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Great Insight into Fraud Finders

Who are the Whistle Blowers

(see: http://faculty.chicagogsb.edu/luigi.zingales/research/PSpapers/whistle.pdf )

(also thanks to Strategy + Business magazine for alerting us to this research)

Who finds the fraud in businesses today? The SEC? Not if you read the research by Alexander Dyck, Luigi Zingales and Adair Morse. They looked at 230 cases of corporate fraud involving more that $750 million in assets. Their report is a great read and it covers a number of issues, findings and recommendations in its very accessible report body (approx. 44 pages). I highly recommend this as a must read.

Here’s a great quote from this report:

“We find that no specific actor dominates the revelation of fraud. Even using the

most comprehensive and generous interpretation, shortsellers and equity holders revealed the fraud in only 9 percent of the cases. Financial analysts and auditors do a little better (each accounting for 14 percent of the cases), but they hardly dominate the scene. The Securities and Exchange Commission (SEC) accounts for only 6 percent of detected frauds by external actors. More surprising is the key role played by actors who lack a direct role in investment markets, such as the the (sic) media (14 percent), non-financial market regulators (16 percent), and employees (19 percent).

As interesting as who detects corporate fraud are who did not. Stock exchange

regulators, commercial banks, and underwriters are notable for their complete absence. Also, private security litigation plays a minimal role (less than 2 percent) in the detection of fraud. This does not mean that it is useless to prevent fraud, since it could be the mechanism through which people committing fraud are forced to pay for their mistakes. But it does suggest that this mechanism cannot work alone. It needs another (vast) set of institutions to help bring fraud to light.”

Also interesting was the time required for different groups to detect the fraud.  Plaintiff lawyers took 31.4 months while the SEC took 21.2 months, employees took 20.9 months and financial analysts/short sellers only 9.1 months.

Information like this point out that the current wave of GRC (governance, regulation and compliance) technology and legislation is either unnecessary or may not produce the desired effect governments are hoping for. Certainly, governments may claim that SarbOx and its relatives are needed to give the SEC a better success rate but the fact that so many other constituencies are identifying fraud (and faster, too) than the SEC may suggest that better answers lie elsewhere.

I’d like to see more automation re: auditing and how major auditing firms re-invent their businesses. We should expect auditors to have real-time access into client information systems and using tools that automatically highlight questionable transactions for immediate review. The idea of an annual audit seems so out of place in this modern age. An annual review of the books may have made sense in Luca Pacioli’s time (i.e., 1493 AD) but not now with the technology, analytics and other capabilities available to auditors.

Trouble on the Project Mgmt Front?

Project Headaches – More to Come

Check out the 1/1/2008 issue of Computerworld (“Projects Get More Troublesome”).

Computerworld does an annual Vital Signs survey of IT managers. The number one management challenge identified by respondents is now “Managing Projects”. This is up from its number three ranking last year.

What’s contributing to the increased project complexity? Answers provided in this article included:

-          increased globalization of projects

-          fewer silo projects and more enterprise-wide initiatives

-          more geographically distributed projects

-          fewer/no people within business units to help with project specifications

Michael Krigman’s blog will likely zero in on this issue some more.

If this stat that Computerworld reported is true, then this could represent:

-          a boon for systems integrators and other consultants

-          an opportunity for independent consultants, particularly those with international backgrounds and expertise

-          new  growth  for project and program management training organizations

Personally, I’m not expecting any major sea change. Project management woes in IT have never fully been solved or may not ever go away completely as IT projects are not just technical problems to be solved. IT projects are political, economic, personal, social, geographic, power, organizational and emotional matters (to name a few). It takes exceptional skill to manage one successfully because a great project manager is adept at numerous skills. They have a high emotional IQ, are empathetic, are technically savvy, motivate others, are fiscally savvy, navigate corporate politics and possess excess political capital that must be expended from time to time to make the project a success. It doesn’t matter if you are certified project manager if you lack all of those soft side skills, political power, etc. You have to have it all to win in the world of big project management.

Successful project management is not about ticking and tying time sheets and comparing them to project PERT charts. It takes years of apprenticeship and the appropriate personality to become really successful. Sadly, some of the greatest project managers I’ve met have had to expend all of their political power to make a huge project succeed only to have to leave their employer in the end as they’ve either burned a few too many bridges or have overdrawn their personal goodwill in the effort to get the project finished.

I hold great project managers in awe and for good reason. These people are part coach, movie director, politician, fund-raiser, technician, therapist, negotiator and accountant. How many disciplines can you claim?

Book Review - 4 stars

Book Review: Business Consulting

The Economist developed a serious, substantial book on the consulting industry. Its no-nonsense title is: “Business Consulting” (ISBN  1 86197 702 6). This book is an exceptional assessment of the consulting industry from the late 1990s to 2005. Whether you work in a strategy consultancy, management consultancy, BPO firm or traditional systems integrator, you really should read this text.

Here’s one brief excerpt that particularly resonated with me:

“Everyone is a consultant these days, from sales people to beauticians, so what do we mean by “business consulting”? The more traditional “management consulting” is usually associated with one particular high-end style where the consultant’s role is to advise senior managers. But this style ignores the large proportion of consulting that is now involved in implementation: systems integration, outsourcing, and so on. These days, most consultants are expected to provide not just advice, but also solutions. If that is the case, what is it that distinguishes business consultants from all the other consultants out there? Why consultants, not contractors? The point is that business consultants are supposed to improve businesses: they are not hired to maintain the status quo but to change it. This might be changing a company’s strategy or revoking, even taking over, a process in order to transform it, but it does not include managing an existing process or taking over a function in order to deliver the same levels of service at a lower cost. Consultants should be defined less by what they do (offering advice, implementing systems, outsourcing processes) and more in terms of the changes they achieve.”

This is spot on. People who managed outsourced functions are not consultants. Technicians are often not consultants. This book goes to great depth in explaining how and why so many consulting firms changed direction in the last decade to pursue different kinds of work, use different kinds of workers and offer different kinds of careers to their service workers. They look at the cumulative impact of service firms going public, of changing workforce expectations, of new work technologies and more.

This book carefully dissects the consulting market of late. A great bit of discussion focuses on the changing nature of clients and how much shrewder they’ve become. When so many consultants were cut loose after the 2000 tech bubble meltdown, many of these went to work for clients and have become an integral part of current pricing negotiations. Gen Y (or Millennial) workers are also creating a strain on consultancies. Economic and other factors (e.g., tendency to be fast followers instead of thought leaders or innovators) are also explored extensively.

This book will be of lesser importance to those running service delivery groups within technology firms. But, the issues that are discussed will still be pertinent.

If you read this blog, you should read this book.