vonya global [the blog]

The Vonya Global Blog Has Moved

2012-01-06T11:52:00.000-06:00

We are delighted to announce that our Blog has moved and is now hosted on the Vonya Global corporate website (http://www.vonyaglobal.com). We would like to thank all of our loyal Blog followers, we appreciate your continued interest and support.

Come check us out!

Executive Compensation: Set a Clear Course

2011-11-17T11:53:00.001-06:00

Executive compensation has been filling the news media and creating a tremendous amount of public debate lately. One major question centers on pay for performance strategies versus pay practices in reality. In other words, at the end of the year did the executive pay strategy result in the desired performance and did it meet budgeted expectations. If not, what were the unintended consequences and what adjustments get made going forward.

Many say executive compensation is more art than science. A formula that works for one company will not work for another. And, a compensation formula based solely on a company’s income statement may not work at all.

At a high level there are three main principles that must be met in order for the compensation strategy to work.

The program must be achievable.
The program must be believable.
The program must create alignment within the management ranks.

If any of these fail, the compensation program will fail.

With the founding principles in place, the starting point has to be the company’s strategic plan. The primary assumption is that the Board and Executive Management fully support the strategic plan. A failure to support the plan will not only derail the compensation strategy, it will derail the entire business. Obviously a strategic plan can include a tremendous amount of initiatives. It is important to narrow the strategic plan down to the 3-5 most critical and measurable activities. These have to be things that the company and executive have control over. The instinct might be to want to include many metrics in the compensation program, but in reality if there are too many measures, nothing gets measured. So instead, narrow the focus and use compensation to drive towards the desired performance.

The last three important elements to consider before finalizing a plan is to make sure there is agreement on the appropriateness of the measures/metrics chosen, make sure the amount of pay is appropriate, and make sure the compensation plan is driving towards the desired performance.

Is there a need to include Internal Audit in something as strategic as executive compensation? Many readers are probably responding, No Way! Before committing to an answer I suggest you consider it this way. Internal Audit’s job is to help the Board and Executive Management identify and assess risk and then help them establish and evaluate a system of internal control to mitigate the risk. I’d submit there is no better independent sounding board than the Internal Audit Department. So, before publishing the compensation program bring in your risk and control expert, and maybe a few of those unintended consequences can be avoided.

This blog post was written by Steven Randall. Steve is a Managing Partner with Vonya Global, a premier provider of internal audit consulting services, and a Director of the Adler-Caris Foundation, a not-for-profit dedicated to raising funds for Alzheimer’s Disease research. If you would like more information about Vonya Global or if you have a questions for Steve, you may contact him through this blog, the company website, twitter, or his LinkedIn Profile.

Digital Knowledge - Is Your Board of Directors Keeping Up?

2011-10-20T14:50:00.003-05:00

[This article was contributed by Fay Feeney, CEO of Risk for Good]

Social media accounts for 22.5 percent of the time that Americans spend online, according to "State of the Media: The Social Media Report." This is compared with 9.8 percent for online games and 7.6 percent for e-mail. You can read more in the NY Times.

This is a voluntary opportunity for you to keep your board current and relevant. If you’re waiting for a regulatory push to get your boardroom thinking digitally, you may not be ready to take action and learn what is happening 24/7 on computers and mobile devices around the world.

Here are some statistics about digital connectivity to help you consider moving this up as a priority. Digital knowledge leads to opportunities for companies to grow, reach and help their customers, employees, investors and stakeholders. Are your business revenues connected to connectivity in Asia? Has digital connectivity impacted new patterns in:

Consumer and supply chain behavior?
Operating model innovations?
Security and transparency issues?

Connectivity in Asia
The growth in mobile Internet usage is outpacing the rest of the world:

45% of metro Chinese are online via a mobile device at least monthly, up 21% from 2010
11% of metro Indians access the mobile net monthly, up from just 1% in 2010.
Japan saw the biggest jump in mobile Internet usage: 57% of adults now have access, up 24% from last year.

So what now?
Are you challenging yourself to look beyond the status quo, to understand how changes are disrupting your business? Is your board doing the same or are they operating in the old twentieth-century mode? Your business is being challenged to expand communications, challenged to attend to shareholder concerns, challenged address issues of trust, challenged take on new technologies (cloud, social media) and much more. You should take the opportunity to push your board to think digitally. Doing so will allow you to succeed in, and meet the needs of, the twenty-first century.

This article is the second in a series contributed by Fay Feeney, CEO of Risk for Good. Risk for Good helps board chairs and lead directors navigate the disruption to their business from a social, mobile and global world.

Today’s minefields can cost your company: time, money and goodwill. Risk for Good works with your board to evaluate your exposure and leverage the opportunity from: social media, corporate social responsibility, sustainability, board composition, succession and the multitude of other areas where your board needs to manage emerging risk.

Modern boardrooms address these questions before others demand a “comply or explain” response. We use the quiet in our client’s boardroom to prepare thoughtful answers to today’s tough business questions.

If you are interested in contacting Ms. Feeney, you may do so through this blog or the Risk for Good website.

Boardroom Digital Literacy - R U Talking to Me?

2011-10-07T14:18:00.007-05:00

[This article was contributed by Fay Feeney, CEO of Risk for Good]

Boardroom protocol is being exposed every day on the internet. Does Rupert Murdoch really think we can't see beyond his prepared remarks to determine for ourselves the "tone at the top" coming from his boardroom?

No need for board activists to add to the conversation from the outside about boardroom happenings. Now we hear directly from the CEO. When Yahoo fired their CEO Carol Bartz, she shared the inside scoop using her iPad. We learned of her accusing Chairman Roy Bostock, of board mistreatment. In the same Fortune interview, she called her fellow directors “doofuses” and said they “f---ed me over.”

It may be surprising to see the boardroom portrayed like this in mainstream media, but imagine what happens when 100 million people on Twitter can now get involved in the conversation.

I know that many people in the boardroom are still on the sidelines about social media. What will it take to get your board ready to tackle their willingness to learn what is happening on the internet? Will it take seeing your company’s name in the news before you add digital literacy to your director’s education? I can see the incredulous look on the directors’ faces when the board is called on for their oversight of digital issues.

I can only imagine a board being characterized as:

“illiterate”: showing or marked by a lack of personal knowledge with the fundamentals of a particular field of knowledge.Or maybe a board will be portrayed as:

“ignorant”: Lacking knowledge, information, or awareness about something in particular: "ignorant of social media".
Worse yet is as a board leader to know that it is true. So I ask, when are you planning to get digital and social media on your agenda? Who is going to be responsible for taking action to get it on your fall board agenda? Whatever title you have in the boardroom (board chair or lead directors), you are setting the boardroom agenda. Are you waiting for your CEO, Corporate Secretary, Corporate Counsel, Audit Committee Chair to bring resources and spend budget to get this to happen for you and your board?

This article is the first in a series contributed by Fay Feeney, CEO of Risk for Good. Risk for Good helps board chairs and lead directors navigate the disruption to their business from a social, mobile and global world.

Today’s minefields can cost your company: time, money and goodwill. Risk for Good works with your board to evaluate your exposure and leverage the opportunity from: social media, corporate social responsibility, sustainability, board composition, succession and the multitude of other areas where your board needs to manage emerging risk.

Modern boardrooms address these questions before others demand a “comply or explain” response. We use the quiet in our client’s boardroom to prepare thoughtful answers to today’s tough business questions.

If you are interested in contacting Ms. Feeney, you may do so through this blog or the Risk for Good website.

Fraud Risk Management: Fraud Risk Has Been Rising And It's Likely to Continue

2011-09-15T15:18:00.002-05:00

We have released the final report on the effectiveness of corporate fraud risk management. The report is the result of a study which compiled opinions on the risk of fraud and the effectiveness of corporate fraud risk management. While the study participants almost universally agreed that the risk of fraud has increased during the economic downturn over the past 24 months, many believe that the risk will continue to rise over the next 24 months.

Some of the results include:
- Fraud risk will continue to rise over the next 24 months
- Highest fraud risk lies with suppliers
- Executives say highest fraud risk is in Asset Misappropriation (false billing schemes)
- Internal Auditors say highest fraud risk is in Asset Misappropriation (Expense Reports)
- Employee tip is the #1 way fraud is uncovered
- Code of Ethics is #1 Fraud Prevention strategy

It is well known that the risk of fraud is present in almost every business regardless of size, shape, and complexity. The risk could materialize itself in an employee, a vendor, a client, or in the boardroom. It could be “detrimental” by bleeding company assets or “beneficial” by artificially inflating company financial statements. These frauds could play out in scenarios that are quite varied, and be concealed by strategies that are sophisticated and complex. The report reveals some of the strategies corporations use to combat the risk of fraud.

The study compiled opinions of Executives and Internal Auditors from private, public, and not-for-profit organizations, spanning many industries on strategic planning for fraud prevention, detection, and deterrence. One of the goals of the study was to provide information that would allow companies to evaluate the investment in fraud risk management. This is the second study Vonya Global has conducted on this topic; the first was released in 2009. The study compiles opinions about risk management strategies employed to combat fraud.

To download a copy of the report please visit Vonya Global’s home page: www.vonyaglobal.com.

This blog post was written by Steven Randall. Steve is a Managing Partner with Vonya Global, a premier provider of internal audit consulting services. If you would like more information about Vonya Global or if you have a questions for Steve, you may him through this blog, the company website, twitter, or his LinkedIn Profile.

A Walk to the Pub... An Internal Auditor's Commitment to find a Cure

2011-08-26T08:46:00.000-05:00

The following article was written and contributed by a dear friend and Internal Audit Colleague. As he is nearing a milestone birthday, he is making a personal commitment to help those who suffer from ovarian cancer. Here is his story, please help him if you can:

September 2nd will be my forty-tenth birthday, so I've decided to take a walk to the pub for a pint of beer. Let me tell you why.....

Amanda heard the silent killer but didn't understand what it was saying. Trouble was, nor did some of her doctors.

My wife learnt that she had ovarian cancer in the spring of 2002. Abdominal pains; swollen stomach; unexplained infertility; this was what Amanda had heard from her body. "Gluten intolerence...irritable bowel syndrome...take these drugs" was what she heard in response from the medical community, until an investigative operation revealed the killer. But "silent"?

After a recurrence of the disease in 2004, an appearance on BBC TV's Breakfast Time show - bloated and bald from the effects of chemotherapy - to raise awareness of ovarian cancer, three major operations, twelve cycles of chemotherapy and countless hospital visits, appointments with specialists, scans, tests and other general disruptions to a normal way of life, Amanda's consultant declared her "cured" last summer, eight years after she was first diagnosed.

Her cure wasn't just about conventional medicine though. Complementary therapies, nutritional and dietary change, and a lifestyle re-evaluation all played a role in her recovery alongside the clinical care overseen by her enlightened oncologist. (Thank you, Dr. Harper!)

Amanda was lucky to be diagnosed early. The UK has one of the worst ovarian cancer survival rates in the developed world.

So I've decided to raise money for Ovarian Cancer Action (and celebrate my 50th birthday!) by going for a pint of beer.....in Britain's most remote pub!

The Old Forge at Inverie on the Knoydart peninsula is accessible by boat from Mallaig, at the end of the road and railway line west from Fort William. But I’m not going by boat. On September 1st, my last-ever day as a forty-something, I will set out alone on foot from Glenfinnan to trek across 28 miles of some of the wildest and most remote terrain in the Western Highlands of Scotland. By the end of the day I aim to reach a remote bothy (a basic stone shelter), 12 miles to the north, where I shall spend the night. The following morning, as a 50-year old(!), I will head west to cover the remaining 16 miles to Inverie where I shall enjoy my birthday pint (or pints!) of beer in The Old Forge. And then collapse in the Bunkhouse!!!

Don't expect a running commentary from me en route though. There's no mobile phone coverage where I'm going. As one account of the route puts it: "If you break a leg, you crawl to a stream (for water), wrap up warm, and wait."

I'm doing this because of Amanda, not for her. I want to help Ovarian Cancer Action fund critical research and raise awareness that the "silent" killer can be heard. I'm doing this for your wife, mother, sister, daughter, grand-daughter.....so that hopefully they can choose to go on journeys that will have happy endings (like a pint of beer!), rather than be forced by the silent killer onto a journey that more often than not, won't.

I'm looking forward to my pint of beer in The Old Forge. And it's your round. Please spare the price of a pint (or several!) for Ovarian Cancer Action.

Thanks for taking the time to visit my JustGiving page.

Donating through JustGiving is simple, fast and totally secure. Your details are safe with JustGiving - they'll never sell them on or send unwanted emails. Once you donate, they'll send your money directly to the charity and make sure Gift Aid is reclaimed on every eligible donation by a UK taxpayer. (Non-UK taxpayers can also donate with JustGiving.) So it's the most efficient way to donate - I raise more, whilst saving time and cutting costs for the charity.

So please dig deep and donate now.

This blog post was written by Peter Seyderhelm. Peter is an Internal Audit, Risk, Compliance and Corporate Governance professional in London, UK. If you would to contact Peter, you may reach him through this blog or his LinkedIn Profile.

In Business We Must "Jiggle the Gate" - Lessons From the Air and Water Show and the Home

2011-08-19T11:23:00.002-05:00

Today, as the jets are flying over Chicago (and my office – how cool is that?) practicing their maneuvers for the annual Chicago Air and Water Show this weekend, I am reminded of two things:

1 – The importance of effective internal control systems

2 – The importance of monitoring those internal control systems

It doesn’t take an aerospace engineer to understand that while flying in tight formation a pilot must be constantly aware of his position relative to the other aircraft in the formation. One false move by any of the pilots would spell disaster for everyone. Fortunately they have computer systems in the cockpit that continuously calculate time, space, distance (i.e. internal control system) and a built in warning system alerting them when things are going wrong (i.e. monitoring). However, it is up to the pilot to react to these indicators to avoid disaster. It is pretty amazing to me that all of this works, considering they are flying at speeds over 500 mph and at a distance of 18 inches apart from each other. Heck, I find it difficult jogging next to someone who is only 18 inches away from me – I can almost guarantee we’d bump into each other – but not these pilots. Amazing!

Well, effective internal controls systems and monitoring the internal control systems is important in other places too. Parents of toddlers know all about internal control systems (gates around staircases, plastic covers over door knobs, protective covers over electric outlets…) and monitoring systems (you can’t leave a toddler alone, right? and when you do there is technology for to help - it is called a baby “monitor” after all!). How about pet owners? Do you think they know a little about internal control systems and monitoring? Absolutely.

