountants? Fig. 4 shows that itis. Respondents were asked to think about whataccountants should encourage, where they are able toinfuence the culture around decision-making. Thebehaviours oered or consideration all into three groups,representing three cultures:

1. Conviction culture: this group concerns baselessconviction and consensus, in which plans have to besure re beore they can be accepted something thatis rarely easible and can lead to overstated businesscases.

2. Morality culture: this group concerns honesty, and thedrive to adopt courses o action that are air, ethical,and legal.

3. Risk-management culture: this group is most closelymatched to the culture o risk management,emphasizing evidence, objectivity, and open explorationo uncertainty.

Although respondents were able to select as many o theoptions as they liked, the items related to convictionculture were rarely selected. The most selected item in thisgroup, with 32%, was the requirement or convincing

business cases. This perhaps attracted some supportbecause it calls or evidence, but many respondentspresumably saw the danger o being paralysed bydemands or certainty, or understood that the demand orcompelling cases can lead to overstated claims and aocus on advocacy at the expense o objectivity.Respondents comments on this question most otenmentioned the risk o not approving any business cases.

The two most selected behaviours were part o risk-management culture, but were very closely ollowed by thethree morality culture items.

An accountant should strive to take out the emotionalinterest surrounding business decisions, especially in

smaller businesses in which there may be owner/shareholder involvement in the management o theorganisation.Finance Director, Corporate sector, Malta

While a compelling business case or a new idea wouldbe perect in an ideal world, the best anyone can do isprovide a substantial business case using as much

analysis, modelling, and risk assessment as possible toenable an inormed decision to be made. Requiring acompelling case can stie initiative, which in turn could

mean the business stagnates or, worse, goes backwards

when competitors are willing to take a calculated risk ona new idea or project.Financial controller, corporate sector, England, UK

0% 20% 40% 60% 80% 100%

quantification and better understanding of the

variety and likelihood of possible outcomes

from a proposed plan, including the

implications of unfavourable events

quantification and better understanding of the

most likely outcome from a proposed plan


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14

Fgr 4: Dcsn-makng cltrs t ncrag

Wr cctt c c t crprt ctr r c mg,

wc t t crg? (P ct tt pp.)

These preerences were consistent over all job roles, agegroups, both genders, and across all sectors and sizes oorganisation, and all countries or which an adequatenumber o responses was gathered. This is the globalculture o accountants everywhere.

However, women selected conviction culture itemssomewhat less than men. This is true even when thetendency or men to select more options overall isadjusted or.

Also, respondents in Canada and the USA selectedconviction culture items somewhat more oten thanrespondents rom other countries. Support or questioningleaders was strongest in the UK, Ireland, and the USA, andweakest in Malaysia and the Rest o the World. Support orthinking careully about decisions, using calculations andmodels where possible, was strongest in the UK, Ireland,Canada, Australia, and the USA, but somewhat weaker in

China, Malaysia, Singapore, Hong Kong SAR, and the Resto the World.

Finally, respondents in larger organisations tended toselect risk management culture items slightly less otenand conviction culture items a lot more oten (though stillrarely).

0% 10% 20% 30% 40% 50% 60% 70% 80%

Questioning proposals even when they are

by senior people

Recognising uncertainties and being willing

to seek and use relevant data

Making decisions that fairly reflect the

legitimate interests of the organisations

stakeholders, without bias from the

personal interests of decision makers

Choosing actions that are ethical

Choosing actions that are legal

Thinking carefully about decisions,

including using calculations and / or models

where possible

Requiring compelling business cases for

new ideas

Achieving consensus

Unquestioning compliance with instructionsfrom senior people

Dont know


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3. MANAGEMENT ACCOUNTS 15

Survey respondents were asked to choose an organisationthey knew well and to give details o practices andbehaviours in connection with ve technical areas. Detailso the organisations they chose are given in section 9, butthey spanned all sectors and various types o entity. In themajority o cases respondents thought their leaders eltnancial pressure. That pressure was thought to beintense by 28% and strong by 46%.

The rst technical area covered by the survey was perhapsthe most traditional contribution o accountants tomanagement the production o management accounts.

Management accounts were extremely common, with 89%o respondents indicating that they are produced or theirchosen organisation.

Management accounts contribute to identication orisks. Particularly ratios such as costvolumeprot

analysis, decision trees, capital-asset pricing models,discounted cash ows and hedging techniques not onlyhelp management identiy risks, but also help them take

reasonable steps and measures to prevent, avoid orreduce them. Finally, management accounts designlong-term solutions to long-term prevention o risks.CFO, corporate sector, Greece

FRequeNCy

The requency with which management accounts areproduced is related, in principle, to risk management.Frequent accounting refects an attitude o wanting to gaininormation rather than assuming that events are unoldingas predicted and desired.

As shown in Fig. 5, by ar the most common requency wasmonthly or our-weekly (82%) but this was related toorganisation size. Very small organisations were morelikely than large ones to produce management accountsquarterly.

More organisations produced management accountsweekly than annually.

Fgr 5: T rnc wt wc managmnt accntsar rdcd

The primary area o control is to use the right risk models

to measure exposure to commodity price uctuations and

FX exposure. The budget at best serves only as a guide.The real world is very dynamic and you cant wait toolong to make a decision.Senior executive, public sector, Singapore

GooD pRACTiCeS FoR MANAGeMeNT ACCouNTS

Many simple, and some not so simple, managementaccounting practices can contribute to good managemento risk. Fig. 6 shows the extent to which some selectedpractices are already in use and respondents thought theyshould be used more. The practices are shown indescending order o popularity but were presented in adierent order in the survey.

