Re-Imagining the Organization 2008 Financial Management Institute of Canada – Manitoba Chapter Professional Development Day Presented by: David R. Hancox, CIA, CGFM Co-Author: Government Performance Audit in Action Faculty: Siena College and USDA Graduate School, Washington DC Director of Audits: NYS Comptroller’s Office

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 2 Kudos to Tom Peters Re-imagine: Making the Compelling Case for Radical Enterprise Change … and then Doing Something about It! The Audit Profession is failing and not meeting the public’s expectation – dramatic change is needed All we do is tinker – Incrementalism is the death of innovation Nick Negroponte

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 3 Peters was inspired to write Re-Imagine! because he is "madder than hell." He rants about organizational barriers and the egos of "petty tyrants" thwarting the good intentions of enterprising people in numerous ways. He sets out to reinstall the will, passion and know-how into every executive and employee who is ready to take on a renewed sense of individual responsibility.

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 4 “If you don’t like change, you’re going to like irrelevance even less.” —General Eric Shinseki, Chief of Staff. U. S. Army

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 5 “Good management was the most powerful reason [leading firms] failed to stay atop their industries. Precisely because these firms listened to their customers, invested aggressively in technologies that would provide their customers more and better products of the sort they wanted, and because they carefully studied market trends and systematically allocated investment capital to innovations that promised the best returns, they lost their positions of leadership.” Clayton Christensen, The Innovator’s Dilemma

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 6 PASSION! ENTHUSIASM! Passion & Enthusiasm have to be at the Head Table

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 7 Static/Imitative Integrity. Quality. Excellence. Continuous Improvement. Superior Service (Exceeds Expectations.) Completely Satisfactory Transaction. Smooth Evolution. Market Share. Dynamic/Different Dramatic Difference! Disruptive! Insanely Great! (Quality++++) Life-(Industry-)changing Experience! Game-changing! WOW! Surprise! Delight! Breathtaking! Punctuated Equilibrium! Market Creation! The Auditors Today Where the Auditors should be today!

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 8 “The ‘surplus society’ has a surplus of similar companies, employing similar people, with similar educational backgrounds, coming up with similar ideas, producing similar things, with similar prices and similar quality.” Kjell Nordström and Jonas Ridderstråle, Funky Business

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 9 Experience: “Rebel Lifestyle!” “What we sell is the ability for a 43-year-old accountant to dress in black leather, ride through small towns and have people be afraid of him.” Harley exec, quoted in Results-Based Leadership

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 10 “This is an essay about what it takes to create and sell something remarkable. It is a plea for originality, passion, guts and daring. You can’t be remarkable by following someone else who’s remarkable. One way to figure out a theory is to look at what’s working in the real world and determine what the successes have in common. But what could the Four Seasons and Motel 6 possibly have in common? Or Neiman- Marcus and Wal*Mart? Or Nokia (bringing out new hardware every 30 days or so) and Nintendo (marketing the same Game Boy 14 years in a row)? It’s like trying to drive looking in the rearview mirror. The thing that all these companies have in common is that they have nothing in common. They are outliers. They’re on the fringes. Superfast or superslow. Very exclusive or very cheap. Extremely big or extremely small. The reason it’s so hard to follow the leader is this: The leader is the leader precisely because he did something remarkable. And that remarkable thing is now taken—so it’s no longer remarkable when you decide to do it.” —Seth Godin, Fast Company/

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 11 “The Bottleneck is at the Top of the Bottle” “Where are you likely to find people with the least diversity of experience, the largest investment in the past, and the greatest reverence for industry dogma? At the top!” — Gary Hamel/“Strategy or Revolution”/Harvard Business Review

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 12 Innovation! NOT Imitation

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 13 I Borrowed Your Watch: Here’s What Time It Is Make a Difference Add Exceptional Value Enduring Relationships with others who Have the Potential to Be Great Focus/Strong Sectoral Approach Dramatic Difference Research Roots Research Investment Unique Analytic Process Highly Disciplined Fundamental Intrinsic Value Analysis Partnership Culture Mutual Support Enthusiasm Make a Difference Visibility/Tell Story/Brand

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 14 Credo 1. Ready. Fire! Aim. 2. If it ain’t broke... Break it! 3. Hire crazies. 4. Ask dumb questions. 5. Pursue failure. 6. Lead, follow... or get out of the way! 7. Spread confusion. 8. Ditch your office. 9. Read odd stuff. 10. Avoid moderation!

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 15 “Beware of the tyranny of making Small Changes to Small Things. Rather, make Big Changes to Big Things.” —Roger Enrico, former Chairman, PepsiCo

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 16 “ Ninety percent of what we call ‘management’ consists of making it difficult for people to get things done.” – Peter Drucker

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 17 Organizing Genius / Warren Bennis and Patricia Ward Biederman “Groups become great only when everyone in them, leaders and members alike, is free to do his or her absolute best.” “The best thing a leader can do for a Great Group is to allow its members to discover their greatness.”

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 18 Insist on Speed!

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 19 Dispense Enthusiasm!

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 20 “You must be the change you wish to see in the world.” Gandhi

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 21 “You can’t behave in a calm, rational manner. You’ve got to be out there on the lunatic fringe.” — Jack Welch

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 22 What We Need to Do To the Auditing Profession The auditing profession is under siege today We have to get back to basics and assure we meet the public’s expectations We need to lead our staff in a new direction

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 23 Agenda Define five major challenges and the cause Propose a focus that will enable auditors to meet the public’s expectations

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 24 Challenges to the Auditing Profession 1.Not using due professional care 2.Not properly assessing internal controls 3.Not obtaining sufficient, competent evidence 4.Not obtaining sufficient knowledge about the area being audited – (inherent risk) 5.Not developing an appropriate level of professional skepticism

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 25 Not using due professional care The complexity of today’s organizations creates challenges in understanding what to do Technology drives most organizations and it’s constantly changing – it’s hard for auditors to keep up-to-date Distance between audit locations and main offices can create supervision challenges

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 26 Due Professional Care Internal Controls –Do we really assess the five components of COSO? Control Environment Risk Assessment Control Activities Information & Communication Monitoring

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 27 Due Professional Care Evidence –Do we really obtain sufficient, competent and relevant evidence? Paramlat Inherent Risk –Do we fully understand the risks to the area we are auditing – do we have enough knowledge? Worldcom

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 28 Due Professional Care Professional Skepticism –Do we have a questioning mind and make a critical assessment of evidence? –Are we willing to suspend judgment about the honesty of agency management? –Do we use diligence which a prudent and competent person would exercise under a given set of circumstances?

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 29 Not properly assessing internal controls Most large organizational frauds can be traced to the control environment –Managements, attitude, philosophy, operating style – the ethics and integrity of people in the organization – the competence of people. It is the foundation of all other control components Auditors shy away from this component because it is more subjective

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 30 Not obtaining sufficient, competent evidence Documentary evidence has limited value today because of technology –Color copiers, color printers, Internet access to corporate logos, scanners and software enable anyone to duplicate and alter original documents

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 31 Not obtaining sufficient knowledge Too many auditors are desk-bound The desk is a dangerous place from which to view the world Understanding inherent risk requires knowledge of programs, functions and activities

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 32 Not being professionally skeptic Too often auditors accept at face value what is told to them Challenging management is not in keeping with good relationship management – it’s not what your mother taught you

Financial Management Institute Copyright 2008 David R. Hancox, CIA, CGFM 33 Summary Doing a good audit is hard work Much of what we are asked to do, requires us to challenge others and to not accept at face value what we are told or evidence we review We need to step up to the plate and accept that some parts of our work are subjective and depends on our professional judgment