My business is helping organizations evaluate their systems of internal controls and also the effectiveness of the internal control monitoring. It is as important in a corporation as it is in an airplane and as it is in the home. Can you think of an example of when there have been breakdowns in either the internal controls or the monitoring of those controls in business? You probably don’t have to think too hard. It has happened all too often and unfortunately it continues today. Sometimes it is a fundamental breakdown in internal control, sometimes it is someone circumventing internal control, and other times it is a failure to monitor the control. When done purposely or with malicious intent it is usually for a perceived short term gain (meeting quarterly earnings, making a bonus) at the expense of the long term.

The examples in the corporate world have been discussed and evaluated over and over and over. It cost many their jobs and many more their life savings. But business is not alone in this. If you happen to be a college sports fan, the recent examples of Ohio State (my alma mater) and this week the University of Miami (FL) are shining examples of failure to monitor internal controls systems, ignoring warning indicators, and/or circumventing internal controls systems… all for short term gain at the expense of long term success.

Why have internal controls and effective monitoring systems? Well, besides all the obvious reasons, it is simply the right thing to do. It is important to protect our pilots, protect our children, protect our pets, protect our investments, protect our reputations, and protect our chances at long-term success. However, it is not enough to simply design and implement a good system of internal control. You have to TEST it! Imagine installing a baby gate at the top of a staircase. When finished installing the natural instinct is to jiggle it to make sure it is stable, right? Who would install a baby gate and not test it? And, for good measure you would test it regularly. You could do a great job in creating the control (installing the gate), a great job in monitoring the control (checking regularly to make sure it is still there), but if you don’t test it (jiggle the gate) you could fail as a parent with catastrophic consequences.

When enacted in 2002, the Sarbanes-Oxley Act created the requirement for publicly traded companies to design, monitor, and test systems of internal controls. However, most private companies and private institutions are not held to such standards. While “it is the right thing to do” many private companies ignore the need for internal controls and many more fail to test. If you are reading this and work for a private organization (heck, any organization) think about how often your organization “jiggles the gate” when it comes to the financial reporting processes, information technology, security, privacy, policy and procedures, and operations. If you really think about it, you might not like the answer. A small investment each year to design controls, monitor controls, and “jiggle the gate” will go a long way to protect your opportunity for long-term success.

Effective systems of internal controls are critical to all of us in every walk of life. It is important in the cockpit, at home, in the classroom, and yes, in the workplace. So, do yourself a favor and go “jiggle the gate!”

For those of you in Chicago, I hope you enjoy the Air and Water Show this weekend!

Information Risk Management Topics and Trends for Internal Auditors and Audit Committees - a Vonya Global Web Seminar

2011-07-15T14:37:00.005-05:00

As the old adage goes, “Information is Power.” It is undeniable that the company with the best information has an advantage. Access to information impacts every decision a company makes from long-term strategic planning, to which suppliers to use, to which markets to serve, to which employees to hire or promote, all the way down which paperclips to order.

On the flip side, losing information can do more damage than having it in the first place. Competitive advantages can be lost, privacy can be violated, security can be threatened, and reputations can be ruined. It is critical to understand and manage the risks to information and unfortunately it is getting harder each day.

On August 18, Vonya Global will be hosting a one hour web-based seminar on Information Risk Management and the latest trends that have Chief Information Risk Officer’s concerned. The presentation is geared towards the Internal Audit and Audit Committee communities and will cover:

Consumerization of IT
Cloud Computing
Mobile Security
Social Media

To capture the potential these new technologies offer, companies need to embrace the opportunity while balancing solid risk management. We invite you to learn about these technologies and what they mean from an Information Risk Management perspective. If you are in the Internal Audit profession or seated on an Audit Committee, you should attend this session.

To register please visit http://www.vonyaglobal.com/ and follow the link to the session.

Board Director and Audit Committee Member Independence

2011-07-12T10:30:00.000-05:00

Audit Committee Member independence as it relates to SOX section 301 definitions and SEC Rule10A-3 (specifically the definitions of “affiliate” and “affiliated person”) proves to be an area clouded by many shades of gray. In short, a clear and explicit definition of an “affiliated person” or “affiliate” is not defined. Rather, what is provided is a safe harbor definition suggesting that an individual is not an “affiliated person” if that person:

is not an executive officer and,
does not own more than 10% of the company stock.

Although this specific definition applies to ownership of securities, determining if a Director is an “affiliated person” appears to require more than that initial look.

What the rules are as of now.
Under SEC Rule 10A-3, all issuers must be in compliance with SOX Section 301 in order to be listed on any securities exchange. Specifically, they require each member of the Audit Committee of the issuer must be independent. The requirements establish two criteria and allow for each exchange to make more strict rules of their own:

Audit committee members are barred from accepting any consulting, advisory or compensatory fee from the issuer or any subsidiary thereof, other than in the member’s capacity as a member of the board and any board committee.
An Audit Committee Member of an issuer that is not an investment company must not be an affiliated person (see definition of “affiliate” below) of the issuer or any subsidiary apart from the member’s capacity as a member of the board or any board committee.

To answer the question about an “affiliated person”, the definition of an affiliated person by the SEC is “a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, [the issuer]”. The SEC defines control as “the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through ownership of voting securities, by contract or otherwise”. Finally, as part of the definitions by the SEC, they have provided a baseline determination for what may or may not be an affiliate by providing a safe harbor under which a person who is not an executive officer and is not a greater than 10% stockholder is not deemed to control the issuer, therefore not an “affiliated person”.

Based on many discussions and information, other than the safe harbor definition, clear or explicit requirements for who is defined as an “affiliate” are not provided. Rather, the determination of whether a person falls within the category of an “affiliate” requires a factual determination based on a consideration of all relevant facts and circumstances on a case by case basis by the Board. These facts and circumstances would look deeper into the relationship to determine if control or influence exists or whether interference with judgment may occur.

Given the impossibility of defining all the relationships with a company that may arise for Directors and Director candidates, we believe it is advisable that Boards retain discretion to decide independence on a case by case basis rather than use rigid standards.

However, if a company is looking to define or add more explicit language for the definition of an affiliated person, you can look beyond the SEC rules and Sarbanes Oxley to rules established by the national exchanges and other professional associations (e.g. NYSE, NASDAQ and NACD) where more strict independence requirements. These requirements although not explicitly defining “affiliate” look deeper into the relationships of the Board Directors and Audit Committee Members, including:

NYSE – “No material relationship.” Under the NYSE listings, no director qualifies as independent unless the board of directors affirmatively determines that the director has “no material relationship” with the listed company, either directly or as a partner, shareholder or officer of an organization that has a relationship with the company.
NASDAQ – “No interference with independent judgment.” The rules provide that an independent director is a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship that, in the opinion of the company’s board of directors, would interfere with the exercise of independent judgment in carrying out their responsibilities of a director.
NACD – “The strictest definition of the term is a director whose only connection to the company is the receipt of director fees.”

If an organization is looking to define independence in the strictest sense, then the NACD definition would fit best; however, based on our experience and knowledge, most Boards follow listing standards of the national exchange for which they belong. In addition to the exchange definitions, they also allow their Boards the discretion to make judgment on member independence on a case by case basis.

This post was contributed by Sargon Youmara, a Partner with Vonya Global. If you would like to contact or connect with Sargon directly you can find his profile on LinkedIn: http://www.linkedin.com/in/syoumara.

The GRC Approach - for Small Internal Audit Departments

2011-06-01T15:59:00.001-05:00

Governance, Risk and Compliance (Part 2)

First identify all of the functions and/or groups that interact with the area subject to assessment. Then through interviews and evaluation determine the following:

Governance: the goal, mission and objective of the program.
Risk: the risks that are being managed by each of the functions and groups involved.
Compliance: the rules, regulations, internal policies, the operating procedures that influence the operating activities. In this space it is also necessary to identify all of the tools, people, and resources available in support of the compliance efforts.

Once determined, you can assess whether the various functions are aligned as to the Governance mission and objective, you can determine if they are operating against a common set of Risk factors and you can evaluate whether the Compliance efforts are operating cohesively across all groups and whether resources are being deployed to effectively address each of the compliance requirements.

This evaluation is then used as the springboard to development of a high level summary regarding the cohesiveness of the company’s GRC activities across the multiple disciplines subject to review.

This post was contributed by Brad Zolkoske. Brad is the Director of Internal Audit at International Coal Group. He is responsible for the design, development, coordination and communication of auditing services throughout the company. Brad’s number one goal at International Coal is to establish a professional internal audit function that actively supports the company’s growth and culture initiatives.

During the course of his 20 year internal audit career Brad has worked in internal audit management for several publicly traded manufacturing companies. He is an expert at getting exceptional performance out of small audit departments. Brad can be contacted through this blog or through his LinkedIn profile.

When does GRC Fit within a Small Audit Shop?

2011-05-24T21:53:00.000-05:00

Governance, Risk and Compliance (Part 1)

Governance, Risk and Compliance (GRC) is the latest and greatest hot topic being thrown at Internal Audit functions. But what really is the place for GRC in the profession today? Having been bombarded with Risk Management literature and programs for many years and those programs appearing to still be in their embryonic state, what confidence is there to be had in the GRC initiative?

As it turns out, there is a practical application for GRC in the world of Internal Audit. Certain cross-functional audit projects can greatly benefit from a GRC perspective. When faced with a large project across multiple disciplines, divisions, regions or operating groups the GRC model can provide a structure for evaluating the control environment in a manner and perspective that should appeal to senior management’s vision of the organization.

Stay tuned for Pat 2 of the GRC for Small Internal Audit Departments.

Internal Audit Departments and Building a Definition of Risk

2011-05-18T16:16:00.001-05:00

Internal Audit Departments today are constantly told to be "risk based" and to assist their companies in the management of risk. While this sounds great in concept, the execution is a different manner as many companies today do not have a formal risk management program with which to align. When tasked with developing such programs Internal Audit should not fall into the trap of developing a population of risks before first arriving at a common definition of risk.

Understanding how your company views risk is a good place to start. Is risk viewed as good or bad? Remember, risk is not just a negative; the presence of risk presents the possibility of reward as well as loss. In looking at risk as both a positive and negative, Internal Audit Departments will better align their risk activities with the thoughts and strategies of management.

This definition, once developed, can then allow Internal Audit Departments to evaluate risks and risk management activities to determine if the potential for success warrants the risk being taken; to assess whether the risks being taken are aligned with corporate values, goals, objectives, policies and management capabilities; and to determine whether the culture of your organization is strong enough to allow for a legitimate discussion about risk events that haven’t yet happened.

Ground Still Shaking as Aftershock Severity Decreases - Japan Earthquake Update May 10, 2011

2011-05-11T11:48:00.001-05:00

Lunchtime 25th April to 2nd May – 208Lunchtime 2nd May to 9th May – 216
North East Report
The status of the NE area has shown some improvement over the past 2 weeks, but still has a long way to go in the worst hit areas.

Toll of dead and missing has improved somewhat to around the 25,000 level, with confirmations still arriving that in excess of 90% of victims were indeed victims of the Tsunami (i.e. drowning) and not of the Earthquake itself.
Estimates of the time it will take to clean up the debris field are now ranging between 2 and 3 years, this suggests the rebuilding boom may be a bit more delayed than originally anticipated
The number of people still in temporary shelters has dropped to around 120,000, however rapid falls are not expected yet due to the slow pace of establishing temporary housing units.
Very large numbers of volunteers descended on the worst hit areas over the “Golden Week” holiday period last week to assist with the cleanup efforts.
Plenty of focus, daily news reports etc, still on the nuclear reactor in Fukushima, refer “Nuclear Situation” below.

Tokyo Report
Tokyo is best described as having achieved “business as normal”, i.e. as normal as possible under the circumstances

Main remaining problem for the non-tsunami areas is achieving regular levels of factory production, refer business perspective below.

Blackouts & Brownouts
These have been discontinued for the time being, but reinstatement is widely anticipated over the hottest of the coming summer months, i.e. July and August.

Nuclear Situation
This remains front page, as well as 2nd and 3rd page, news on a daily basis here locally, even if it is not the focus of the international foreign press any more.

Progress continues, but still at a slow pace, they have now reached the stage where workers are inside the No 1 Reactor repairing the damaged cooling system. Achievement of this would enable rapid attainment of “cold shutdown” status. Nonetheless, high radiation levels inside the reactor continue being detected, so progress on repairs is not likely to be so rapid.

Remotely controlled equipment now in frequent and widespread use

Government has now introduced a “legally binding 20km exclusion zone” nonetheless is permitting some to visit their residences for up to 2 hours to collect valuables etc. All are being given protective clothing and screened for radiation upon return. Refer graphic below for levels of radiation in Eastern Japan as of Monday 9th May. Second graphic depicts the evacuation zones in more detail.

Newspaper Articles
An article came out 2 days ago detailing how the Power Company will need assistance from the government to pay all the damages it is liable for. Seems the government is going to assist, however the price will be nationalization of the company. Apparently this reactor also was built very close to a known fault line.

Locals were to be accorded a voice in discussions about reopening the second nuclear plant in Fukushima, i.e. the one that was shutdown without any radiation leakage, seems that it is only some 10km south of the problem plant.

Another article late last week came out detailing that over 40% of hospitals equipped to deal with radiation sickness & problems were “overly close” to nuclear plants in general.

Prime minister requested that another nuclear plant South of Tokyo be shutdown due to some safety concerns, the (separate) power company which operates this plant is going to acquiesce to the government’s request. This power plant however is run by the power company which services the Nagoya area where the likes of Toyota & Suzuki manufacturing facilities. This shutdown is actually quite a serious development and does not bode well for Blackouts and Brownouts over summer.

Aftershocks and Seismic Data
Caution is still required as there have been 424 in total since my last report 14 days ago however the outstanding feature of these was that they were almost exclusively smaller in size and therefore hopefully a reliable sign everything is indeed settling down

Lunchtime 25th April to 02nd May – 208
Lunchtime 02nd May to 09th May – 216

Saw another article this morning highlighting the ongoing plight of several towns and villages up north which are now suffering daily floods at high-tide due to the fact the local land level has dropped by up to 1.2 meters (this also happened in Chile in their big earthquake in the 1960’s by the way).

Large number of aftershocks are centered in the Fukushima area (i.e. near the problem reactor site)
The Intensity of the median level is now 4.8, a significant fall from the median level of 5.4 in from 2 weeks earlier, maybe this will prove to be a more effective method to judge the level and direction of seismic activity, We will find out soon enough.

Business Perspective

Economic Impact
Forecasts are gradually being revised downwards for the March and June quarters, but being revised upwards after that due to the reconstruction efforts that will commence as previously reported.

However, some are beginning to wonder if reconstruction efforts will, or even can, begin that quickly as other estimates are appearing that it will take up to 3 years to clear the debris field.

The major economic impact remains in the Agricultural sector, which does nor bode well for food prices this summer.
Factory Closings
Number of closings now seems to have stopped, however the number of factories unable to resume full production shows no dramatic sign of improvement just yet.

All carmakers in particular seem to have been hit quite hard by this problem, but the degree varies from one to the other.