The most striking thing about these results is that mostrespondents approved o every practice. They indicatedeither that the practice was already in use and shouldcontinue or increase, or that the practice was not in usebut should be.

3. Managmnt accnts

0% 20% 40% 60% 80% 100%

Weekly

Monthly or 4 weekly

Quarterly

Annually

Other (please

specify)


18/36

16

Fgr 6: T ractcs sd n managmnt accnts

Even risk-adjusted perormance measures, which were notamiliar to some respondents, had overwhelming approval(once you exclude respondents who answered dontknow.)

Risk-adjusted perormance measures are most well knownin the nancial services sector, with 53% o respondentsindicating that they were used already, against 34%overall.

Capital gearing ratios are not meaningul or organisationsthat do not have debt unding. This probably explains the

relatively high proportion o respondents whose chosenorganisation did not and should not include these ratios inmanagement accounts.

BuDGeTARy CoNTRoL

Making comparisons with budgets was the most requentpractice in use now and this really deserves a survey o itsown. In principle, budgetary control can be the opposite orisk management.

I budgets are set ater months o negotiations,unsupported by evidence, and remain unchangedthroughout a whole year then the budget can become astraightjacket. Variances can become obsolete quickly. Ipeople see no need to look ahead at possible outcomes,but instead wait or variances to signal that attention isneeded, then budgetary control really is the opposite orisk management.

Problems with budgetary control have led some to call orthe end o budgetary control and its replacement by moreadaptive systems (Hope and Fraser 2003). However, some

research (Marginson et al. 2006) suggests that mostorganisations are reluctant to stop budgeting and insteadcope by applying their budgets more fexibly, updatingthem more oten during the year, and accepting varianceson details as long as overall numbers are not greatlyaected.

This survey asked just two ollow-on questions aboutbudgetary control. The rst asked how respondentsthought people in their chosen organisation viewed thenumbers in the budgets (Fig. 7). By ar the most commonwas to see the numbers as the basis or evaluatingperormance (62%), though only 15% indicated thatpeople saw them as a basis or criticism.

One group o respondents was markedly more likely to seethe budget as a basis or evaluating perormance; non-executives selected this 77% o the time.

Arguably, one o the strengths o budgetary control is thatvariances are a orm o reporting by exception. Theyrepresent surprises that deserve attention. However,although 48% indicated that the numbers were seen asreasonable planning assumptions, only 21% thought theywere viewed as a basis or learning and improvingperormance.

0% 20% 40% 60% 80% 100%

Comparison against budgets

Liquidity of the organisation

Analysis of past trends

Proportion of costs that are fixed, or a

breakeven analysis, relating volume and

profit

Graphs showing results for past time

periods (e.g. last 6 months, last year

superimposed on this year)

Analysis of sensitivity of results (e.g. to

interest rates, currency exchange rates,

credit risk)

Capital gearing ratio, or similar, relating

debt to equity, or interest to earnings

Information about the limitations of figures

that rely on estimates, samples, or non-

financial data captured in unreliable ways

Risk adjusted performance measures (e.g.

RAROC)

Used now and should use more Used now and should use the same

Dont use but should use Dont use and should not use

Used now but shou ld use less Don' t know


19/36



3. MANAGEMENT ACCOUNTS 17

Fgr 7: hw nmbrs n bdgts ar wd

Some o the views are mutually incompatible. Specically,the numbers cannot truly be both aspirational targets andminimum acceptable levels o perormance within thesame organization without some conusion. It is also hardto see how either o these views is consistent with the viewthat the numbers are reasonable planning assumptions.

When respondents selected incompatible views thispresumably indicates that dierent people in their chosenorganisation have dierent views. Such incompatibilitiesbetween views should tend to undermine the value obudgetary control.

Overall, 21% o respondents selected views that indicatedone or more o these incompatibilities.

Respondents were also asked what contribution theythought budgetary control made to the management orisk in their chosen organisation (Fig. 8). In general theyindicated a positive contribution. Again, non-executiveswere the most enthusiastic, more so than chie nanceocers, or example.

Risk managers were the least positive about thecontribution o budgetary control (though still positiveoverall), with 45% indicating that its contribution wasneutral or worse.

Budgetary pressures can lead to people takingunnecessary risks to achieve targets and thereore can

undermine compliance with procedures in place tominimise identied risks.Risk manager, corporate sector, England, UK

Ratings o the contribution o budgetary control alsodeclined slightly or larger organisations.

Fgr 8: T cntrbtn bdgtar cntrl t rskmanagmnt

More work needs to be done on 12-month rolling budgets

so that we can integrate risk management more.CEO, not-or-prot, England, UK

0% 10% 20% 30% 40% 50% 60% 70%

As a basis for evaluating performance

As reasonable planning assumptions

As minimum levels of acceptable

performance

As aspirational targets

As a basis for learning, to improve

organisational performance

As a basis for criticism

Not applicable because we dont have

budgets / don't know

0% 10% 20% 30% 40% 50% 60%

Strongly positive

Somewhat positive

Neither positive or

negative

Somewhat negative

Strongly negative


20/36

18

Another important technical area where accountants cancontribute to eective risk management is through regularnancial orecasting. Risk assessment is, in principle,orecasting that explores multiple possible outcomesrather than just one best guess. So, nancial orecastingcan be a prime example o risk management happeningwithin core management activities.

