Thursday, November 17, 2011

Executive Compensation: Set a Clear Course

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.

Thursday, October 20, 2011

Digital Knowledge - Is Your Board of Directors Keeping Up?


[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.

Friday, October 7, 2011

Boardroom Digital Literacy - R U Talking to Me?



[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.

Thursday, September 15, 2011

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

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.

Friday, August 26, 2011

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

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.

Friday, August 19, 2011

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


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!



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.

Friday, July 15, 2011

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


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.


Tuesday, July 12, 2011

Board Director and Audit Committee Member Independence

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.

Wednesday, June 1, 2011

The GRC Approach - for Small Internal Audit Departments

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.

Tuesday, May 24, 2011

When does GRC Fit within a Small Audit Shop?

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.


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.

Wednesday, May 18, 2011

Internal Audit Departments and Building a Definition of Risk

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.


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.

Wednesday, May 11, 2011

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

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

May 10, 2011

The overall situation is gradually improving. My next report will not be until early June around the 3-month anniversary of the main temblor.

Total aftershocks over the past 2 weeks are as follows:
    Lunchtime 25th April to 2nd May – 208 Lunchtime 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.

Friday, May 6, 2011

Earthquake Sickness - Japan Earthquake Update April 25, 2011

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

April 25, 2011

Total aftershocks over the past 2 weeks are as follows:

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

Cherry blossom-viewing season in the Tokyo area is over and is now moving up North through the worst affected regions on the way to its inevitable conclusion in Hokkaido in mid-May.

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 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 As if the grief of loved ones lost isn't enough, Japanese survivors are now suffering from "earthquake sickness," with symptoms like dizziness and anxiety. The residents of northeastern Japan live with constant reminders of the powerful March earthquake that sent a deadly tsunami crashing into their shores. Aftershocks occur almost daily. And many survivors sometimes feel the ground shaking even when it is not. Doctors say the sensation is just one of the symptoms of the "earthquake sickness" that many survivors now have to contend with, on top of everything else. Here, a brief guide:
      What is "earthquake sickness"? The term refers to a collection of sensations earthquake survivors sometimes experience, even long after the ground stops trembling. The main symptom is dizziness, which doctors in Japan have seen a lot of lately. The condition is "similar to motion sickness," says Dr. Hideaki Sakata of the Mejiro University Clinic, as quoted by AFP. But for people worried the next deadly temblor could hit at any time, another symptom — the phantom quake — can be the most stressful. What is a phantom quake? It's when someone is convinced the Earth is rumbling under his feet although, in reality, it is perfectly still. "Sometimes I'm sitting with my friends and I tense up and say, 'Do you feel that?'" says Wakana Oyamada, an office worker in Shibuya, as quoted by The Irish Times, "and they haven't because it was in my imagination." Dr. Sakata says the sensation is similar to the lingering feeling of swaying people sometimes experience when they first get off a boat. Are there any other symptoms? Yes, anxiety. Understandably, earthquake survivors commonly worry that another Big One could happen at any moment. That concern has been impossible to ignore in northeastern Japan. The area devastated by the quake and tsunami on March 11 had been rattled by more than 400 aftershocks of magnitude 5.0 or greater, with more than 65 of magnitude 6.0 or higher, and at least five of magnitude 7.0. Every one of them had the potential to push a few more people past the breaking point. Has this hit the Japanese harder than earthquake survivors elsewhere? Quite possibly. In Japan, every time an aftershock is strong enough to rattle the walls, people wonder whether it will send another tsunami crashing into the damaged Fukushima nuclear plant, releasing a new burst of radiation. "People are getting too sensitive," says Dr. Kazuhiro Soeda, as quoted by The New York Times. "This is something we've never experienced before."

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.

Tuesday, May 3, 2011

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

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

April 11, 2011

Here is an update on the situation in Japan which I originally compiled as of lunchtime Monday 11th April 2011.

However, following yet another major aftershock (7.1 Richter Scale) late in the afternoon on the 11th, which was pretty much right at the problem reactor site by the way, the tectonic situation has changed dramatically with approx. 85 additional aftershocks over the past 20 hours alone, with another major one this morning at 8.15 (of strength 6.3) but with an epicenter very close to Tokyo in Chiba. Refer “Aftershock and Seismic” section below for details.