A negative effect on overseas supply chains is still being reported, but the extent, particularly to non-Japanese entities is difficult to gauge from here.

This matter still warrants further monitoring.
Economic Recession Likelihood is unchanged
For the current QTR, this is unchanged and considered almost a certainty but only at marginally negative growth levels, for the next QTR it is also considered quite likely with the magnitude dependent on how quickly the problems associated with the JIT system in b) above can be remedied.

Subsequently the growth positive effects of rebuilding are supposed to kick-in, but that timing may prove optimistic.
Financial Markets
Would think the Securities analyst’s are all busy revising forecasts and valuations (downwards) for all local public companies.

Funding of reconstruction efforts – Discussion still underway for a special additional budget and to increase the Consumption Tax rate to fund reconstruction, nothing concrete decided yet however.

BOJ still under pressure to commit to buying “Reconstruction Bonds” from the government, but the BOJ head is still resisting pressure to do so.

Earthquake Sickness - Japan Earthquake Update April 25, 2011

2011-05-06T10:14:00.001-05:00

Toll of dead and missing still hovering around the 28,000 level, seems in excess of 90% of victims were indeed victims of the Tsunami (i.e. drowning) and not the Earthquake itself.
The number of SDF & US military personnel searching in earnest all over the worst affected areas (including some within the 20km restricted zone) is being ramped up from 12,000 to 20,000+
Prices of used cars are reportedly increasing rapidly, estimates are that about 10% of all vehicles in the region were destroyed.
Food and fuel logistics to the worst regions continues to improve, but still hearing of isolated hamlets and villages where relief is only just arriving over the past 2 weeks.
Cherry blossom-viewing season has now commenced in the worst affected regions signaling the imminent, and no doubt most welcome, arrival of warmer weather.
A veritable string of foreign dignitaries have been visiting the worst affected areas, handing out all sorts of things, some useful, some not. Can’t see why they cannot organize a shipment of 30 to 40 front-end loaders and 20 or 30 bulldozers which would be pretty useful right about now.
Plenty of focus still on the nuclear reactor in Fukushima, refer “Nuclear Situation” below.

Tokyo Report
In regard to getting back to normal, Tokyo has now arrived at the stage where it can be considered “business as usual”, except for any business that would normally be conducted with suppliers/clients up North of course.

Food supplies are almost back to normal, with almost no empty spaces on store shelves than last week. Supplies of bottled mineral water (2.0 liter PET bottles) are available once again, but supplies still rather limited.

Main remaining problem for the non-tsunami areas is achieving regular factory production, refer business perspective below.

Blackouts - Discontinued
These blackouts have been discontinued for the time being, but may have to be reinstated over the hottest summer months.

Situation
I see no reason to change the wording of the summary I wrote 2 weeks ago which is as follows:

“Progress with closing down the remaining 3 reactors continues at a snails pace as one problem after another arises to slow efforts”.Main focus is now clearing the most radioactive debris and getting more control over the whole situation, including the use of remotely controlled equipment. Therefore the situation is still far from resolved and vigilance is still required” (I am disappointed to still be repeating this same conclusion, however am being given no real choice otherwise)

Government has now introduced a “legally binding 20km exclusion zone” around the reactor and a few additional selected areas, and all remaining residents are being asked to evacuate, seems they are not being forcibly evacuated just yet.

An article came out last week claiming that most nuclear reactor sites (worldwide) are uninsured simply due to the very high cost of doing so.

Another article came out detailing how the Power Company had decided to make compensation payments to the victims of JPY 1,000,000 (approx. USD 12,500 at current rates) per family. Anyone who knows anything about Japan will know this is woefully inadequate, and the power company promptly found themselves in very hot water once again.

Aftershocks and Seismic Data
Caution is still required as there have been 367 in total since my last report 14 days ago including several very big ones, as per the data below.

Lunchtime 11th April to 18th April – 246
Lunchtime 18th April to 25th April – 121

Looks like a “normal week” is going to be around 90-120 for the time being.

Another story from the seismological community came out last week which claimed all recent seismological protection activities have been focused on the South-Western Japan (where the Philippine and Eurasian plate intersect), as it was considered the next “high-risk area”. Not surprisingly, the article claimed the assessment approach was flawed and should be abandoned.

Another article emerged during the week in regard to “Earthquake Sickness”, details are as follows:

Phantom quakes and Japan's 'earthquake sickness' Aftershocks are fraying the nerves of survivors in Japan. And some people feel them even when the ground is perfectly still

What is "earthquake sickness"?

as quoted by AFP

What is a phantom quake?

as quoted by The Irish Times

Are there any other symptoms?

had been rattled by more than 400 aftershocks

Has this hit the Japanese harder than earthquake survivors elsewhere?

as quoted by The New York Times

The “Tokyo Big-One” or not?
This is the other discussion going on in some sectors locally.

The general consensus at this point in time is “unfortunately not” as this quake was centered much further North, and all aftershocks have been almost focused mainly along the “Pacific Plate / Nth American Plate” boundary, also in the below diagram.

Business Perspective

Economic Impact
Forecasts are gradually being revised downwards for the March and June quarters, but being revised upwards after that due to the reconstruction efforts that will commence.

Barely any reconstruction has commenced to date however.

The major economic impact will occur in the Agricultural sector, which does nor bode well for food prices this year.
Factory Closings
Number of closings now gradually starting to reverse, however the number of factories unable to resume full production has stabilized and shows no dramatic sign of improvement just yet.

Toyota has resumed production at all facilities but it cannot increase to more than 50% capacity levels.

There is no reason to conclude any other major (or not) domestic manufacturers are any better off then Toyota, even though Honda, whose facilities are mainly located much further south, is reputed to be in better condition although not completely unaffected.

A negative effect on overseas supply chains is still being reported, but the extent. Particularly to non-Japanese entities is difficult to gauge from here.

This matter still warrants further monitoring as the full effect of the disruptions may not yet be fully played out
Economic Recession Likelihood is unchanged

For the current QTR, this is unchanged and considered almost a certainty but only at marginally negative growth levels, for the next QTR it is also considered quite likely with the magnitude dependent on how quickly the problems associated with the JIT system in b) above can be remedied.

Subsequently the growth positive effects of rebuilding should gradually become more evident from around the September quarter and serve as a base for subsequent rebounds in GDP, no reconstruction efforts are underway at the present time however, cleanup activities are yet to get into full swing.
Financial Markets
Would think the Securities analyst’s are all busy revising forecasts and valuations (downwards) for all local public companies.

Funding of reconstruction efforts – Discussion now underway to increase the Consumption Tax rate and use the initial increase in receipts to fund reconstruction, nothing decide yet however.

Still Shaken from Sizeable Aftershocks (7.0+) - Japan Earthquake Update April 11, 2011

2011-05-03T09:49:00.001-05:00

The first of 3 very large aftershocks on Thursday evening around 11.30 pm served to keep us all focused on the (still existing) tectonic problems at hand. The second and third ones occurred at 5.16pm on Monday and 8.15 am on Tuesday with a dramatic pick-up in overall frequency.
The cherry blossom season is now in full swing in and around Tokyo reminding all that life goes on. It was not being celebrated with the usual merriment, as earthquake reminders abound, but was celebrated extensively nonetheless.

North East Report
The status of the NE area has shown some improvement over the past week, but still has a long way to go in the worst hit areas.

Toll of dead (13,000) and missing (14,000) has actually fallen back from an earlier total of approx. of 30,000, but in excess of 150,000 still in temporary shelters in the worst affected regions.
Emergency housing has just started to become available (by lottery), but a great deal more needed.
12,000 SDF & US military personnel now searching in earnest all over the worst affected areas including some within the 20km restricted zone.
Convenience store chains report that number of stores still closed has dropped dramatically from 40% (of some 3400) to about 6.0% now.
Much of the focus still on the nuclear reactor in Fukushima, refer “Nuclear Situation” below.

Tsunami height – May have been much higher than originally thought, getting more reports of the Tsunami having been funneled to heights of up to 30 and 40 meters.

Tokyo Report
In regard to getting back to normal, Tokyo has almost arrived at the stage where is can be considered “business as usual”.

Food supplies are almost back to normal, with even less empty spaces on store shelves than last week. Supplies of bottled mineral water (2.0 liter PET bottles) starting to become available once again, but supplies are very limited.

Main remaining problem for the non-tsunami areas is achieving regular factory production, refer business perspective below.

Blackouts - Continue
These blackouts continue, but are scheduled for termination in the next week or 2. They may be reinstated over the summer months however.

Nuclear Situation
Progress with closing down the remaining 3 reactors continues at a snails pace as one problem after another arises to slow efforts. Main focus is now the radioactive water that has been released into the ocean and other water slated for storage, therefore the situation is still far from resolved and vigilance is still required.

Government is mulling the introduction of a “legally binding exclusion zone” around the reactor, not that there isn’t one at the present time of course, but seems the present one is voluntary and a number of residents have been returning to their homes to collect belongings etc.

Aftershocks and Seismic Data
Caution is still required as there have been 98 in total since my last report 7 days ago including one very big aftershock last week, as per the data below. To this I must add the additional 84 or so (in dark blue font below) since 11.14 Monday morning to 9.15am today.

Looks like this week’s total is going to be way above last week’s of 98, therefore it is still too early to conclude everything is “settling down to normal levels”.

Intensity maps of the 3 major aftershocks on Thursday evening, Monday afternoon and this morning are as follows:

Thursday Evening
Note : The epicenter is not very far from the reactor location in Fukushima, which caused some concerns about additional reactor damage.

Monday afternoon – 17.16pm – Epicenter was also pretty much right at the reactor site in Fukushima, and at least briefly, cut power to the plant.

Tuesday Morning 8.12am – Not as strong as above 2 shocks, but much closer to Tokyo, so was felt at about the same intensity.

Business Perspective

North-East Area – Economic Impact

Share of Japan GDP which the worst hit areas account for is being estimated to be around 6.0%, not all of which will be lost due to the quake and tsunami’s, however the situation in regard to b) below is still worsening.
Factory Closings
- Number of closings now slowing down, however the number of factories unable to resume full production continues to grow, e.g. Toyota which is aiming to resume production at all facilities this week, only it cannot do so at more than 50% capacity levels.
- There is no reason to conclude any other major (or not) domestic manufacturers are any better off then Toyota.
- A negative effect on overseas supply chains is also now being reported.
- This matter warrants further monitoring as the full effect of the disruptions may not yet be fully played out.
Economic Recession Likelihood is unchanged
- For the current QTR, this is unchanged and considered almost a certainty but only at marginally negative growth levels, for the next QTR it is also considered quite likely with the magnitude dependent on how quickly the problems associated with the JIT system in b) above can be remedied.
- Subsequently the growth positive effects of rebuilding should gradually become more evident from around the September quarter and serve as a base for subsequent rebounds in GDP.
Financial Markets
- Would think the Securities analyst’s are all busy revising forecasts and valuations (downwards) for all local public companies.
- It still remains to be seen whether the BOJ will actually print money to fund reconstruction efforts, the Governor is refusing to do so and many others think it is not necessary anyway as there is still plenty of domestic savings to tap into to. The pressure to do so is coming from some political quarters, ostensibly for nation economic benefit, which very few financial market participants find very credible.
March 31 Fiscal Year End
- Has passed without any major lingering problems, and should be considered another sign that all is gradually getting back to normal.

Stay or Flee? – The “Flygin” Discussion
This discussion is over, recommendations were provided in the last update.

Situation Still Bad - Japan Earthquake Update April 4, 2011

2011-04-29T13:31:00.000-05:00

Tokyo Report
In regard to getting back to normal, Tokyo continues to make quite good progress overall.

Major fiscal Year-End on Thursday 31st March appears to have passed without any lingering earthquake problems.

Food supplies are gradually returning to normal levels, currently estimated to be around 85% of “normal levels”, but there are still blank spaces on many store shelves for items still out of stock which are not being replenished or diverted North-east.

Business is also getting back to pre-quake “normal levels” with the exception of factory production in some areas, refer business perspective below.

Blackouts - Continue
Areas subject to blackouts have been divided into 5 regions each comprising approx. 4 sub-regions. Blackout schedule is posted on Tepco’s (power company) website in Japanese. These blackouts are also being cancelled on a fairly frequent basis as one and all make efforts to conserve electricity and thereby render them redundant.

These rolling blackouts interfere with factory production of a whole range of goods however, and cannot be considered positive for the economy, refer also “Business Perspective” below.

The area in which I live (near Tokyo Disneyland) was recognized as an “officially damaged area” 2 weeks ago, and is therefore exempted from any further blackouts, and has had a lot of repair work (roads, water-pipes, gas mains etc.) completed since that time. Residents of some areas still queuing up for daily supplies of drinking water however.

Drinking Water
The situation in regard to bottled drinking water supplies is no longer in panic mode, however the larger PET bottles of bottled mineral water are still reserved exclusively for families with young children. Smaller bottles of mineral water are still around and available to all however.

Radioactivity readings at all fresh water treatment plants in the Tokyo area have fallen back well below levels considered safe for infants less than 1 year old as anticipated earlier, this is due to the very short half-life of the isotope in question – 8 days.

Nuclear Situation
Power now connected to all reactors, attempts underway to restart back-up systems, and efforts continue to plug the current cause of most concern, the radiation leak into the ocean.

Overall progress is being made, but it is still frustratingly slow progress, therefore still far from resolved and vigilance is still required.

The big unknown surrounding the nuclear situation is what radioactive isotopes are being leaked/emitted and how dangerous they are respectively. Readings taken by the IAEA late last week raised concerns yet again due to the fact they detected Cesium 137 in some of their readings in a small village not far from the reactor where approx. 100 people are still in residence.

The following is from MIT’s “Nuclear Information Hub” website:

Yield
6.80%
6.30%
6.30%
6.10%
6.10%
5.80%
2.80%
2.30%
1.10%
0.70%
0.40%
0.40%
0.30%
0.20%

Fission Product
cesium-133/134*
iodine-135 / xenon-135
zirconium-93
cesium-137
molybdenum-99 / technetium-99**
strontium-90
iodine-131
promethium-147
samarium-149
iodine-129
samarium-151
ruthenium-106
krypton-85
palladium-107

Half-life
2 years
7 hours
1.5 million years
30 years
200,000 years
30 years
8 days
3 years
not radioactive
15 million years
90 years
1 year
11 years
7 million years

Building Nuclear Reactors in an Earthquake prone country
Japan has many Nuclear Power plants, so why hasn’t this happened before? Is the question on the minds of many.

Apparently this is not the first reactor to be damaged by an earthquake (and Tsunami in this case) in Japan, back in 2007 (when there was a big earthquake in Niigata) there was some damage to a plant on the other side of the country, refer “Kashiwaki Kariwa” location in the below diagram:

The “Tokyo Big-One” or not?
This is the other discussion going on in some sectors locally.

