The ERM Current™

Last week, the Government Accountability Office (“GAO”) released the results of its annual audit of the Securities and Exchange Commission (“SEC”).  In the audit report, the GAO identified six significant deficiencies in the SEC’s internal control over financial reporting.  The collection of these deficiencies amounted to a material weakness in the SEC’s internal control over financial reporting.  For those who are not familiar with the term “material weakness”, it represents a reportable event that must be disclosed by U.S. public companies as a result of the Sarbanes-Oxley Act of 2002.  Here is what the GAO detailed in their report.

During this year’s audit, we identified six significant deficiencies that collectively represent a material weakness in SEC’s internal control over financial reporting. The significant deficiencies involve SEC’s internal control over (1) information security, (2) financial reporting process, (3) fund balance with Treasury, (4) registrant deposits, (5) budgetary resources, and (6) risk assessment and monitoring processes. These internal control weaknesses give rise to significant management challenges that have reduced assurance that data processed by SEC’s information systems are reliable and appropriately protected; impaired management’s ability to prepare its financial statements without extensive compensating manual procedures; and resulted in unsupported entries and errors in the general ledger.

As the primary enforcement agency for accurate financial reporting by U.S. public companies, the SEC should be leading by example in creating processes that provide reliable financial information.  Sadly, this is not the case and has not been for the past several years.  Let’s hope SEC Chairwoman Mary Shapiro does a better job than former SEC Chairman Christopher Cox and can effect the necessary change within the agency.

Yesterday, JP Morgan Chase CEO Jamie Dimon shared his views on the financial crisis with Charlie Rose at the Securities Industry and Financial Markets Association annual meeting in New York.  In the interview, Mr. Dimon reflected on risk management approaches taken by many financial institutions leading up to the crisis.  He stated, “You should never rely solely on VaR, Basel I or Basel II for risk management practices.  If you did, it was a mistake.”   He went on to explain that sound risk management practices require both quantitative analysis and management judgment to be effective.  He also noted that there are legitimate failures in the application of the Basel II Capital Accord that left many institutions with insufficient capital positions.   His full remarks can be viewed in the video web link below.

Jamie Dimon speaks with Charlie Rose at SIFMA Annual Meeting

The Wall Street Journal reported last week that Treasury Secretary Timothy Geithner is apparently fed up with the infighting amongst the various federal agencies vying for turf in the proposed financial regulatory reform package. Here is a brief video detailing the brouhaha.

Last week, the Governor of the Bank of England, Mr. Mervyn King, delivered a speech to a group of international bankers about how we can emerge from the current economic crisis successfully.  In his view, regulatory reform should be both “simple and robust” to be effective.  Here’s a brief excerpt from his speech.

A lesson of history is that few generations have been able to avoid a repetition of earlier banking crises. The essential problem is that we can no more bind our successors than our predecessors were able to bind us. Rare events, even when dramatic at the time, lose their power to shape policy as memory recedes. The role of institutions is to retain a collective memory and to resist the temptations of the present. That is one of the most important roles of a central bank. It is accepted as such in the domain of monetary policy. And there is an equivalent role in financial stability.

The introduction of simple and robust policy tools into a regulatory regime based on the exercise of constrained discretion would make it easier to resist overly rapid expansion of financial institutions. In particular, the authorities should maintain a clear focus on the issues that matter when the worst occurs – liquidity and leverage. It should be intrusive, in the sense of knowing what is going on, but not bureaucratic. A system in which it is easier for a large bank to expand and then destroy its balance sheet than for an individual to open a bank account has lost focus. That is not the fault of regulators, but a reflection of the pressures and incentives they have faced – from all of us.

The same can be said for a company’s enterprise risk management program – a simple, yet robust approach is required to be both successful and sustainable.  Wheelhouse Advisors can help you build an effective ERM program to meet these objectives.  Visit www.WheelhouseAdvisors.com to learn more.

Welcome to The ERM Current™ Blog.  This blog is an added feature to the monthly publication of The ERM Current™ dedicated to providing the latest updates and current trends in Enterprise Risk Management & Control.  We welcome your comments and participation in this forum. For more information, please visit www.WheelhouseAdvisors.com.