Regular nancial orecasts were common, with 80% orespondents indicating that they were produced or theirchosen organisation.

FRequeNCy

As with management accounts, the most popularrequency o production was monthly or our weekly, butoverall it seems that orecasts are less requent on averagethan management accounts.

Fgr 9: Frnc rdcng fnancal rcasts

Larger organisations orecast slightly more requently.Organisations eeling more nancial pressure orecastmore oten. The organisations sector also plays a role,with not-or-prot organisations more likely to orecastannually compared with accountancy rms, even thoughthe rms were slightly smaller on average.

FoReCAST peRioD

The period or which organisations orecast also varies ininteresting ways. Fig. 10 shows the overall results.

Fgr 10: Tm rds crd b fnancal rcasts

The most common is orecasting to the nancial year end,with 50% o respondents selecting this. It is more commonstill or large organisations and or organisations eelinggreater nancial pressure.

However, organizations eeling nancial pressure due tolow liquidity or high gearing were much more likely to beorecasting on a rolling basis, with high gearing prompting18-month orecasting.

Management accounts provide a snapshot o how theorganisation has perormed at any particular time, butthey enable corrective action to be taken where items are

not going to plan. By using rolling 12- or 24-monthorecasts they also help to highlight areas o concern inthe uture to enable suitable risk mitigations to be put in

place.Financial controller, corporate sector, England, UK

4. Rglar fnancal rcasts

0% 10% 20% 30% 40% 50%

Weekly

Monthly or 4 weekly

Quarterly

Annually

Other (please

specify)

0% 10% 20% 30% 40% 50% 60%

To the financial year

end

The next 12 months,

on a rolling basis

The next 18 months,

on a rolling basis

Other (please

specify)


21/36



4. REGULAR FINANCIAL FORECASTS 19

FoReCASTiNG pRACTiCeS

Many practices supporting management o risk areapplicable to regular nancial orecasts. Fig. 11 shows howoten a selection o these were in use and whererespondents thought they should be used more, or less, intheir chosen organisation.

As with management accounts, approval o these practiceswas overwhelming in all cases (once dont knowresponses were excluded). Most respondents indicatedthat the practices were used or should be.

Nearly hal (49%) o respondents did not know i outputrom Monte Carlo simulation was used and an unusuallylarge proportion o respondents (20%) thought it was notused and should not be used. This pattern is perhaps anindication that many respondents did not know whatMonte Carlo simulation is and others guessed rom its

name that it is a complicated procedure requiring specialskills and perhaps also expensive sotware. In act, MonteCarlo simulation is a more useul and easier alternative toordinary sensitivity analysis and in simple cases can bedone with standard spreadsheet sotware. It shows howuncertainty in estimates o inputs to a orecast translatesinto uncertainty about the outputs o that orecast.

Fgr 11: practcs sd r fnancal rcasts

Financial orecasts give a heads-up on the likely risk oailure on some nancial KPIs.Internal auditor, corporate sector, Switzerland

0% 20% 40% 60% 80% 100%

Assumptions documented

The possible impacts of external factors

such as the economy and competition

Notes of risks and uncertainties

A clearly stated plan of action on which

each forecast is based

Sensitivity analysis for variables in the

forecast considered one by one

Forecasts for alternative scenarios

The possible impacts of/on non-financial

factors, such as volume constraints, safety,

error rates, or public reactions,

Analysis of past forecasting errors

Ranges (i.e. prediction intervals showing a

range within which results are likely to fall)

Output from Monte Carlo simulation


Dont use but should use Don t use and should not use

Used now but should use less Don't know


22/36

20

uNeThiCAL FoReCASTiNG GAMeS

Extensive research has probed the biases that lead to poororecasts. Part o the problem seems to be that pressuresin organisations lead to dishonest gaming o orecasts.These are orms o unethical behaviour so common thatwe tend to see them as normal.

Respondents were asked how oten they thought each othree such behaviours occurred in their chosenorganisation and the results are shown in Fig. 12, indescending order o requency. All the behaviours are onesthat ought to reduce the accuracy o orecasts, turning theorecasts into something else.

Fgr 12: Frnc dsnctnal bars nrcastng

i r p, w t ( t ) t wg br

ccr r c rgt?

All the behaviours happen oten enough to be a concern.Answers on each behaviour tended to correlate, withrespondents oten reporting similar requencies or eachbehaviour. Despite this, just 3% o respondents reportedthat none o the behaviours ever happened.

Respondents working at board level tended to think thesebehaviours were less requent than did others, though theystill recognised them as requent. Non-executives ratedthem least requent, on average, with a majority thinkingthat optimistic orecasts to avoid criticism never happen intheir chosen organisation. This contrasts with the views oother respondents. For example, only 20% o nancialcontrollers, accountants, and management accountantsthought it never happened and, presumably, they arebetter placed to know.

Forecasts are more oten constructed to meetexpectations; seldom to reect actual oreseeable events.

Financial controller, corporate sector, Australia

Forecasting tends to be excessively optimistic. The

business knows that i the orecasts are realistic thechances are they wont get unding, thereore they budgetwhat they think will be accepted then rebaseline part way

into the project; the company is woeul at killing projectsthat should never have passed the blue sky thinking

stage.Internal auditor, corporate sector

0% 20% 40% 60% 80% 100%

Forecasts treated as

targets rather than

predictions

Optimistic forecasts

provided to avoid

criticism / pressure

Pessimistic

forecasts provided to

reduce expectations

Always Usually Sometimes Never Dont know


23/36



5. OTHER SUPPORT FOR DECISION MAKING 21

Where accountants support decision making they are otenrequired to help predict the possible consequences oalternative courses o action. As with regular nancialorecasts, this is a prime example o an activity wheremanagement o risk should be integrated.