The general consensus at this point in time is “probably not” as this quake was centered much further North, and all aftershocks have been almost exclusively along the “Pacific Plate / Nth American Plate” boundary, also in the above diagram.

Some are expressing the concern this quake may have placed extra pressure on other fault lines closer to Tokyo, however others have countered this cannot be assumed with any degree of certainty yet.

Aftershocks and Seismic Data
Seems that I will be able to say once again that despite the fact the number of aftershocks is not in any real decline, the average severity does seem to have fallen somewhat. Caution is still required however as there have been 119 in total since my last report 6 days ago.

Business Perspective

North-East Area – Economic Impact
Share of Japan GDP which the worst hit areas account for is being estimated to be around 6.0%, not all of which will be lost due to the quake and tsunami’s, however situation in regard to b) below is worsening.
Factory Closings
Number of closings due to inability to secure key production parts/components is increasing. This is leading many to consider relocating production elsewhere for the time being at least.
This is due to the Just-in-time inventory system which keeps inventories of production components at low levels and will affect Japan’s GDP for the March and June quarters at least.
Despite several forecasts for only minor negative impact on GDP, this factor also warrants vigilance, as it could easily have a much larger impact if the “production recovery” assumptions in some of these forecasts prove too rosy.
Economic Recession Likelihood is unchanged
For the current QTR, this is considered almost a certainty but only at marginally negative growth levels, for the next QTR it is also considered quite likely with the magnitude dependent on how quickly the problems associated with the JIT system in b) above can be remedied.
Subsequently the growth positive effects of rebuilding should gradually become more evident and serve as a base for subsequent rebounds in GDP.
Financial Markets
Saw a program guest on CNBC over the weekend describe the (initial) foreign press coverage of the whole incident (Quake, Tsunami and Nuclear problem) as “an inverted pyramid of piffle” which I do agree with in relation to the initial coverage, i.e. the first 2 weeks or so, however there is growing evidence that the more recent coverage has been more in line with reality and the local coverage.
March 31 Fiscal Year End
Has passed without any major lingering problems, and should be considered another sign that all is gradually getting back to normal.
A colleague and I drover to an area approx. 100km North of Tokyo (i.e. approx 140km from the Fukushima plant) to assist with some Year-End activities on Thursday evening, there was no sign of anything abnormal happening, apart from some businesses closing earlier to conserve electricity.

Stay or Flee? – The “Flygin” Discussion
This discussion degenerated into a spiteful affair between 4 or 5 individuals, so I doubt we are going to get any constructive conclusions from it at all.

However, for the record, here some personal recommendations from yours truly:

In the event anyone finds themselves caught up in an event of such magnitude:

Make arrangements to get your family out of any affected area immediately
By this, I do not mean just get them out of the worst affected Tsunami areas, I mean get them out of anywhere that “business as usual” cannot be conducted from the next day (inclusive of many parts of Tokyo in this instance) to a safer location in-country, or overseas

This is because we all should anticipate some severe infrastructure damage to occur with an event this size and therefore it is probably not wise to keep your families close-by “for the sake of being close-by”, i.e. in this regard the nuclear power plant situation in Fukushima is nothing more then additional infrastructure damage.
Attend to your work related responsibilities, if you have them.
By this I do not mean contact all your staff and merely ask if they are okay, give them the same opportunity to get their families out of the affected areas as well.
Anticipate a food and water buying panic to occur immediately by people who are not well prepared for such an event (and even by some that are)
By this I mean don’t let such responses catch you by surprise and therefore plan ahead (refer next point)
Prepare in advance, i.e. as much as you can in any case
By this, I do not mean have a few extra bottles of mineral water stored in the kitchen, I mean conduct a full risk analysis of what you will need to survive a few weeks without basic services and utilities. If you are not willing to do this, you are gambling with the lives of your families in the first place, also if you think conducting a risk analysis is a burden/nuisance of some sort, it is probably better if you do not venture into “such countries” in the second place as historical statistics dictate such events are going to occur at some stage.

The term “such countries” is not limited to just Japan, but would prominently include such countries (and locations) as Chile, New Zealand, Indonesia, Alaska, California and The Philippines etc. i.e. this list is not an exhaustive list, just the main locations around the Pacific Rim, the point is that the list is a bit longer than you would initially surmise.

Tokyo Slowly Improving - Japan Earthquake Update March 29, 2011

2011-04-28T18:04:00.001-05:00

The following is part of a series of email updates about the effects of the earthquake in Japan. The emails originated from a colleague in Tokyo and provide an insiders perspective. These posting have been unedited and tell the story from one person's vantage point

March 29, 2011
North East Report
The status of the NE area remains bad across the board, still not enough food, fuel, clothing etc. reaching the right places. Toll of dead and missing continues to climb every day and is now is excess of 28,000, with in excess of 150,000 still in temporary shelters in the worst affected regions. The only positive here is that the number of people in shelters has dropped from over 200,000 late last week. Much of the focus still on the nuclear reactor in Fukushima, refer “Nuclear Situation” below.

Tokyo Report
In regard to getting back to normal, Tokyo is still making quite good progress overall.
Food supplies are gradually returning to normal, but there are still blank spaces on many store shelves for items still out of stock which are not being replenished, I can only assume such items are from the NE area. Gasoline rationing is no longer a problem as anticipated earlier.

Blackouts
Main remaining problem is now “rolling blackouts” in some outer Tokyo areas and surrounding areas, these are required as the power company claims it can only supply 70% of regular demand. Areas subject to blackouts have been divided into 5 regions each comprising approx. 4 sub-regions. Blackout schedule is posted on Tepco’s (power company) website in Japanese.

These rolling blackouts interfere with factory production of a whole range of goods, and cannot be considered positive for the economy, refer also “Business Perspective” below. The area in which I live (near Tokyo Disneyland) was recognized as an “officially damaged area” late last week, and is therefore exempted from any further blackouts.

Drinking Water
The situation in regard to bottled drinking water supplies is still in panic mode, but at a lower level than it was last Friday. The larger PET bottles of bottled mineral water are still reserved exclusively for families with young children. Smaller bottles of mineral water are still around and available to all however.

Radioactivity readings at all fresh water treatment plants in the Tokyo area have fallen back well below levels considered safe for infants less than 1 year old as anticipated earlier, this is due to the very short half-life of the isotope in question – 8 days. Most families with young children are still accepting bottled water supplies in any case.

Note
In this case, the drop in readings was thankfully predictable due to being able to ascertain the half-life of the Iodine Isotope in question. It would be encouraging to see more readings on other isotope levels, refer “nuclear situation” report below.

Nuclear Situation
Power now connected to all reactors, attempts are underway to restart back-up systems, cooling systems etc. Progress is being made, but it is still slow progress, therefore still far from resolved and vigilance is still required. Another minor panic earlier this week when much higher levels of radioactive isotopes were detected in the sea just off the reactor location, and in the water which has accumulated on reactor floors.

The big unknown surrounding the nuclear situation is what radioactive isotopes are being leaked/emitted and how dangerous they are respectively. The following is from MIT’s “Nuclear Information Hub” website:

Yield
6.80%
6.30%
6.30%
6.10%
6.10%
5.80%
2.80%
2.30%
1.10%
0.70%
0.40%
0.40%
0.30%
0.20%

Half-life
2 years
7 hours
1.5 million years
30 years
200,000 years
30 years
8 days
3 years
not radioactive
15 million years
90 years
1 year
11 years
7 million years

Note that longer half-lives do not necessarily mean more danger. Some fission products have extremely long half-lives but emit very little radiation at any given time, so they are not dangerous. Other fission products emit huge amounts of radiation but exist for such a short period of time that they are not dangerous. How harmful a given fission product is to humans is a complicated function of half-life, radiation intensity, and various human biology factors.

Link to the website for those interested is here : http://mitnse.com/2011/03/

Link to an explanation of units of radioactivity measurement : http://web.mit.edu/newsoffice/2011/explained-radioactivity-0328.html

Author’s Notes

It was the seventh isotope “iodione-131” that was involved in the fresh water panic last week.
Clearly the level of danger is not merely linked to the half-life of each isotope, as it also matters a great deal how rapidly one receives a dose of radiation etc., however being aware of respective half-lives will assist in predicting how long a certain problem may be expected to linger.
Local English language newspaper (The Japan Times) this morning details concerns about the effect of longer-life cesium-137 (30 year half life) on seafood, but correctly notes concerns about Iodine 131 will only be very short-term in nature.

Plutonium News – NHK 29th March 2011

Plutonium found in Fukushima plant soil

Author’s Note : Seems there are plenty more readings/levels to come.

The “Tokyo Big-One” or not?
This is the other discussion going on in some sectors locally.

The general consensus at this point in time is “probably not” as this quake was centered much further North, but I would like to hear some professional seismologists’ opinions as well as there are plenty of other fault lines in and around Tokyo on which another one could occur.

The red arrows below indicate where all the activity has been on this occasion.

Aftershocks and Seismic Data
Seems this time I will be able to say that despite the fact the number of aftershocks is not in any real decline, the average severity does seem to have fallen somewhat. Caution is still required however as evidenced by two 6.5 magnitude quakes that caused additional tsunami warnings on Monday morning.

Total number of aftershocks that I could obtain data on from the Japanese Meteorological Agency website is now 643, with other sources claiming as high as 850 and 1100+. The difference in numbers can all be attributed to how many of the smaller shocks are recorded by some or not at all by others.

Business Perspective

North-East Area – Economic Impact
Share of Japan GDP which the worst hit areas account for is being estimated to be around 6.0%, not all of which will be lost due to the quake and tsunami’s, however situation in regard to b) below is worsening.
Factory Closings
Number of closings due to inability to secure key production parts/components is increasing. This is leading many to consider relocating production elsewhere for the time being at least. This is due to the Just-in-time inventory system which keeps inventories of production components at low levels and will affect Japan’s GDP for the March and June quarters at least.
Economic Recession Likelihood
For the current QTR, this is considered almost a certainty but only at marginally negative growth levels, for the next QTR it is also considered quite likely with the magnitude dependent on how quickly the problems associated with the JIT system in b) above can be remedied. Subsequently the growth positive effects of rebuilding should gradually become more evident and serve as a base for subsequent rebounds in GDP.
Financial Markets
Article from Bloomberg this week detailing Central Bank Governor’s reluctance to purchase Gov’t Bonds due to his concern about the effect it would have on the JPY and inflation, i.e. he is acting in stark contrast to his US counterparts:
Bank of Japan Governor Masaaki Shirakawa is under fire for refusing to consider 1930s-style purchases of government bonds to fund reconstruction from the nation’s record earthquake. Shirakawa repeatedly attempted to quash direct buying of government debt, a step allowed in extraordinary circumstances with the permission of the Diet, in appearances before lawmakers this week. The policy would undermine confidence in the yen and provoke a surge in consumer prices, he said at parliamentary fiscal and finance committee hearings.

Stay or Flee? – The “Flygin” Discussion
Big discussion going on in the business community about the number of foreign expats who simply dropped everything and fled the country. Discussion has focused on what their responsibilities are to their colleagues or employees and whether or not they should be fleeing just when Japan and the Japanese are going through one of it’s darkest hours.

Full range of opinions being expressed on this topic, refer the following 4 examples:

"If I had left as the president, my role as a leader would have been diminished," said Gerry Dorizas, the president of Volkswagen AG's operations in Japan, who has been in that role four years. "We've been very transparent."VW Japan has moved all staff, including 12 expats and 130 Japanese staff and their families, to Toyohashi in Aichi prefecture.One foreign investment banker in Tokyo says he wasn't surprised that so many employees left. "We don't hire people into the financial industry to risk their lives - this is investment banking and we hire investment-banker types," he said. "We are trying to avoid ostracism for those who come back - there is no upside in that - but there is good-natured hazing."To be sure, most foreign senior-level managers leading teams in Tokyo stayed in the capital or relocated their entire offices to other locations in Japan, according to several managers interviewed Tuesday.

A Human Crises Emerges - Japan Earthquake Update March 25, 2011

2011-04-27T13:15:00.000-05:00

Attn: Earthquake Relief Supplies Miyagi Prefectural Office 3-8-1, Honcho Aoba-ku, Sendai city, Miyagi 980-8570, JAPAN	Attn: Earthquake Relief Supplies Iwate Prefectural Office 10-1 Uchimaru Morioka city, Iwate 020-8570, JAPAN
Attn: Earthquake Relief Supplies Aomori Prefectural Office 1-1-1 Nagashima, Aomori city, Aomori, 030-8570, JAPAN	Attn: Earthquake Relief Supplies Fukushima Prefectural Office 2-16 Sugitsuma-cho, Fukushima City 960-8670, JAPAN

Tokyo Report
In regard to getting back to normal, Tokyo is making quite good progress overall.

Main remaining problem is now rolling blackouts in Tokyo and surrounding areas, gasoline rationing has pretty much disappeared over the past 5 days as anticipated

Drinking Water
The situation in regard to bottled drinking water supplies however, has reverted to that of a full blown panic from 2 days ago. Apparently, small amounts of a radioactive Iodine isotope were detected in one fresh water treatment plant in Tokyo on Wednesday. Subsequently the government advised it was at a level that was in excess of that recommended for infants (less than 1 year old). They then advised that it was best not to let infants drink the water for the time being and that it should not be used when making milk from infant powdered milk formulas.

This has set off a full blown panic amongst all families with children under 3 years old, the larger PET bottles of bottled mineral water have now been reserved exclusively for families with young children. Smaller bottles of mineral water are still around and available to all however.

The location at which the slightly elevated levels of isotope were detected, reported that test levels promptly fell back under the recommended level the following day. But the panic had started and all other locations started testing their water treatment plants as well, with several reporting slightly elevated levels.

Sure enough though, the very next day, the details in the government warning advise that high levels of concern are not warranted as infants would have to drink the water for between 6 & 12 months straight before there was any danger to their health, this fact was promptly ignored by 99.9% of all mothers and families affected.

Personal Perspective
In my humble opinion, regular tap water from these treatment plants in Tokyo, and surrounding areas, has not been drinkable for the past 20 years in the first place. This is primarily due to the very liberal amounts of chemicals (chlorine etc.) they use to purify it with. It is hard to believe that anyone has been letting infants actually drink the water directly at all, let alone mix it with baby formula.

So this is once again a classic case of paranoia triggered by very minor problems that may be (and they don’t know this for sure) associated with the nuclear problem. The other point related more directly to the radioactive element in question, is that this isotope has a half-life of only about 8 days, so this problem should quickly disappear in the next week or so. I will update this point next week.

Nuclear Situation
Power now connected to all reactors, attempts underway to restart back-up systems, cooling systems etc. Progress is being made, but it is still slow progress, therefore still far from resolved and vigilance is still required. Another minor panic ensued earlier this week when smoke started billowing again from one of the damaged reactors.

