We use the Kalashknikov as a metaphor to demonstrate the power of corporate risk management. We need to question how more effective our risk firepower would be if we could deploy the right firepower upon the company’s leaders.
Executives and CEOs have been fortunate, up to now, that shareholders have been patient. AGMs have been peaceful, but it is only a question of time before avaricious CEOs suffer the full force of fate. Although HLS was an unpleasant case to observe, it does demonstrate that investors have not even come close to the full extent of venting their spleen.
This has clouded the corporate bottom line in many cases. So, we have to look through the fog. One thing we need to change is auditors’ attitude and professional execution of the job. They must pay more attention and exercise own professional judgement to prevent or detect fraud. All professions are waking up to the dangers of fraud. Sleeping through the investment crises, or passing the buck is not a risk option anymore.
Professional exams now check whether students have grasped the value of corporate ethics. The Association of Investment and Management Research (AIMR) formulate the Chartered Financial Analyst (CFA) exams. Whereas professional exams may have included little on ethics before, the CFA curriculum has changed with time. The Level I 2003 exam has a 15 % topic
weight for Ethics and Professional Standards, and a 30 % weight for Asset Valuation. There is real hope that these can safeguard against some of the flagrant corporate excesses committed recently.
Graduates and auditors are also more familiar with IT systems and technology. They understand the principles of IT operations, including off-site storage and backup facilities. This means that they are able to consult with others to rebuild an incriminating audit trail of evidence against directors who have committed serious corporate errors.16 One infamous example was the Enron–Andersen shredding of vital documents. Another case was New York attorney Eliot Spitzer successful action against Merrill Lynch and CSFB for their part in “ramping” worthless dot-com shares during the TMT craze. All these are possible with technology to reconstruct shredded statements or deleted emails.
The successful litigation against Merrill Lynch and CSFB shows that punitive action can be effectively taken despite attempts to obstruct it, or to destroy vital evidence. A business tradition was to take risk as an inevitable part of life, callously saying: “Leave losses to be recovered from insurance or law-suits.”
This does not add to corporate profits, but detracts from it, once the final bills have been calculated. The litigation against the culprits of the Barings and other banking and fund fiascos still continues, and there seems little net compensation for the losers, after accountants and lawyers have deducted their fees. Insurers are not mugs, and they are reluctant to pay for someone else’s errors, especially when they stem from a risk-seeking or risk-ignorant attitude.