Many accountants have been trying to provide support ordecision making and 78% o respondents indicated that intheir chosen organisation accountants provide suchsupport.

Accountants need to be business partners. They need to

be involved in decision making and help other unctionssee the possible implications o the decisions that they

are about to make or have made in the past.CFO, corporate sector, Republic o Ireland

The role o accountants has increased due to the efectso economic and nancial instability.

Public sector, England, UK

pRoviSioN oF TooLS

Not all support or decisions is provided by accountants inperson. Asked Do accountants provide a tool or tools orothers to use in the decision making (e.g. spreadsheet,sotware, checklist, template, policies and procedures)?94% o respondents indicated that they did.

DeCiSioN SuppoRT pRACTiCeS

Fig. 13 shows which good practices were used ormanaging risk in decision support, and which respondentsthought should be used more. As beore, all practices werestrongly supported, with Monte Carlo simulation unamiliarto many, and hampered by its intimidating name.

[Forecasts are] a key tool or risk management; all keyproposals are modelled beore a decision is made.CEO, not-or-prot, England, UK

Fgr 13: practcs sd n dcsn srt

5. otr srt r dcsn makng

0% 20% 40% 60% 80% 100%

Analysis of past actual results

Analysis of the implications of different

future scenarios

Sensitivity analysis for forecasts or

decisions

Identification of potential knock on effects

of actions that may not have immediate

financial effects

Facilitation of planning, process design, or

decision making workshops

Checklists of risks

Weights or limits for risk

Other limits or weights intended to

discourage excessive risk taking

Monte Carlo simulation to combine

uncertainties


Don t use but should use Don t use and should not use

Used now but should use less Don't know


24/36

22

eFFeCTS AChieveD

What eect does accountants support or decision makinghave? Fig. 14 shows how oten it has each o three eectsdirectly related to integrated risk management, accordingto respondents.

Fgr 14: Frnc ll cts n dcsn makng

hw t, t , t pt cctt pprtg

c mg t wg fct?

I respondents are oten the ones providing that decisionsupport it would not be surprising to nd that they thinkthey have a positive eect on decision making. Indeed,other roles below board level do take a very slightly lesspositive view. However, it is board level respondents who

are most positive, and non-executives in particular. It couldbe that they are unaware o the extent o dysunctionalbehaviours.

CoNTRiBuTioN oF GooD pRACTiCeS

Do the good practices improve decision-making behaviour?It seems that in decision support, there is at least a linkbetween respondents answers. Fig. 15 shows therelationship between two summary scores. The Goodpractices score is the number o decision support goodpractices used now. The Average eect score refects therequencies o each o the helpul eects on decisionmaking achieved by accountants. Although the graph isnot steep, the trend is quite clear: the use o more goodpractices correlates with more positive eects.

[Forecasting] makes people think outside o the box andconsider possible actions that may have a direct impact,

and their results should unoreseen events happen. Itencourages a more pro-active approach, rather thanreactive.Financial accountant, public sector, England, UK

Fgr 15: us gd ractcs and t ct n dcsnmakng

Good, unbiased nancial planning certainly goes a long

way to efect good risk management.Consultant, public practice, Malaysia

An accountants input can move the decision away rompassionate ideas to more o a sound business ooting,

also considering costs o administration such as settingup oreign VAT registrations and making returns.Financial controller, corporate sector, England, UK

0% 20% 40% 60% 80% 100%

Makes people more aware of the

uncertainties involved

Helps people think more widely about

possible consequences of the decision

Encourages decisions reflecting the

interests of all relevant stakeholders


0

1

2

3

4

5

6

7

1 2 3 4 5 6 7 8 9

Good practices score

Averageeffectscore


25/36



5. OTHER SUPPORT FOR DECISION MAKING 23

DeCiSioN-MAKiNG GAMeS

A number o behaviours can undermine good decisionmaking under uncertainty. Fig. 16 shows how otenrespondents thought each o a selection o thesebehaviours happens in their chosen organisation.

Again, the behaviours are common, with ew respondentssaying they never happen. Just 4% o respondents thoughtnone o the behaviours ever happen in their chosenorganisation.

Again, it is board members who are most likely to beunaware o these games, especially non-executives, thoughonly a minority o board members are in this position oignorance.

Decision analysis is sometimes hijacked by higher-level

political motivations, leading to poor decision making and

unoreseen adverse impacts.Financial controller, corporate sector, Republic oIreland

Fgr 16: Dsnctnal bars n dcsn-makng (1)

Fig. 17 shows the results o another group o questionsabout dysunctional behaviours. This time the ocus is onlies told to persuade others to accept a proposal. Theoverall requency o occurrence is less than or thedecision-making behaviours in Fig. 16, but still high. Threeo these are the very behaviours that respondents cited asresponsible or strategy ailures generally.

Fgr 17: Dsnctnal bars n dcsn-makng (2)

As beore, board-level respondents were aware o thesebehaviours but judged them slightly less prevalent thanother respondents. Risk managers judged them to be mostrequent. This is not because the board-level respondentswere within smaller organisations because in act theirchosen organisations were oten the larger ones.