Aftershocks and Seismic Data
Seems I spoke a bit too soon in my update on Tuesday earlier this week when I said the frequency and severity of aftershocks was abating somewhat. Almost as soon as I hit the SEND button, a series of quakes around 6.0 in strength commenced and continued for several hours into that night! Total number of aftershocks that I could obtain data on from the Japanese Meteorological Agency website is now 553, with other sources claiming as high as 760 and 1000+. The difference in numbers can all be attributed to how many of the smaller shocks are recorded by some or not at all by others.

Comparative Data
This has been very hard to come by as quakes this large are quite rare, but the most recent two of similar (bit larger and bit smaller magnitude respectively) were the December 2004 quake in Indonesia at 9.1, and the Chilean quake of 8.8 in Feb 2010.

Indonesian Quake Dec 2004 of 9.1 magnitude
In the week after the 9.1 Indonesia quake in 2004 that caused a killer tsunami, there were 84 aftershocks with magnitudes ranging from 5.0 to 7.0.
Estimated length of rupture was approx. 1600 miles

Chilean Quake 27 Feb 2010 of 8.8 magnitude
In the week after the 8.8 Chilean quake in Feb 2010 that also caused a killer tsunami, there were 21 aftershocks with magnitudes ranging from 6.0 to 7.0.

In the 2 months after the 27 February 2010 Chile Quake, i.e. as of 23 April 2010, a total of 305 aftershocks with magnitude equal or larger than M5.0 had occurred, and 21 of these aftershocks had a magnitude of at least M6.0 or greater.

Japan Quake
In the week after the 9.0 Japan quake in 2011 that also caused a killer tsunami, aftershocks were as follows:

Magnitudes ranging 7.0 or higher - 4
Magnitudes ranging 6.0 to 6.9 - 40
Magnitudes ranging 5.0 to 5.9 - 106
Magnitudes ranging 4.0 to 4.9 - 125

Estimated length of rupture is approx. 300 to 400 miles

Sub-Total in Japan for 5.0 or greater quakes is therefore 150 (i.e. 1.78 times as many as Indonesia)

Sub-Total in Japan for 6.0 or greater quakes is therefore 44 (i.e. 2.09 times as many as Chile)

To date, in the 2 weeks to date after the 9.0 Japan quake in March 2011 aftershock totals are as follows:

Magnitudes ranging 7.0 or higher - 4
Magnitudes ranging 6.0 to 6.9 - 50
Magnitudes ranging 5.0 to 5.9 – 132
Magnitudes ranging 4.0 to 4.9 - 174

Conclusion : Plenty more aftershocks to come yet

Business Perspective

North-East Area – Economic Impact
Share of Japan GDP which the worst hit areas account for is being estimated to be around 6.0%, not all of which will be lost due to the quake and tsunami’s, however there will be an immediate negative effect without any doubt, prior to a more medium-term positive effect as the rebuilding commences the Kobe quake has already provided a good example of this “negative then positive” economic effect.

Just-In-Time (JIT) Inventory System
This system is simply NOT compatible with the disruptions caused by such big earthquakes, many factories simply no longer have sufficient stocks of key parts to continue operations, many big manufacturers (automobiles, electronics, high-tech industries in general etc.) are badly affected in this regard, and this will affect Japan’s GDP for the Quarter Ending 31 March as well as for the Quarter ending 30 June this year.

Economic Recession Likelihood
For the current QTR, this is considered almost a certainty but only at marginally negative growth levels, for the next QTR it is also considered quite likely with the magnitude dependent on how quickly the problems associated with the JIT system in above can be remedied. Subsequently the growth positive effects of rebuilding should gradually become more evident and serve as a base for subsequent rebounds in GDP.

Financial Markets
Heard earlier this week that several non-Japanese brokers were calling for a complete trading halt on the local stock exchanges, which at first glance is understandable under such circumstances, until you dig into the issue “Stay or Flee” detailed directly below. Seems none of the Japanese brokers were requesting trading halts.

Stay or Flee?
There’s a big discussion going on in the business community about the number of foreign expats who simply dropped everything and fled the country. Discussion has focused on what their responsibilities are to their colleagues or employees and whether or not they should be fleeing just when Japan and the Japanese are going through one of it’s darkest hours.

More disturbing is that a new term has entered the local vocabulary for such people “fly-gins” an abbreviation for the term “Fly-away gaijins” (i.e. those non-Japanese that fly away at the first sign of difficulty) and is completely derogatory, worse still it seems to have been invented in Japanese quarters.

At this point in time, there are some pretty thick lines being drawn in the sand on this issue, and newspaper and internet articles all over the place are saying that “all the non-Japanese” are flying overseas etc. etc. The issues involved are numerous and cross-cultural in nature and any discussion about family or personal safety immediately gets emotionally charged as you would expect.

What one should do, or not do, will of course depend on one’s individual circumstances and family needs etc. and the debate still continues at the present time, so I will send another update on this point sometime in the near future, hopefully with some fleshed-out recommendations for anyone caught up in similar circumstances in the future.

Vonya Global to Present on Power of Social Media at IIA Chicago Breakfast May 16

2011-04-27T11:13:00.000-05:00

Think Social Media is just for keeping up with friends? Think again. While it is true you can stay updated on long lost friends and former colleagues, there are many practical business uses for Social Media which will add value and efficiency to your daily routines. By attending this session you will gain a basic understanding of the various social media platforms as well as some of the more useful supporting applications.

As an added bonus - part of this session will be a hands-on tutorial so if you have access to a computer with WiFi, you will want to bring it along.

The objectives of the session include:

Gain an understanding of the various social media platforms
Gain an understanding of the purpose of each social media platform
Gain an understanding of the various applications to make social media user friendly
Learn how to use the various social media platforms for business gain

Please visit the IIA Chicago Chapter Website for more information and to register.

A New Perspective - Japan Earthquake Update March 18, 2011

2011-04-26T15:24:00.000-05:00

Food is gradually reappearing on the shelves in convenience stores and supermarkets, fresh fruit and vegetables still in short supply. This is supported by the very large numbers of delivery vans and transport company trucks evident on the roads over the past few days. Getting several reports that infant formula’s and diapers have been in very short supply and was one main reason why so many Japanese (i.e. the ones with very young children) decided to fly overseas earlier in the week.
Gasoline tankers however have not been seen in encouraging numbers and gasoline rationing continues.
Drinking water supplies quite ample, though 1.5 litre PET type packs of drinking water are still in very short supply (smaller bottles are in ample supply however)
Running water is still not available in some areas in and around Tokyo Disneyland (reclaimed land areas suffered from liquefaction and subsequently subsidence) and some areas N & NE of Tokyo.
Rolling black-outs commenced in Tokyo yesterday and are slated to continue today (maybe even longer which is a concern) Schedules of affected areas are available on the internet, seems the non-internet literate elderly are unable to find the information.
Am hearing sporadic reports of internet and e-mail problems from yesterday. This is a first, they have been very reliable to date.

Other Comments

Reports circulating overseas yesterday that the Power Company and Government had “given up” all efforts to contain the reactor problems and fled the reactor site were promptly proved groundless and totally false early yesterday morning.
Japanese news reports late last night had the power company, despite the snow and freezing cold and having to bulldoze a new path to the reactor etc., only 600 meters short of being able to restore power to the back up generators, which if successful, would enable them to contain the reactors in the “normal” prescribed manner for these things.
This morning they have large fire trucks and the self-defense force helicopters still in action delivering water to where it is needed. The rational conclusion therefore is more like “No-one is even considering ‘giving-up’ yet, but they still have a long way to go, so vigilance by all is still required” (Can anyone really imagine the Japanese Army would simply just give up?)
The overall situation here today has not deteriorated at all, in fact may have improved somewhat.
I continue to have grave reservations about the quality and accuracy of most news reports I am reading in English, one international English television network is most conspicuous in this regard.
The remainder of this report (below these comments) therefore is mostly focused on factual data and generally reliable forecasts.
A humanitarian tragedy is gradually unfolding in the worst hit areas, simply because most people, are as yet, unable to leave for Southern areas and are literally sitting around in “the freezing cold” waiting for help.

Tectonic Instability & Aftershocks
Only a couple of biggish aftershocks in Tokyo this morning and only a couple more last night, frequency continues falling gradually day by day (some of these would have been considered reasonably good sized earthquakes by themselves until last Friday of course)

Aftershock maps reveal aftershock activity is confined to the area where the “Pacific Plate” is being pushed beneath the “North American Plate”, which runs from around due east of Tokyo straight up the NE coast. Refer diagram below.

RE AFTERSHOCKS
Total number of aftershocks is being reported by various sources as anywhere between 800 and 1,000 to date+

Refer 2 diagrams below for :

(These are in Japanese but should be relatively understandable in any case.)

Weather in the worst affected areas

The weather can only be described as “freezing cold”, refer temperature map below at 0500 local time, every location in the worst affected area is below zero.

Weather Forecasts

Weather forecast for today 18th March in Fukushima (inclusive of wind direction) is as follows:

Weather forecast for the Tokyo area is as follows:

Initial Response - Japan Earthquake Update March 13, 2011

2011-04-26T14:43:00.000-05:00

The following is the first in a series of email updates about the effects of the earthquake in Japan. The emails originated from a colleague in Tokyo and provide an insiders perspective. These posting have been unedited and tell the story from one person's vantage point.

March 13, 2011
I am pleased to advise that everyone eventually reported in as being fine late Friday night, but we remain a long way from “business as usual” here on Tuesday morning. Damage in Tokyo is nothing like that up north of course, but is still extensive and we are being told to expect “Brown-Outs” again during the day due to power shortages.

A few Earthquake Notes
Work & Office

Office was shaken quite violently for about 3 full minutes, and even though the office was a complete mess afterwards (files, papers, binders strewn all over the place, cabinets falling over etc.), damage was fortunately limited to some minor furniture damage only. No structural damage evident to the office building.
Shaking continued unabated for around 2 full hours after the main shock, inclusive of many quite severe aftershocks every 10 minutes or so and at a less frequent rate and intensity all through the weekend to this morning. Intensity of main quake revised upwards to 9.0 on the Richter scale on Sunday evening. Intensity map of the main earthquake is appended below.
No trains (a big problem in Tokyo), no mobile phones & all freeways closed on Friday evening, phone services restored over the weekend, some trains still not running on Tuesday morning due to power shortages. Brown-outs expected during the day.
All locals were extraordinarily well behaved despite the hardships endured. Food, fuel and other shortages feared in the Tokyo area for the next week or so. Supermarket and convenience stores were heavily depleted over the weekend.
Most of the damage up North was caused by very large tsunami’s, there have been none in Tokyo Bay of any significance.
E-mail services were maintained throughout the entire period, and instantly became our main form of communication; quite an unexpected yet impressive result all things considered.

Around Home
Liquefaction damage around home however (we live on reclaimed land near Tokyo Disneyland) is extensive, roads cracked and split, water and gas mains broken and uplifted all over the place, some concrete damage around the front gate and car parking area only. No gas, no running water, or other services, electricity grid still functioning fortunately, the cold weather (and rain later today) does not help.

The situation at the nuclear facility in Fukushima prefecture is still very unclear, so we are also watching that very closely as you would expect even though we are located almost 300 km from the facility in question.

The other big question relates to whether or not this is the “Big One” that Tokyo has been 20 years or so overdue, in view of the location most are concluding not.

Will report again later in the week, hopefully under more normal circumstances by then,

An Insider's Update on the Aftermath of the Japan Earthquake

2011-04-26T12:57:00.000-05:00

Vonya Global will be posting a series of emails from our colleague in Tokyo, Japan. He has been providing us with regular updates from an insider's perspective. Updates include everything from economic, infrastructure, health and safety, aftershocks, and news validity. The emails have been very interesting and useful. We will be posting them here with his permission.

Internal Auditors Pledge to Shape Up - Vonya Global's Shape Up for Summer 60 Day Charity Challenge

2011-04-20T15:24:00.001-05:00

Vonya Global launched its’ inaugural “Shape Up for Summer 60-day Charity Challenge” last week. 28 Internal Auditors from various companies around Chicago in addition to the employees of Vonya Global have committed to shape up for summer. Throughout the 60-days Vonya Global, with the help of two certified personal trainers and one certified nutritionist, will provide diet and exercise tips to motivate the group on their quest to shape up. At the end of the 60-days Vonya Global will donate $1 for every pound the group loses to the Greater Chicago Food Depository.

“Our consulting business is designed to help companies shape up by assessing risk and evaluating procedures for controlling risk in business operations. We thought it was a perfect tie-in to individually shaping ourselves up while helping us fulfill our mission of social responsibility. We are excited about helping our group shape up while also befitting a great cause, the Greater Chicago Food Depository. We are also grateful for all of those who are helping us during the challenge.” Steven Randall, Vonya Global Managing Partner

Vonya Global encourages individuals around the world to participate. For more information about the challenge people can visit the Vonya Global website (http://www.vonyaglobal.com) and click on the links for “Shape Up for Summer.” The Shape Up conversation is already under way at the Vonya Global Facebook pages.

Study Launched to Evaluate Fraud Prevention and Fraud Detection Strategies - Invitation to Participate

2011-02-14T09:53:00.002-06:00

Vonya Global will soon launch their bi-annual study on corporate strategies to address Fraud Prevention, Fraud Detection, and Fraud Deterrence. The Executive Study on the Strategic Plan for Fraud Prevention, Fraud Detection, and Fraud Deterrence compiles the opinions of Executives and Internal Auditors from private, public, and not-for-profit organizations, spanning many industries.

Historically, there have been several studies conducted about fraud and fraud statistics, but few that deal directly with the strategic plans to manage fraud risks. The timing of this study is appropriate due to the heightened sensitivity to fraud risk based on the economic conditions. It seems more groups, including regulatory bodies, investors, clients, and suppliers are increasingly concerned about the ability to demonstrate effective fraud prevention and fraud detection strategies.

"Companies should do more to deter and detect fraud. Costs go far beyond the simple dollars someone steals or gains through materially misstated financial statements. Loss to employees and stockholders can be substantial.” – a response from the 2009 Study

PARTICIPANTS WANTED
Vonya Global is currently seeking volunteers to participate in the study. Participation in the study will take roughly 15 minutes and all responses will be anonymous. To enroll in the study please visit Fraud Study. As a reward for participating, volunteers will be provided special access to the results and will be invited to a member’s only webinar.

MEDIA SPONSORS
Vonya Global is currently evaluating Media Sponsorship. The Media Sponsor will be provided rights to the distribution of the results and acknowledgment in the final report. It is expected that the final report will be ready by well over 5,000 executives in over 75 countries. To inquire about sponsorship please visit Fraud Study. Click on the link to send an email and list "Study Sponsorship" in the subject line.

