Don’t ignore the lessons of the GFC
26 March 2010
What have we learned from the global financial crisis? After chairing a panel of leading directors and accountants at the CPA Business Outlook 2010 conference yesterday, I jotted down ten lessons from the GFC.
– In your risk planning, don’t ignore scenarios that seem outrageous – such as a 70 per cent fall in copper prices if you are a miner. Never assume they will not happen. In the current environment, the scenario of a break down in China can’t be ignored irrespective of its likelihood.
– Many companies isolated particular risks but did not take into account the contagion effect that would flow from one event. And so a fall in revenues can affect loan covenants and the ability to raise equity.
– The director community is divided over whether, say, an engineer or marketer on a board needs to study the detail of accounts that have been ticked by the CEO, the CFO and the auditor. This is at the heart of the case against Centro non-executive directors.
– When directors don’t ask questions about the detail in the accounts it usually means they have not studied them.
– Boards must take a keen interest in who is appointed as chief financial officer and make sure the internal auditor reports to the board’s audit committee and not the CEO.
– Over regulation – like the Sarbanes-Oxley US rules – lead to excessive reliance on box ticking by boards and insufficient examination of the detail, scenarios and strategies. This contributed to the US problems. To some extent, the Sarbanes Oxley disaster spread to Australia where there are now around 600 matters where directors can be charged. In turn, this requires box ticking
– Enormous effort is put into the detail of annual reports but few actually read them and the accounting standard applied to accounts are different from the accounts used by institutions. This can cause problems.
– Most companies could report their results within two weeks of balance date and should do so. They might not have all the detail but they would keep the market informed.
– Every director should isolate the top four risks their company faces and should make a realistic assessment of their risk appetite.
– Many smaller and medium sized companies have difficulty attracting skills to their board.
That’s a pretty big list to keep front-of-mind going forward, but that’s the challenge directors face. Should another crisis hit, the lessons learned from the GFC will make it much harder for directors to say they ‘couldn’t see it coming’.
Full article here