0% 20% 40% 60% 80% 100%

Significant decisions strongly biased by the

personal interests of decision makers

Decision making undermined by personal

power battles

Significant decisions driven by beliefs held

more strongly than evidence supports

Excessive focus on the consequences for

some priorities at the expense of

understanding others (e.g. time versus

safety)


0% 20% 40% 60% 80% 100%

Assessing risk as low to make a course

of action more attractive

Stating expected results from a course of

action with unjustified confidence to make it

more attractive

Overestimating benefits of a course of

action to make it more attractive

Underestimating costs of a course of

action to make i t more attractive



26/36

24

Risk management within core management activities isalso concerned with routine risks occurring in highvolume business processes. In one sense these are notrisks at all because their occasional occurrence is virtuallyinevitable, but when and where they will happen, and atwhat cost, are uncertain. This is a big part o operationalrisk. Some organisations have good reporting o qualityproblems in their business processes, while others remainunaware that the major driver o their productivity is inact their rate o aults.

In the survey, 59% o respondents indicated that theirchosen organisation uses reports o data on errors,backlogs, complaints, or other quality issues o businessand/or nancial processes (excluding debtors analysis). Othese, 67% were produced or collated by accountants/thenance unction.

eFFeCT oF RepoRTiNG quALiTy iSSueS

Fig. 18 shows how respondents viewed the impact o theirprocess quality reporting. The respondents to value itmost highly were the non-executives and the auditors. Itmay be that their relative distance rom the organisationmakes them particularly appreciative o this kind oinormation.

Fgr 18: undrstandng rdd b rrts n altsss

d rprt qt cr mgmt rtg

t r prrmc b prc?

DySFuNCTioNAL BehAviouRS

Three dysunctional behaviours were explored and theresults are shown in Fig. 19. While these behaviours areless common than others discussed above they remaincommon enough to be a major concern.

It is possible that some respondents are working inorganisations where persistent quality issues areexperienced but management, including accountants,remain unaware o them due to lack o inormation.

Fgr 19: Dsnctnal bars rlatd t alt

Although each behaviour never happens in around 37% oorganisations on average, only 25% o respondentsthought that none o these behaviours ever happen in theirchosen organisation.

Once again, it is non-executives who are most likely to beunaware o these behaviours.

6. Rrtng rcss alt

0% 10% 20% 30% 40% 50% 60%

Yes, considerably

Yes, slightly

No

Dont know

0% 20% 40% 60% 80% 100%

Ignoring signs of other quality issues

Gaming performance measures to hit

targets at the expense of real performance

Ignoring signs of dissatisfied customers



27/36



7. CONTROLLING UNETHICAL AND ILLEGAL BEHAVIOUR 25

The nal section o the survey covered other roles in riskmanagement oten taken on by accountants, romdesigning internal controls to scrutinising expense claims,and activities designed to reduce or respond to unethicalbehaviours.

TRADiTioNAL CoNTRoL DuTieS

Fig. 20 shows the results o asking about the extent towhich accountants in the nance unction currently dovarious things designed to control nancial non-compliance. Not surprisingly these activities are common,and equally so in all sizes o organisation.

Fgr 20: practcs r cntrllng fnancal nn-cmlanc

Where these activities were not done by accountants in thenance unction they might still have been done by others.

pRoMoTiNG eThiCAL BehAviouR

Fig. 21 shows the results o asking about activitiesspecically designed to tackle unethical behaviour. Theseare also common, though slightly less so. Also, they aremuch more common in larger organisations.

Fgr 21: practcs rmtng tcal bar

These practices were associated with lower requencies odysunctional behaviours to a slightly greater extent thanother groups o practices in the survey, suggesting thatthey may be particularly helpul.

Unortunately, the survey did not ask what types ounethical behaviour were addressed by these controls.Fraud, thet, bribery, and alse accounting seem obvious;unair discrimination perhaps also. But what about thedysunctional, requently dishonest, behaviours exploredearlier in this survey? Is deliberately biased orecasting amatter to take to the condential whistle-blowing hotline?

7. Cntrllng ntcal and llgal bar

0% 20% 40% 60% 80% 100%

Ask for explanations of variances against

budget

Design financial procedures and controls

Personally scrutinise expense claims for

items that should not have been claimed

Search for and examine patterns of

transactions that may indicate other types

of fraud

Personally scrutinise expenditures for

amounts that might be bribes

Search for and examine patterns of

transactions that may indicate money

laundering

Yes No Don't know

0% 20% 40% 60% 80% 100%

A disciplinary process for dealing with

unethical behaviour

Corporate culture evaluation to help ensure

appropriate behaviour and avoid unethical

or dysfunctional actions

Training on how to act when unethical or

illegal behaviour is detected or suspected

An official listener and advisor for staff with

ethical concerns

Confidential whistle-blowing hotline

Yes No Don't know


28/36

26

So ar this report has analysed the ndings o eachquestion, considering technical areas in isolation. Thissection considers observations across all technical areas,including some common themes.

pRevALeNCe oF DySFuNCTioNAL BehAviouRS

There were our groups o questions about dysunctionalbehaviours, most o which were dishonest though somewere not. In each group there were some respondents whoindicated that none o the behaviours in the group everhappen in their chosen organisation.