A Project for 2011... maybe for Internal Auditors: Reviewing Corporate Policies and Procedures

2011-01-21T12:01:00.002-06:00

Are Policies and Procedures important? We certainly think so, unfortunately many companies have old, outdated Policy and Procedure manuals while some have none at all. As companies and internal audit departments are planning projects for 2011, consideration should be given to reviewing and updating the Corporate Policies and Procedures.

Policies and Procedures are a company’s way of documenting and communicating management’s vision into instructions for employees on how to handle issues as they arise and how employees should be executing their job responsibilities in a consistent manner.

Written Policies communicate:

Company Rules in simple language
Delegation of Authority
Enforcement and consequences if not followed
Impartial administration of company-wide Policy
Evidence for Governance, if legally approved and followed

Procedures communicate:

Clear guideline on how to implement a policy
Establish boundaries for employees

While Policies are general in nature, Procedures provide the details as to what to do, often with examples and forms. Sometimes procedures include emergency steps.

By creating a Policy and Procedure Manual, the company provides a source for all employees to turn for guidance on standard matters and have management focus on exception handling and not need to waste time on day-to-day operations.

Successful Policy and Procedure Manuals require reviews and updates as laws and company environments change. Their dynamic nature requires work but overall it eliminates the redundant need for repeated instructions through time consuming meetings, memos or other correspondence.

Policies and Procedures should be assigned to a position within the company, for example the Finance Manual should be “owned” by the highest Finance position within the company, such as the CFO, and the Employee Handbook by the highest HR position such as the HR Director, etc. Policies should cover the key activities which need to be customized for each organization.

The objective is to create easy to understand policies and procedures that provide clear guidelines for everyone to follow.

Need a hand? We would be glad to help, just give us a call.

Strategic Planning for 2011? Changes in Business Can Compromise the Effectiveness of Internal Controls

2010-12-21T15:47:00.000-06:00

If we have learned anything from the Sarbanes-Oxley era and the scandals that brought down the economy, it is that internal controls have to be effective. The first step is control design. When done properly, the design will include preventive controls to preclude undesirable activities and detective controls to alert management when exceptions occur. An appropriate design of preventive and detective controls is critical, but not sufficient. Control environments are dynamic. Changes in the business often result in workload shifts. When this happens, roles and assignments are informally swapped to make the work load more equitable. As informal process changes evolve, the control design is often unintentionally compromised, sometimes with significant consequences.

For example, an Accounts Payable Manager has the responsibility to review all vendor master file changes before payments to vendors are made. However, if the Accounts Payable Manager is suddenly swamped with a new system implementation she may not have the time to review the master file changes and she may not be available when the payable checks are ready.

In situations like this, the Accounts Payable Manager might assign the vendor master file review to an employee who is responsible for processing checks but does not have system access to enter invoices. On the surface, this appears to be a viable alternative since the responsibilities for invoice processing and vendor change review are segregated. However, this informal role change has just compromised the control system.

What happens if this employee creates an invoice from a fictitious vendor? Since the employee has been given the responsibility to review new vendor additions, the fictitious vendor is not questioned. After the invoices are processed, she simply prints the check and pockets the payment.

This is only one example to illustrate how a “quick fix” may not be in the best interests of the company. Informal reassignments are common as new pressures develop. When workloads shift, it is worth the time to review the internal control design in total. If there is no time for a total control design reevaluation, enlist the help of the Internal Audit department. In any case, when responsibilities are reassigned make sure that there are adequate mitigating controls throughout the entire process. Having “trusted” employees does not always protect against errors or fraud.

‘Tis the Season to be Internal Audit Planning

2010-12-10T12:45:00.003-06:00

As the holiday season is rapidly approaching, good tidings are regularly shared as should be the case. It is time to be joyous and celebratory for the year that was and hopeful for the year that shall come.

It is also a time for Internal Auditors to take stock in their year that was and plan for the year that shall come. I presume most Internal Audit Departments have completed their annual risk assessment, are trying to wrap up any remaining items from the 2010 Internal Audit schedule, and are putting together their 2011 Internal Audit Plan.

Here are some questions I recommend Internal Auditors ask themselves:

How has the economy impacted the audits I complete?
How responsive is my audit plan to changes in risks?
How was the 2010 plan better than the 2009 plan and how is 2011 going to improve upon 2010?
What were my significant accomplishments in 2010?
Were these accomplishments significant to only me or did they have a profound impact on the company?
What significant accomplishments are going to be made from the 2011 audit plan?
How is the 2011 audit plan going to enhance the strategic relevance of Internal Audit?

The easiest thing to do is keep everything the “same as last year” - and there could be logic in it like... the economic conditions, staffing shortages, resource constraints, regulatory requirements, and so on. But, the CEO can’t go to the Board and say "the company's 2011 strategic plan is the same as our 2010 plan" and neither should the Internal Auditor. Take whatever flexibility you have and think strategic, think relevance, and think profound impact. Successfully do that now and in 12 months the 2012 planning will become much more fun!

For more information on Internal Audit’s strategic role please review The 2010 Report on the Strategic Role of Internal Audit.

Maximizing the Asset: Inventory Management in a Sluggish Economy

2010-12-06T15:21:00.003-06:00

If you are experiencing shrinking margins, cash flow may become your primary concern. Increased sales will produce increased cash input, but purchases and investments lead to cash outlays, and what about inventory? Inventory sits in the warehouse. Inventory not only freezes cash flow but generates expense by requiring handling and storage space. Unless it is on the way out the door to a customer, inventory contributes nothing of value to an organization.

Inventory management is a tradeoff between the ability to meet customer expectations and the necessity of keeping assets fluid to meet unexpected demands and higher costs. Before investing in more storage space or warehouse management tools, consider using resources in ways to decrease inventory.

1. Time is money
The inventory level needed to achieve a given customer fill rate is roughly related to the square root of the lead time. That means that if all other impacts are the same, inventory levels can decrease by 50% when the lead time shortens from four weeks to one week.

One of the strategies to reduce lead time is to develop the ability to customize products at the final stages of production. This allows for the flexibility needed to respond to changes in customer demand. This not only reduces the lead time, but decreases the risk of producing the wrong products.

2. Forecasts are always wrong
Forecasts, by definition, will always be wrong. If forecasting must be used, avoid using financial projections to plan production. Although finance is a vital function in any organization, financial projections do not capture demand. Understanding demand is the key to having the right products in the right places. If a demand forecasting and deployment system is not in the budget, a simpler spreadsheet model can be used quite effectively. Even better, develop relationships with customers to directly access their needs.

3. Negotiate with vendors
Many vendors will manage inventories. Some will replenish daily, leaving only a small safety stock on the premises.

4. Standardize components
Fewer components needed across product lines mean a lower overall inventory. Examine the bills of material for similar types of components and work with engineering to consolidate wherever possible.

5. Get rid of obsolete products and components
Obsolete parts take up valuable space and require handling. If a component is custom made and may be used in the future to service product, move it to after-market stocks. Otherwise, find a buyer on the internet or simply throw the parts away.

The value of an investment in inventory is measured only by how quickly it disappears. The optimal amount of inventory is no inventory at all. This is not a realistic expectation, so the next best strategy is to minimize it wherever possible.

To conduct an audit of your inventory management process, give us a call.

Internal Audit - Adding Value in the Not-for-Profit World

2010-11-18T16:45:00.000-06:00

While not-for-profit organizations perform many of the same accounting functions as public corporations, not-for-profits are inherently different in many ways and require a unique Internal Audit focus. In 2006, the American Society of Association Executives (ASAE) published the results of a research project undertaken by The Center for Association Leadership to identify characteristics of the most successful not-for-profit organizations. The study found the following factors to be common in the most successful associations: Commitment to Purpose, Commitment to Analysis and Feedback, and Commitment to Action.

By focusing on the conclusions of this study, auditors can go beyond assurance and provide insight that will help to identify and mitigate risk. An entity level assessment should ask questions to identify the risks associated with each factor listed above.

Commitment to Purpose
A successful organization aligns its products and services with a customer focused mission. Its reason for being is measured by its relevance to the customers and/or members. Questions for auditors to ask include:

Are strategies aligned with the interests of the customer and/or member before the generation of revenue or the promotion of an image?
How can upcoming changes in the external environment affect the commitment to the mission? Are underlying values constant?
Does the association periodically and clearly define the customer? Does it best serve the customers and/or membership directly or through chapter organizations? Are the needs of special interest groups being prioritized effectively?

Commitment to Analysis and Feedback
Communication and data-driven strategies are vital to the success of a not-for-profit organization. The organization should be the ultimate authority concerning the needs and issues of its customers and/or members as well as the state of the business environment. To evaluate the risk associated with poor analysis and feedback, the following questions will be helpful:

Are initiatives and strategic goals supported by data and research?
How is information shared throughout the organization? Are all levels of employees actively involved?
Are computer systems and models appropriate and sufficient?

Commitment to Action
A successful organization is flexible and adapts quickly to crisis situations. For not-for-profits, these situations typically involve a financial setback or a leadership void. Leading not-for-profit organizations also actively pursue alliance opportunities that will leverage services for the membership. The following questions assess the organization’s commitment to continuous improvement and adaptability:

Does the organization have an action plan that will support quick decision-making in the event of a crisis?
Are there “sacred cow” programs or services that cannot be changed?
How does the organization identify and evaluate potential alliances?

Internal Audit has a responsibility to monitor risks particular to the not-for-profit environment. By using the 2006 study as a guideline, a partnership between audit and organization leadership can help foster success and better results for the membership community.

Data Analytics: Providing Greater Internal Audit Depth During A Turbulent Economy

2010-11-08T14:04:00.004-06:00

Data Analysis through Computer Assisted Audit Techniques (CAATs) is an efficient way to test transactions, providing 100% assurance on the effectiveness of Internal Controls. Using basic tools such as Microsoft Excel and Access, advanced tools such as ACL or IDEA, or the tools embedded in ERP applications has been a best practice for years but has often been viewed as a luxury, not a necessity. This year, during this economy, using CAATs has become absolutely critical.

Obviously budget pressures have gone through the roof, resulting in massive global layoffs. Reductions in work force, especially to the accounting department, create enormous pressure on the employees who remain. Requiring employees to take on more responsibility often increases the likelihood of errors and misstatements. Added pressures like salary freezes combined with less oversight can tempt an otherwise honest employee to cut corners or commit fraud. The risk of financial misstatement doesn’t get any higher.

A critical way to respond to these challenges is to increase (or initiate) the use of data analytics. This approach evaluates and monitors data from every transaction processed by a company to identify anomalies. Applying data analytics to review transactions in accounts payable, advertising, freight, health benefits, construction, and other areas can yield hundreds of thousands or more in savings and recoveries. When this process is done by management instead of internal audit, errors are identified sooner and with more precision.

CAATs have been around for more than 20 years and those experienced in using CAATs have had experience ranging from good to fabulous. Unfortunately CAATs have typically been used only by Internal Audit Departments and only on selected audit projects. The inconsistent usages of CAATs make it difficult to maintain the knowledge and experience to make CAATs a regular and sustainable part of the audit process.

With the status of the economy, CAATs have become an essential part of effective Corporate Governance. The first step is gaining the basic knowledge to make CAATs part of the oversight process. The second step is sharing the knowledge throughout the Internal Audit department and management ranks. The third step is imbedding the process into the fabric of the organization to make it sustainable and continuous. Getting more oversight with less effort is possible today by simply leveraging CAATs, a technology most companies already employ.

To learn more about how to make CAATs a routine part of the audit process, please contact Vonya Global for a free consultation. Leveraging readily available software tools in combination with proprietary methodologies, our team of data analysis experts focus data analytics at common problem areas to help our clients recover overpayments and develop a sustainable approach to continuous auditing.

ACL is a registered trademark of ACL Corporation and IDEA is a registered trademark of Caseware IDEA.

This article was contributed by Joe Oringel and Kim Jones of Visual Risk IQ, a thought leader in Continuous Auditing and Monitoring. For more information on Visual Risk IQ, please visit their web site at www.visualriskiq.com.

Data Analytics: Identifying and Responding to Business Risks Efficiently

2010-11-01T13:33:00.001-05:00

Every time a company processes a transaction there is risk. Be it accidental errors such as duplicate entry, incorrect posting, and transposing numbers or intentional misconduct, all might be difficult to spot. As technology has advanced, so has the speed and volume of transaction processing. More is done in less time, which potentially increases the likelihood of error.

What can be done to prevent or mitigate these risks? Internal Controls. When designed properly, Internal Controls can detect a risk once it happens, or better yet, prevent a risk from happening in the first place.

Under the COSO Internal Control-Integrated Framework, internal control is broadly defined as a process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: a) Effectiveness and efficiency of operations; b) Reliability of financial reporting; and c) Compliance with laws and regulations.*

An example of an internal control is the three way match between a Purchase Order, a receipt of the goods and the related invoice. The control is that the match ensures that the invoice has the authorized price from the Purchase Order and that the quantity agrees to what has been received.

Designing an effective system of Internal Controls is just the beginning. Once designed, it is important to test the Internal Controls to make sure they are operating effectively. The traditional method for testing would investigate a sample size of roughly 25 invoices. If there are exceptions, the sample size will be increased. If there are no exceptions in the first 25, the Internal Controls were deemed effective. Without automation, this is the typical way to test the transactions and make assumptions on the entire population by extrapolation since there are too many transactions to manually test each one.

But what if there were errors, just not represented within the sample? Using CAATTs is the answer.

Computer Assisted Audit Tools and Techniques (CAATTs), is the practice of using software such as Excel or Access, or specialized Audit software such as ACL or IDEA, or ERP specific tools built into SAP or Oracle to automate or simplify the audit process. CAATTs are an efficient way to test all transactions, providing 100% assurance on the effectiveness of Internal Controls.*

What are the benefits?

Large amount of data can be examined efficiently
Timely identification of business risks and exceptions
Business days are not interrupted with information requests to pull paper samples
Once established, running the tests is simple and very cost-effective

What are the drawbacks?

Setup time requires IT resource knowledge and availability
Knowledge of the software to create the tests accurately
Different system applications at different locations requires different tests to be created

To learn more about using CAATTS to identify and respond to business risks more efficiently visit www.vonyaglobal.com or contact Vonya Global for a free consultation.

* Excerpts taken from www.wikipedia.com

Use Internal Audit to Reduce Costs of Major Construction Projects

2010-10-26T16:12:00.000-05:00

Organizations involved in major capital projects are missing out on significant opportunities to strengthen internal controls and reduce costs. This is not to say that construction managers are fiscally irresponsible, conversely they are very reluctant to spend money where it is not absolutely necessary. So much so that in an effort to contain costs, most organizations don’t budget funds for construction audits until the project is complete or nearing completion. However, this “Close-out” audit is only one component of a successful control and cost containment program. Vonya Global believes that investing in internal audit early in the construction process may save thousands or hundreds of thousands of dollars throughout the project. “Full-scope” construction auditing optimizes the effectiveness of internal controls, reduces total project costs, and maximizes cost recovery.

Close-out Audit - At the project’s conclusion, the owner requires assurance that the General Contractor/Construction Manager (CM) has completed the work in accordance with the contract. A close-out audit provides the owner confidence that the contracted obligations were fulfilled and the billing was accurate per the contract terms. While this is a critical step to verify compliance with the contract, it doesn’t solve other problems caused by a poorly written contract. In fact, contracts rarely protect all the interests of the owner.
Involving construction audit services at the beginning, rather than the end of a construction project is far more effective because it mitigates risk before it materializes. Audit’s first responsibility is to protect the owner’s interest by creating favorable contractual agreements and improving the project control environment. Keeping Vonya Global engaged throughout the construction project assures the effectiveness of the control environment and identifies inappropriate cost overcharges.

In creating the contract (the binding agreement between the owner and all parties involved in the construction process), many owners place their trust in the knowledge of the General Contractor/CM and Architect to include all the appropriate provisions in the contracts. Most owners will then seek legal counsel to review the contract focusing on the insurance and indemnification sections. Additionally, the General Contractor/CM and Architect are often relied upon to track and control project costs. The result is an agreement which may not contain the necessary terms and conditions to adequately protect the interests of the owner, may not establish an effective system of internal controls, and may not establish a systematic means of monitoring contract compliance.

The American Institute of Architects (AIA) provides standard construction contracts, such as the:

• AIA A101 for stipulated sum projects
• AIA A111 and A121 agreements for cost reimbursable projects
• A201 which contains the related General Conditions to the agreement

However, even these contract provisions require modification to fully protect the interest of the owner. For example, the Accounting Records or “Right-to-Audit” clause should be strengthened, and the Changes or “Change Order” clauses often require clarification. These modifications improve the owner’s control over project costs, and allow for recoveries.

An effective “Full-scope” audit program utilizing the construction audit services of Vonya Global establishes an effective control environment, defines expectations for all parties, reduces the potential for conflict, reduces total project costs, and reduces the owner’s risk. Performing a “Full-scope” construction project audit is a best practice, and the earlier a qualified Construction Auditor is involved in the project life-cycle, the greater the benefits to the project owner.

Internal Auditors – Playing a Strategic Role

2010-10-20T09:22:00.003-05:00

"We believe Internal Auditors can play a more strategic role; whether they do in their specific organization is up to the Audit Committee, Executive Management, and the Internal Audit Department. We have released a report that will provide a starting point for a conversation between the three groups." - Vonya Global

Vonya Global announced today that the Final Report on the Strategic Role of Internal Audit has been released. In compiling information for the study, Vonya Global surveyed a cross-section of Executives and Internal Auditors from both public and private organizations in a variety of industries to evaluate their opinions regarding the strategic role of Internal Audit. The study set out to determine whether it is Internal Audit’s role to evaluate strategic risks and if Internal Audit is equipped to do so effectively. The primary goal was to provide a benchmark for Internal Auditors and Executives on the strategic role of Internal Audit.

The 2010 study is a follow up to a similar study conducted in 2008 and was designed to compare opinions in 4 areas:

1. Vision, Goals, and Objectives of Internal Audit
2. Mission and Value Relative to Strategic Risks
3. Process, Skills, Time, and Budget
4. Compliance Requirements

In 2008 it was revealed that a gap exists between Executive Management and Internal Auditors on the function of Internal Audit. The 2010 study set out to explore whether this gap still exists or if it has been closed. In addition, the new study provides a more detailed comparison between Executive Management and Internal Auditors.

While the 2010 Report on the Strategic Role of Internal Audit reveals that many gaps still exist between Executives and Internal Auditors, there are encouraging findings as well. One assumption going into the study was that Internal Audit plays a critical role in a company’s ability to meet its strategic objectives and there appears to be general agreement between Executives and Internal Auditors in many categories. The report provides details and quotes from the participants, such as:

"We make understanding the strategic direction and goals a priority in our risk assessment process so that we can link our audit plan to the strategies and goals of the company.”

"Internal Audit is at the table for senior management discussions, for input on operational challenges and control risks, for the implementation of new systems and replacement of outdated processes, and for risk management.”

“The only risks that management should fear are the ones that they do not know about - it is Audit's job to provide that information.”

The full report can be downloaded by following the link on the Vonya Global home page.

IFRS Best Practice - Early Conversion

2010-09-27T16:44:00.005-05:00

A change in accounting standards, shifting from GAAP to IFRS, is virtually inevitable in the U.S. The shift globally is well underway with 100 countries having switched from country specific accounting standards to IFRS. Based on the experience of these countries, adoption impacts all aspects of operations and will affect a company’s people, processes, information systems and internal controls. IFRS conversion is a significant endeavor; Vonya Global contends that an early start will make a significant difference reducing both effort and cost.

There are parallels between IFRS Conversion and the initial Sarbanes-Oxley Compliance initiatives and applying the lessons learned from Sarbanes-Oxley will significantly reduce the cost of conversion. The most important lesson is to prepare early and start early.

The changing requirements of Sarbanes-Oxley compliance in the first years after the legislation was initially passed gave most companies a false sense of security in pushing off the start date. Each company in this situation found significant resource shortages, an inefficient compliance process, and increased fees from professional services firms. Starting early could have made the compliance process far easier and would have spread the cost over multiple financial periods.

Similarly, early IFRS conversion will streamline the process and spread the cost out over multiple financial periods. IFRS implementation has enterprise wide application – with implications beyond finance and financial reporting – reaching and affecting all parts of the business. It requires modification of processes and systems to support the new accounting and reporting requirements. Companies should begin embarking on their initiatives to achieve timely convergence with IFRS, taking a slower and methodical approach. Some of the advantages to early conversion to IFRS include:

- Simplified reporting
- Reduced operating costs
- Greater transparency
- Comparability for investors
- Improved access to capital

Eventually, GAAP will go away, and IFRS will be the lone standard. This is a historic event. It is accelerating. And it is inevitable. Those who embrace this early will be rewarded.

Study Launched on the Strategic Role of Internal Audit

2010-06-02T17:31:00.007-05:00

Vonya Global is surveying a cross-section of Executives and Internal Auditors from both public and private organizations in a variety of industries to evaluate their opinions regarding the strategic role of internal audit. This is a follow up study to one conducted in 2008. The results of the 2008 study revealed a expectation gap in the strategic role internal auditors play in their organizations. This follow up study will compare how expectations may have changed in light of continued risks of fraud, financial statement errors, environmental risks, security breaches, and privacy concerns.

One executive from the previous study stated the following: "Internal Audit could improve its capabilities in evaluating the effects of strategic and business risk on the overall risk profile of the Company. This would also enhance the primary mission of internal audit to look for potential financial issues.” This statement, along with many others, reveal the importance of internal audit becoming more than a financial compliance function. The results of this new study will highlight whether or not internal audit has taken steps in this direction.

To participate in the study, please visit the Vonya Global website: http://www.vonyaglobal.com

Social Media - is it Friend or Foe?

2010-05-12T16:46:00.004-05:00

Social media is rapidly becoming a critical tool for communication not only bringing benefits, but also risks. For many organizations, social media is a vital channel for communication to customers, partners and stakeholders. However, some organizations see it as a distraction to their employees and a potential security threat and reputation risks. The key, of course, is to maximize the opportunities it presents and minimize the risks.

As an alternative to simply banning or limiting employees from using social media, organizations should understand the role that these innovative services have in today’s world. With the appropriate amount of governance, organizations can leverage social media to help reach their objectives.

In order to develop, implement, monitor and improve social media activities within an organization, an effective governance framework is imperative. A social media strategy and policy should be established followed by a risk assessment. Based on the outcome of the risk assessment, embed key controls, including an acceptable use agreement, corporate image rules and branding guidelines. Implementation of operational best practice guidelines should cover blogging and usage of popular sites such as LinkedIn, Twitter, Facebook, and YouTube.

Finally, ensure that roles and responsibilities are defined, metrics and monitoring procedures are established, and training and communication organization-wide takes place to help provide awareness and conformity.

Whether your objectives are to generate exposure for your business, increase traffic to your site, build new business partnerships or bring in new, qualified leads, benefits from social media can be realized as long as there is an effective governance structure in place to mitigate the associated risks.

Vonya Global is Lowering the Cost of a SAS 70 Assessment

2010-05-04T14:28:00.002-05:00

Statement on Auditing Standards Number 70 (SAS 70) issued by the AICPA requires service organizations to obtain an external opinion assessing internal controls. Issued in 1993, the SAS 70 is not a new requirement but it has increased in relative importance since the enactment of the Sarbanes-Oxley Act of 2002 (SOX, Sarbox), Gramm-Leach-Bliley Act (GLBA), and other new regulatory requirements. Any service organization holding third party data must provide assurance that the data is protected. The certification process can be quite costly for all service organizations, and disproportionally so for smaller companies.

Vonya Global has a history of working with companies on SAS 70 readiness. The work completed by Vonya Global helps companies streamline their internal processes and controls making it easier for the certifying agent to complete the assessment. The easier it is to certify, the lower the cost of certification. As the SAS 70 is an annual requirement, the cost savings are realized each year.

For a limited time, Vonya Global is offering its SAS 70 readiness services at a discounted price. For more information please contact a representative of the firm.

The New SEC Proxy Disclosure Rules and the Relationship Between the Board and Management

2010-04-12T11:43:00.000-05:00

The way to effectively hold a company accountable for their actions is through transparency. On December 16, 2009, the U.S. Securities and Exchange Commission (SEC) approved new rules requiring public companies to increase their transparency around proxy disclosure, specifically:
• Board risk oversight practice and philosophy
• Executive compensation practices and policies
• Board leadership structure
• Board diversity
• Director qualifications and their “value add”

SEC Commentary on the rule states “Disclosure of the board’s oversight of the risk management process should provide important information to investors about how a company perceives the role of its board and the relationship between the board and senior management in managing the material risks facing the company.”

The relationship between the board and management has become of greater importance and will need to continue to strengthen.

Management is responsible for identifying, monitoring, managing, and communicating the risks to the board. As management it is important to use the time with the board and the committees to help them understand the real objective and risk exposure is in relation to the risk culture of the company. The board continually needs to access management’s understanding of risks, attitude towards risk, and their performance. Furthermore, the board must ensure that only well informed decisions are made.

Management manages risk and the board oversees management, therefore the continuous communication between the two, including the committees, is vital for success. The new proxy disclosure rules itself and any additional changes in corporate governance are going to push for continued improvement in this relationship.

Responding to Fraud Risk: the CAE’s Role

2010-03-16T15:07:00.007-05:00

Background: The Association of Certified Fraud Examiners (ACFE) conducts a bi-annual study on fraud investigations, the results of which get summarized in the ACFE Report to the Nation. The most recent report was issued in 2008 and revealed the following:

- U.S. organizations lose 7% of their annual revenues to fraud
- There is approximately $994 billion in fraud losses each year
- Fraud schemes typically last for at least 2 years before they are caught
- Corruption was the #1 scheme at 27% of all reported fraud cases
- False Billing was the #2 scheme at 24% of all reported fraud cases
- Frauds are most likely to be uncovered by a “tip” rather than any other method, including audit
- Roughly 38% of Frauds happened at small companies (>100 employees)
- Roughly 42% of Frauds happened at large companies (1,000+ employees)
- Roughly 39% of Frauds happened at Private Companies
- Roughly 28% of Frauds happened at Public Companies

What these statistics prove is while fraud may not happen at every company; no company is immune to fraud risk. As an inherent risk to business, fraud should be included in Enterprise Risk Management (ERM). Methods for managing and controlling the risk of fraud should include strategies for fraud prevention, fraud detection, and fraud deterrence.

The Chief Audit Executive (CAE) must be involved in the organizational anti-Fraud strategy. As with other business risks the CAE should be assessing Fraud Risk and evaluating the effectiveness of the anti-Fraud strategies. Here is a sample list of strategies:

Fraud Prevention

- Anti-Fraud Tone at the Top
- Strong Corporate Governance and Internal Control Environment
- Policies and Procedures to reflect mindset and actions
- Hire ethical employees (Background checks, signed forms, etc.)
- Code of Conduct – signed by every employee
- Conflict of Interest Statement (employees and business partners)

Fraud Detection

- Establish a Hotline
- Fraud Risk Assessment
- Fraud Penetration Study based on Schemes and Concealment Strategies
- Incorporate Fraud in every phase of an audit (SAS 99)
- Create/utilize a Red Flags Database
- Implement effective SOX Fraud Controls
- Data mine instead of sample testing
- Create a Toolkit including a resource roster of experts (Fraud expert, Investigator, Data mining, etc.)
- Continuously Monitor Transactions for possible Fraud

Fraud Deterrence

- Create an Internal Audit department
- Publicize Ethics Hotline
- Publicize Internal Fraud Cases and Punishment
- Publicize Continuous Monitoring Program

Vonya Global and the ACFE are not affiliated. Information in the opening paragraph is sourced from the ACFE 2008 Report to the Nation, which can be downloaded at the ACFE website.

NACD Directorship names its Top 50 Companies

2010-01-06T09:51:00.003-06:00

The National Association of Corporate Directors magazine, "Directorship", has recently released its list of the top 50 "Best Performing, Best Governed Companies in the Fortune 500." Vonya Global applauds the publications effort to recognize the companies which place an emphasis on Corporate Governance, Ethics, Integrity, and Citizenship. There are hundreds of lists that rank companies based on revenue, profit margin, growth potential, and many other financial and non-financial metrics, but this is the first (and only that we know of) that includes these other, arguably more important metrics to the evaluation equation.

The article stated: "A great employer posts poor earnings or a great profit maker is not a terrific corporate citizen. These facts suggested that something should be done to recognize companies that are both far sighted in terms of corporate governance and producing returns for their shareholders."

The top rated company in the "Nifty Fifty" was Goldman Sachs and their CEO, Lloyd Blankfein, was named the "Directorship" CEO of the Year. Our heartfelt congratulations goes out to Mr. Blankfien and all the other companies which made it on the list.

Vonya Global and the NACD are not related organizations

The 2009 Ponzi Collapse

2009-12-29T08:32:00.004-06:00

The great recession of 2009 brought with it 4 times the annual average of Ponzi scheme collapses (according to an AP report). Headlined by Bernie Madoff's $50 Billion blowout, there were over 150 Ponzi's revealed in 2009 compared to around 40 in 2008.

Was the Ponzi collapse a result of better governance or stricter enforcement? No. The economic situation created conditions which made it impossible for the schemes to continue. We still need better corporate governance, enhanced enforcement, and improved detection.