But what about all groups o behaviours taken together?How many respondents reported that none o thedysunctional behaviours ever happen? The answer iseight, out o the 1,127 respondents who answered all therelevant questions. At the opposite extreme two otherrespondents reported that all the behaviours happen

always in their chosen organisation. These respondentswere an external auditor and a nancial controller.

The survey asked about the requency o 14 dysunctionalbehaviours. Answers were converted into an overalldysunctional behaviour score by allocating one point orsometimes, two or usually and so on. Fig. 22 shows thedistribution o these total scores, including onlyrespondents who answered all relevant questions.

Fgr 22: Dstrbtn ttal dsnctnal barscrs

The UK and Ireland had noticeably lower dysunctionalbehaviour scores than all other main countries and theRest o the World.

uSe oF GooD pRACTiCeS

The survey asked about the use o 39 good practices, owhich 28 were within core management activities and theremainder were other types o control. The total number othese practices in use was calculated or each respondentand the distribution o those scores is shown in Fig. 23,which includes only respondents who answered all relevantquestions.

Fgr 23: Dstrbtn t nmbr gd ractcs ns

The extent to which practices were in use was roughlysimilar in all parts o the world, but the extent to whichpeople thought more o the practices should be used washighest in Malaysia, Canada, and the Rest o the World.

The extent to which respondents thought the practicesshould be used more was related to their role, but notstrongly. People in roles that involved producingaccounting outputs (eg nancial accountant, managementaccountant) were only slightly less interested in doingmore than people in other roles.

8. Cnnctns

0

10

20

30

40

50

60

70

80

90

100

0 3 6 9 12 15 18 21 24 27 30 33 36 39 42

Total dysfunctional behaviour score

Respondents

0

10

20

30

40

50

60

0 2 4 6 810

12

14

16

18

20

22

24

26

28

30

32

34

36

38

Number of good practices in use

Respondents


29/36



8. CONNECTIONS 27

iMpACT oF GooD pRACTiCeS

Organisations using higher numbers o good practices didhave lower scores or overall dysunctional behaviour, butthe relationship is not linear. Fig. 24 shows the averagetotal dysunctional behaviour scores when respondentorganisations were split into two equal-sized groups on thebasis o the number o good practices in use.

Fgr 24: T mact gd ractcs

With each group o practices and each group odysunctional behaviours a similar pattern can be seen. Asthe number o practices used increases, the dysunctionalbehaviour score reduces, but when the number opractices used is at or near the maximum possible thedysunctional behaviour score jumps up. Without thisanomalous rise the overall impact o good practices wouldbe much clearer.

Use o each good practice is individually associated withlower overall dysunctional behaviour scores or allpractices except or:

use o Monte Carlo simulation in decision support

use o Monte Carlo simulation in regular nancialorecasting

showing risk-adjusted perormance measures inmanagement accounts, and

showing capital gearing in management accounts(though the association is very weak).

This is another anomaly, because these are technicallystrong practices and ought to be helpul rather thanhaving a pervasive negative eect on behaviour.

What is the reason or these two odd patterns? Fig. 25shows our variables together that may be a clue to theexplanation. The top line shows how the dysunctionalbehaviour score drops as the number o good practicesused increases, but at 36 practices in use the trendreverses. This is simply a more detailed view o theanomaly already mentioned. (Averages o small groupshave been eliminated to show the main trend clearly.)

The line below it shows the proportion o respondentssaying that risk-adjusted perormance measures are usedin their chosen organisation in management accounts.Below that is a line showing the proportion who say thatMonte Carlo simulation is used or regular nancialorecasting. (Use o Monte Carlo simulation in decisionsupport is very similar indeed, so not shown.) The lowestline shows the proportion o respondents whose job role isrisk manager.

Lower half

Higher half

Total good

practices in use

Average dysfunctional behaviours score


30/36

28

Fgr 25: Dtald analss t mact gd ractcs n dsnctnal bar

iNTeReST iN DoiNG MoRe

Respondents seem to think that using the good practicesshould reduce dysunctional behaviour. The number ogood practices that respondents thought should be usedmore in their chosen organisation was strongly related tothe requency o dysunctional behaviours (Fig.26). In theanalysis there are too ew respondents with very high

dysunctional behaviour scores to calculate reliableaverages, but these unreliable averages (not shown) tendto continue the rising trend. Furthermore, the relationshipis ar too steep to be explained simply as meaning thatorganisations with ew practices in place are moreinterested in adopting more practices.

The general economic climate has orced theorganisation to strengthen the role o the nance unctionin risk management as the risks themselves have

proportionately increased.Public sector, England, UK

These are methods one would expect to see more otenused in nancial services and where a specialist risk-management team exists. The total dysunctionalbehaviours score or nancial services organisations isabout the same as or other corporates, so the sector isunlikely to be the explanation.

Could it be that the organisations whose higher scores or

dysunctional behaviour have caused the two anomaliesare also organisations with aseparate risk managementunction? Unortunately, this was not something askedabout directly in the survey so we cannot be certain.Nonetheless, it does seem to suggest that either (1) whenrisk management is not integrated it is less eective incountering dysunctional behaviours, or (2) when riskmanagement is not done by accountants they see it asless eective in countering dysunctional behaviours.

There is also a risk and compliance unction in ourorganisation, leaving the nance unction mainly ornancial control purposes.Financial services, England, UK

0

2

4

6

8

10

12

14

16

18

20

12 14 16 18 20 22 24 26 28 30 32 34 36 38

Good practices used

Averagedysfunctionalbehaviour

score

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ave. dysfunction behaviour score

% using MC simulation in forecasts

% of risk managers

% using risk adj. perf. measures


31/36



8. CONNECTIONS 29

Fgr 26: intrst n sng gd ractcs mr as anctn dsnctnal bar

BoARD-LeveL AWAReNeSS

In general the survey shows that most board memberswho responded were well aware o the dysunctionalbehaviours, but still a consistent nding was that they wereless aware o these than others urther downorganisations. Non-executives, in particular, seemed to bemost likely to think the behaviours did not happen, thoughthere were only 26 non-executives among the surveyrespondents.

Size, pReSSuRe, AND DySFuNCTioNAL BehAviouR

An obvious pair o hypotheses to explore is thatdysunctional behaviour is more common in largerorganisations and more common when there is highnancial pressure on leaders.

Unortunately, the leaders o larger organisations wereseen as eeling more nancial pressure, making morecomplicated analysis necessary to separate the eects othese two actors. When this was done it emerged that sizeis not linked to dysunctional behaviour, but pressure is,though not strongly. The average overall dysunctional

behaviour score where pressure was intense was almost17% higher than where pressure was only moderate. (Tooew respondents reported low pressure or a reliablecomparison.)

What we might think o as big company politics isperhaps just human behaviour observable in groups o anysize. I you want to escape big company politics you haveto work or yoursel.

Furthermore, although the nancial pressure elt byleaders does seem to increase reported dysunctionalbehaviour, it is ar rom the main driver; it just makes apoor situation a bit worse.

Size AND GooD pRACTiCeS

Another plausible hypothesis is that we should expectmore good practices or integrated risk management inlarger organisations, because they need them (due to thehigher nancial pressure) and because they have theresources to use those practices.

In act, organisation size, as measured by number o

employees, does not link strongly to good practice scoreseither, except or the elements o ethics programmes,which seem to be more common in larger organisations(Fig. 27).

Fgr 27: organsatn s and gd ractc scrs

Some o the highest scores or good risk managementpractices are rom very small organisations. Thestereotype o small and medium-sized enterprises asunsophisticated and uninterested in intelligentmanagement techniques is at best an oversimplication.

Presumably some, at least, are small groups o highlyeducated people, perhaps making decisions about largeamounts o wealth.

0

2

4

6

8

10

12

14

16

18

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28

Dysfunctional behaviour score

AverageDoMorescore

0

1

2

3

4

5

6

7

09

104

9

502

49

250

1,00

0

Ove

r1,000

Employees

Av

e.practicesscores

Mgmt Accounts

Forecasts

Decisions

Fin. Compliance

Ethics


32/36

30

An invitation to participate in this survey was sent toaround 100,000 ACCA members worldwide and over2,000 generously responded. They come rom manycountries and work in many roles.

JoB RoLeS

The job roles o respondents are shown in Fig. 28. With theexception o chairmen, enough representatives o each rolewere available or useul conclusions to be drawn.

Fgr 28: Jb rls rsndnts

For some analyses, the job roles were put into groups onthe basis o similarity.

Type oF oRGANiSATioN

In the interests o collecting good-quality data,respondents were instructed to choose to answer or anorganisation they knew well. This did not have to be a legalentity. Fig. 29 shows the types o organisation they chose.

Fgr 29: Ts rgansatn

Size oF oRGANiSATioN

There are many ways to characterise the size o anorganisation. Since the survey questions ocused on howpeople work together, number o employees was selectedas the measure o size. Fig. 30 shows the distribution osize.

Fgr 30: S rgansatns

9. Sr rsndnts and rgansatns

0% 5% 10% 15% 20% 25% 30% 35%

part of a legal entity

(e.g. department,

division)

an independent legal

entity

a legal entity within a

group or network

a group of legal

entities

0% 5% 10% 15% 20% 25% 30% 35%

09 employees

1049 employees

50249 employees

2501,000

employees

Over 1,000

employees

267

118

177

158

76

188

380

26

33

11

38

230

414

0 100 200 300 400 500

Finance director or CFO

CEO

Chairman

Other executive board director or equivalent

Non-executive board director or equivalent

Financial controller

Financial accountant

Management accountant

Risk manager

Internal auditor

External auditor

Consultant

Other (please specify)


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9. SURVEY RESPONDENTS AND ORGANISATIONS 31

SeCToR

Most respondents chose to answer or an organisation inthe corporate sector, but other sectors were wellrepresented, as shown in Fig. 31.

Fgr 31: organsatns b sctr

iNTeRNATioNAL CoveRAGe

Respondents came rom 109 countries. The countriesproviding 50 or more respondents are shown individuallyin Fig. 32, with all others in the largest group, Rest o theworld.

Fgr 32: organsatns b cntr

FiNANCiAL pReSSuRe

Chosen organisations varied in how much nancialpressure respondents believed was experienced by theirleaders. Fig 33 shows the intensity o that nancialpressure. Financial pressure on leaders was thoughthighest in Ireland and the UK, but lowest in Hong KongSAR.

Fgr 33: intnst fnancal rssr

Fig. 34 shows the main reason or that nancial pressure.

Fgr 34: Rasns r fnancal rssr

Real pressure caused by alling expectations, losses/decits, low liquidity, or high gearing was only slightlymore common at 48% collectively than pressure

generated by high expectations and high pressure to meetexpectations, at a combined 43%.