2009 - The Great Recession, 2010 - The Great Litigation?

2009-12-28T09:30:00.003-06:00

An article this morning in the New York Times reported that 4.7 million cases were filed in the New York court system - the most cases ever filed. Most of these cases were either directly (bad debts and soured deals) or indirectly (domestic violence as a result of lost jobs and foreclosures) a result of the financial crisis. The article stated:

"Judges and lawyers say the tales behind any number of cases, including low-level offenses like turnstile jumping and petty theft, are often a barometer of bad times. And they said that the data showed that courts nationally would be working through the recession’s consequences for years, much as they did with the flood of cases stemming from the crack cocaine epidemic of the 1980s, even after the epidemic had slowed."

Read the article for yourself and make up your own mind -
NY Times Article.

Corporate Crime Task Force Created

2009-11-18T08:56:00.005-06:00

It was announced on November 17th that President Obama's administration has created a Corporate Crime Task Force. U.S. Attorney General Eric H. Holder Jr. said, "Mortgages, securities and corporate fraud schemes have eroded the public's confidence in the nation's financial markets and have led to a growing sentiment that Wall Street does not play by the same rules as Main Street."

The L.A. Times reported, "The Financial Fraud Enforcement Task Force will attack what Holder called "unscrupulous executives, Ponzi scheme operators and common criminals" in much the same way that a similar task force created in 2002 by former President George W. Bush went after corporate malfeasance following the accounting scandals at Enron Corp. and WorldCom Inc."

The article continued: "The Fraud Enforcement and Recovery Act authorized $245 million annually in 2010 and 2011 to hire hundreds of prosecutors, agents and other federal officials to pursue financial fraud. It also strengthened and expanded money laundering laws and other statutes to apply to fraud committed by private mortgage lenders."

Is this something that should worry executives and corporate boards? Or... is this much ado about nothing?

A Proactive Response to Fraud Risk and Fraud Detection - The Fraud Penetration Study

2009-11-17T16:02:00.005-06:00

One of the few truly proactive approaches to fraud prevention and detection, a Fraud Penetration Study is the application of specific audit procedures to increase the likelihood of detecting fraud in a core business system. Unlike the traditional audit approach, the Fraud Penetration Study does not focus on controls or control effectiveness, but rather the authenticity of the transaction.

There are six steps to the Fraud Penetration Study: Risk Identification, Scenario Development, Concealment Analysis, Scoping, Data Mining, and Fraud Analysis.

Fraud risk identification starts with understanding the types of fraud risk. The starting point is accepting the concept of inherent fraud schemes. Once this concept is accepted, the auditor must understand how the scheme would occur in the specific business system; often times referred a fraud scenario.

The fraud scenario is built from understanding the variations of the scheme based on the opportunities for fraud, entities involved, internal controls in place, and business processes currently performed. In essence, the fraud scenario is how the inherent fraud scheme would occur in a company’s business process.

After the fraud scenario is developed, the auditor must identify and understand the common concealment strategies used to hide the fraud in this scenario. Common fraud concealment strategies are false documents, false representations and false approvals. The auditor should identify the red flags associated with the concealment strategies.

The structure of the fraud scenario defines the audit scope for the audit plan. The audit plan may have several fraud scenarios, but each fraud scenario needs its own data mining plan and its own fraud audit procedures. Also, the audit plan provides the auditor with the necessary information to find and reveal the fraud scenario.

Using a data mining tool like ACL(1) or IDEA(1), a sample of vendors would be selected consistent with the fraud data profile for the identified fraud scenario. Building the fraud data profile is the most important step in the fraud audit process. The goal is to select a biased and discreet number of transactions that are more likely to be fraudulent on which fraud audit procedures can be performed.

The purpose of the fraud audit procedure is to gather evidence that is created and stored external to the perpetrator to form the basis of the Fraud Analysis. The procedure should be designed to pierce the concealment strategy. In the false billing scheme, the weakness of the concealment strategy is that the vendor does not exist. If the auditor develops an audit procedure to show that the entity does not exist, the concealment strategy will be unveiled, and the fraud exposed.

Using this methodology, you will find out if there is fraud in your business and if done well, you will find it within the first 3 days of analysis.

1 ACL is a registered trademark of ACL Corporation and IDEA is a registered trademark of Caseware IDEA.

Looking for Ghost Employees in a Retail Environment

2009-11-10T11:17:00.002-06:00

Payroll Fraud, specifically “Ghost Employees” can create a significant financial burden on companies. How much? Well, according to Occupational Fraud and Abuse, by Joseph T. Wells, Obsidian Publishing Co. Inc., Ghost Employee Fraud has the highest median loss relative to all payroll fraud schemes at $275,000 per case. If it is happening at your company, it is hurting your company. Unfortunately for those of you in retail, you are one of the most susceptible.

What can be done?

A large retail organization, one of the Fortune 500 with well over 200,000 employees, has retained Vonya Global to search for Fraud in Payroll. Specifically we will be looking for Ghost Employees which (in our methodology) includes Fictitious Ghosts, No-Show Ghosts, Pre-employment Ghosts, Terminated Ghosts, Temporary Ghosts, Family/Friend Ghosts, and Temp Agency Ghosts.

Unlike an investigation, this project is a proactive approach to fraud detection. The company has no evidence or indication that payroll fraud is occurring, however they understand that based on their size and their industry they are susceptible. Our approach takes an inventory of all payroll data and files. Once we have all the information we will segregate it into groups with similar characteristics and through detailed data analysis we will identify anomalies. We are confident that we will identify Ghost Employees and as a result return hundreds of thousands of dollars to the company.

Contact us if you would like to find out more about this project or how we would help you identify fraud in your business.

House Financial Services Committee passes Garrett-Adler amendment

2009-11-04T14:47:00.000-06:00

The anticipated roll-call vote on the Garret-Adler amendment happened today... passing by a 37-32 vote. The amendment would exempt Small Caps from SOX 404 compliance. There is a long way to go before this bill becomes law, but it is said that the White House supports the bill.

Is this amendment a good thing? You can start a discussion here or follow the one going on now on LinkedIn.

Investors Opposed to Further SOX Delays

2009-11-02T11:59:00.000-06:00

The House Financial Services Committee is considering two amendments to either delay or repeal the requirement for SOX 404(b). The first would require separate studies by the Government Accountability Office and the Securities and Exchange Commission to evaluate the costs and benefits of complying with Section 404(b) for non-accelerated filers. The second would exempt all companies with less than $700 million in market capitalization from Section 404(b).

Investor groups quickly voiced their opposition to the amendments in an Oct. 26 letter to several key members of Congress. Signed by leaders from the Council of Institutional Investors, the Consumer Federation of America, the American Association of Individual Investors, and the CFA Centre for Financial Market Integrity, the letter opposes any effort to further defer or exempt any public companies from the internal control requirements of Section 404, which they say “would do a grave disservice to investors whose trust in the markets is an essential ingredient in any financial recovery.”

“It is our view that the Section 404(b) requirements under SOX provide significant benefits to investors, are valuable regardless of a company’s size and represent an appropriate use of a company’s resources given the importance a strong system of internal controls has in producing reliable financial reporting,” the letter states.

Excerpt taken from October 30, 2009 Compliance Week article written by Melissa Klein Aguilar

A roll-call vote is slated for November 4th.

Construction Auditing: the Foundation to Risk Management and Internal Control

2009-10-28T13:18:00.001-05:00

As the global economy slowly recovers, companies will begin to invest once again in large construction projects. Many projects that had been on hold through the downturn are now beginning to find funding. These projects include both new construction and significantly upgrading facilities such as: Distribution Centers, Manufacturing Facilities, Shared Service Centers, Retail Sites, Data Warehouses, Educational Facilities, and Healthcare Facilities.

While a multimillion dollar project represents one of a company’s largest capital expenditures, it is sometime on of the least controlled expenditures. On October 21st, the Senior Supervisors Group issued a report on the financial crisis and in it they stated, “…weaknesses in risk management and internal controls contributed to industry distress during the financial crisis.” Similarly, weak risk management practices and internal controls could lead to significant losses or delays in a large construction project.

Companies need to learn the lessons of the financial crisis and embed risk management and internal control into all processes, especially construction. The first step to improving risk management and internal control is to leverage the principals of audit. An audit, in this case a construction audit, provides the foundation.

Construction Auditing starts with the Construction Contract
A construction contract will include a variety items such as project description, project timeline, cost estimate, payment terms, documentation requirements and sections on insurance and indemnification. However, the contract should also include certain provisions to specifically protect the owner’s interest. The American Institute of Architects provides a series of standard construction contracts which can be used as a template for construction projects. While these templates provide a solid framework, they are not necessarily written with a bias towards owners rights. Provisions such as “Right-to-Audit” and “Change Orders” plus other internal control enhancements need to be customized. These modifications will improve the owner’s control over project costs, allow for recoveries, and are necessary to strengthen the ability to audit.

"The audit is an integral part of the construction project process. Performed well by seasoned professionals it will assure the Owner that financially they received the product contracted and paid for."

Knowing what to modify and even how to modify is not common knowledge and can’t be done through the legal review process. It is critical to have this review completed by an experienced construction audit professional and it should be done prior to executing the contract. Doing so will save thousands, if not hundreds of thousands of dollars throughout the project.

Pro Bono Construction Contract Health Check
Are you confident in your construction contracts, but would like a second look? For a limited time, Vonya Global will provide a pro bono review of your construction contracts. Certain limitations apply, please call or email for additional information.

Fraud Detection Workshop in Chicago October 27 - Afternoon Session Added

2009-10-13T17:16:00.000-05:00

Due to popular demand an afternoon session has been added to this workshop. The session will begin at 2:30 pm and conclude by 5:00 pm. Admission is free but registration is required. Please confirm by October 20, 2009.

About the Workshop
Fraud schemes are not complex. Yet, fraud is rarely caught until it is too late. Why? Understanding the fraud scheme is not enough. Identifying the fraud concealment strategy and how it is portrayed in data is the only way to detect fraud. It is essential to learn how to detect fraud before it is too late.

Data mining is the key tool to locate and recognize fraudulent transactions. This workshop will demonstrate:

- How to build a fraud scenario approach
- How to map data fields to fraud scenarios
- How to interpret data for patterns and frequency of fictitious vendors
- How to build the fraud audit plan to include data mining

Please visit the Vonya Global website to register or request additional information.

SEC: In-House 404 Costs Top Audit Fees (from CFO.com)

2009-10-08T11:07:00.000-05:00

A two year study conducted by the SEC revealed two very interesting statistics. First, Small companies pay more for SOX compliance than do Large companies. Not in absolute terms, but in relative terms. This information comes as no surprise to CFO's of small companies.

"Although larger companies incur higher compliance costs, smaller companies incur higher scaled costs (i.e., relative to their assets) on average," the SEC wrote in a report released Friday.

Second, internal SOX compliance costs are larger than external audit fees by a large percentage. This comes directly from the CFO.com article:

"What may come as a surprise is that the majority of Sarbox-compliance costs aren't going into auditors' pockets; rather, companies' in-house work to follow the 2002 law's internal-controls provision — Section 404 — is more largely to blame for the expense. The highest cost of Sarbox, the SEC said, is "internal labor costs," followed by audit fees and then costs related to another third party, such as a consultancy, used for help with compliance."

This all comes on the heels of the 4th extension the SEC has given Small Caps to comply with Section 404 of the Sarbanes-Oxley Act. As stated in an earlier post, Vonya Global has a proprietary methodology for helping Small Caps and IPO companies comply with the rigors of Sarbanes-Oxley. Sox OnPOINT™ is a top-down risk based approach which streamlines the compliance effort and is consistent with the PCAOB Audit Standard Number 5. Sox OnPOINT™ helps our clients reduce the cost of compliance.

For more information please visit our website or send us an email.

Small Caps Get Another SOX Reprieve

2009-10-07T17:11:00.000-05:00

The SEC announced on Friday, October 2, 2009 that the SOX deadline for Small Caps is pushed to June 2010. The effort by the regulatory body to make the compliance process easier for the Small public companies makes one wonder if the compliance requirement will ever stick. If so, Vonya Global has a proprietary methodology geared to help Small Caps and IPO's (newly listed public companies). SOX OnPOINT(TM) is a top-down risk based approach which streamlines the compliance effort and is consistent with the PCAOB Audit Standard Number 5.

http://www.vonyaglobal.com/sarbanes-oxley-sox-sarbox.html

The full release from the SEC can be found at: http://www.sec.gov/news/press/2009/2009-213.htm

2010 Hot Internal Audit Topics - what will be on top of your list?

2009-09-29T15:39:00.000-05:00

This is quick poll created by Veronika Fritz of Vonya Global. Check it out if you have a chance: http://polls.linkedin.com/p/59060/dsoui

FINAL REPORT: Strategic Plan for Fraud Prevention, Fraud Detection, and Fraud Deterrence

2009-09-28T22:13:00.000-05:00

Vonya Global surveyed Executives and Internal Auditors from private, public, and not-for-profit organizations, spanning many industries to gather opinions on strategic planning for fraud prevention, fraud detection, and fraud deterrence.

"Companies should do more to deter and detect fraud. Costs go far beyond the simple dollars someone steals or gains through materially misstated financial statements. Loss to employees and stockholders can be substantial.”
- Internal Auditor Response

Historically, there have been several studies conducted about fraud and fraud statistics, but none that deal directly with the strategic plans to manage fraud risks. The timing of this study is appropriate due to the heightened sensitivity to fraud due to the economic conditions. It seems more groups, including regulatory bodies, investors, clients, and suppliers are increasingly concerned about the ability to demonstrate effective fraud prevention and fraud detection strategies.

One of the goals of this report is to help organizations begin to evaluate the investment in fraud prevention, fraud detection, and fraud deterrence to determine if there are more effective ways to manage fraud risk.

A copy of the full report can be downloaded by following this link: Fraud Prevention, Fraud Detection, & Fraud Deterrence Report

Fraud Detection: An Executive Briefing on Data Mining Techniques

2009-09-22T13:54:00.000-05:00

Fraud Detection Workshop, October 27, 2009

Fraud schemes are not complex. Yet, fraud is rarely caught until it is too late. Why? Understanding the fraud scheme is not enough. Identifying the fraud concealment strategy and how it is portrayed in data is the only way to detect fraud. It is essential to learn how to detect fraud before it is too late.

Data mining is the key tool to locate and recognize fraudulent transactions. This workshop will demonstrate:

How to build a fraud scenario approach
How to map data fields to fraud scenarios
How to interpret data for patterns and frequency of fictitious vendors
How to build the fraud audit plan to include data mining

The workshop will be held in Chicago, IL USA on Tuesday, October 27, 2009. The session will run from 8:30 am through 11:00 am. Coffee and a light breakfast will be served.

http://www.vonyaglobal.com/fraud-detection-workshop.html