0% 10% 20% 30% 40% 50% 60%

Corporate sector

Financial services

Public sector

Public practice /

accounting firm

Not-for-profit

0% 5% 10% 15% 20% 25% 30% 35%

Rest of the world

United Kingdom

Ireland, Republic of

Malaysia

Hong Kong SAR

Singapore

China, People's Republic of

USA

Australia

Canada

0% 10% 20% 30% 40% 50%

intense

strong

moderate

low

0% 5% 10% 15% 20% 25% 30%

high pressure to meet expectations (e.g. to

get bonuses)

falling expectations for future growth or

profits

high expectations

losses / deficits

other (please specify)

low liquidity

high gearing


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32

The survey results paint a coherent picture. Respondentsattributed organisational ailure to poor decisions drivenby bias and, to some extent, sel-interest. They recognisedthese behaviours as common in their own organisations.They had a clear view that the contribution o accountantsto the culture o decision making should encouragehonesty and objectivity, but not baseless conviction,consensus, and advocacy over evidence.

They understood that it is better, rom this point o view, toexplain a range o possible outcomes rom a course oaction than to detail just the most likely outcome. This isthe essence o risk management.

There was strong support or a wide range o practicesthat accountants use and that should improvemanagement o risk in core management activities. Thesepractices are oten in use already and respondents mostlythought they should be used more.

A survey such as this cannot prove that good practicescause real improvements in behaviour and resultingoutcomes. Most respondents will have been giving answersabout their own activities and naturally will have a positiveview o the contribution they make. In addition, theanalysis shows statistical correlations but not particularcausal mechanisms.

Nonetheless, the statistical links are encouraging.

Respondents thought that reporting process qualitydoes indeed provide a better understanding o processquality problems.

There is an un-dramatic but clear link between usinggood practices or decision support and helpulimpacts by accountants on decision making on itemsspecically related to managing risk.

Respondents who reported higher requencies odysunctional behaviours were also more likely to thinkthat more good practices should be used. Thissuggests that they do see such practices as being atleast part o the antidote to the dysunctionalbehaviours.

Overall, the more good practices are used the lower the

scores or dysunctional behaviours. However, thisconnection is weakened by a correlation we do notunderstand between particularly sophisticated riskmanagement practices and more requentdysunctional behaviours. Very possibly there is also atendency to try to address bad behaviour by usingmore o the good practices, which would also cloud thestatistical connections.

Overall, this all indicates that accountants are alreadyplaying a role in successully practising risk managementin core management activities, but there is still a need orthem to do more o the same and they think they should.

The reality o risk is that it has to be managed in day-to-day management activities, especially in big decisions.Accountants have an important role to play.

10. Cnclsn


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REFERENCES 33

COSO (The Committee o Sponsoring Organizations o theTreadway Commission) (1992), Internal Control IntegratedFramework(AICPA).

COSO (1999), Fraudulent Financial Reporting: 19871997,An Analysis o U.S. Public Companies (AICPA).

COSO (2004), Enterprise Risk Management IntegratedFramework(AICPA).

COSO (2007), Fraudulent Financial Reporting: 19982007,An Analysis o U.S. Public Companies (AICPA).

Flyvbjerg, B., Bruzelius, N. and Rothengatter, W. (2003),Megaprojects and Risk: An Anatomy o Ambition(Cambridge: Cambridge University Press).

Hope, J. and Fraser, R. (2003), Beyond Budgeting(Boston:Harvard Business School Publishing).

Kahneman, D., Slovic, P. and Tversky, A. (1982),JudgementUnder Uncertainty: Heuristics and Biases (Cambridge:Cambridge University Press).

Leitch, M. (2008), Progressive Risk Control Integrated withStrategy and Perormance Management [online text],, accessed 3 January 2012.

Leitch, M. (2011a), Results o a Survey on Project RiskManagement [online text], ,accessed 3 January 2012.

Leitch, M. (2011b), Results o a Survey on Integrated RiskManagement [online text], ,accessed 3 January 2012.

Marginson, D., Ogden, S. and Frow, N. (2006), Budgetingand Innovation (London: CIMA).

McNulty, T., Ormrod, P. and Florackis, C. (orthcoming),Structural and Processual Inuences on the Risk Behaviouro Boards, ACCA research report no 128 (London: CAET).

Transparency International (2010), CorruptionsPerceptions Index 2010 Results [online text], , accessed 3 January 2012.

Rrncs
http://www.internalcontrolsdesign.co.uk/progressive/niversion.shtmlhttp://www.internalcontrolsdesign.co.uk/progressive/niversion.shtmlhttp://www.workinginuncertainty.co.uk/study_pram_report.shtmlhttp://www.workinginuncertainty.co.uk/study_pram_report.shtmlhttp://www.transparency.org/policy_research/surveys_indices/cpi/2010/resultshttp://www.transparency.org/policy_research/surveys_indices/cpi/2010/resultshttp://www.transparency.org/policy_research/surveys_indices/cpi/2010/resultshttp://www.transparency.org/policy_research/surveys_indices/cpi/2010/resultshttp://www.transparency.org/policy_research/surveys_indices/cpi/2010/resultshttp://www.transparency.org/policy_research/surveys_indices/cpi/2010/resultshttp://www.workinginuncertainty.co.uk/study_pram_report.shtmlhttp://www.workinginuncertainty.co.uk/study_pram_report.shtmlhttp://www.internalcontrolsdesign.co.uk/progressive/niversion.shtmlhttp://www.internalcontrolsdesign.co.uk/progressive/niversion.shtml


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