Over the past week, mother nature delivered 2 reminders to keep us focused on tectonics as well as remind us of the need to keep moving forward.
  • 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.

Friday, April 29, 2011

Situation Still Bad - Japan Earthquake Update April 4, 2011

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

April 4, 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 (11,578) and missing (16,451) continues to climb every day and is now is excess of 30,000, with in excess of 150,000 still in temporary shelters in the worst affected regions.

A massive search operation to locate larger numbers of the missing commenced on Saturday 2nd April in tandem with the commencement of Spring tides that makes it easier to spot bodies when the tide ebbs. The 30kn exclusion zone around the problem reactor side is not included in search operations for the time being.

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:
    Researchers: 30-meter tsunami in Ofunato
    The latest research on the March 11 tsunami that slammed into Ofunato city in Iwate Prefecture, northern Japan shows that it was nearly 30 meters high.
    A joint research team from Yokohama National University and University of Tokyo surveying the Ofunato city shoreline made the discovery.
    They found fishing equipment scattered on the high cliff of the city's Ryori Bay and have determined the tsunami reached as high as 29.6 meters.
    The research group says the great height of the tsunami was formed by the shape of the narrow bay. They will continue to survey traces of the tsunami to clarify the scale the tsunami.
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.

Thursday, April 28, 2011

Tokyo Slowly Improving - Japan Earthquake Update March 29, 2011

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:
    Fission products remain inside the fuel under normal circumstances. When fuel resides in the core, it contains an amount of fission products proportional to the total energy it generated. When the fuel is depleted, it is moved to spent fuel pools and ultimately to dry cask storage, long-term repositories, or reprocessing facilities. At the Fukushima nuclear power plants, fuel inside the core (and possibly the spent fuel pools) is suspected to have likely been damaged. Because of this, some fission products, especially the gaseous products, have likely been released. We do not currently have enough information to know exactly which (or in what amount) fission products have been released. Not all fission products are harmful. Although a few are gaseous, which enables them to travel long distances through the atmosphere, most are not highly mobile and will thus remain localized near the reactor site. Although nearly all fission products emit radiation, only some are potentially harmful to humans. The chart below lists various important fission products along with their yields – the frequency at which they are produced from fission. For example, 6.3% of fission events (on average) will produce xenon-135 (after the highly unstable fission products rapidly decay). The half-life is a general time scale for how long the listed radioactive fission product will exist before decaying to a more stable fission product. Note that cesium and iodine, which were detected near the Fukushima site, are by far the most frequently occurring radioactive fission product elements.
    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
    *Cs-133 is stable but has a high fission yield, but it will then produce Cs-134 from absorbing neutrons in the reactor and Cs-134 is radioactive with a ~2 year half-life. **Half-life reported in the table is for Tc-99. Mo-99 has a half-life of ~66 hours, which then decays to Tc-99m (metastable form of Tc-99) with a half-life of ~6 hours. The Tc-99m then decays to the Tc-99 with the 200,000 year half-life reported in the table.
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 Tokyo Electric Power Company says plutonium has been found in soil samples from the Fukushima Daiichi nuclear power plant. It says the radioactive substance appears to be related to the ongoing nuclear accident, but the level detected is the same as that found in other parts of Japan and does not pose a threat to human health. TEPCO collected samples from 5 locations around the power plant over 2 days from March 21st and found 2 samples contaminated with plutonium. Plutonium is a byproduct of the nuclear power generation process. At the number 3 reactor of the Fukushima plant, plutonium is an ingredient in mixed oxide, or MOX, fuel. Radioactivity from plutonium can be shielded by a sheet of paper. But it can remain in lungs and other organs to cause long-term damages including cancer. The Nuclear and Industrial Safety Agency says the detected level is the same as that found in the environment and not health-threatening for workers who conducted the sampling, nor residents in surrounding areas. The agency said it is awaiting the results of another survey by the Science Ministry outside of a 20-kilometer radius from the plant, as well as a further survey by TEPCO in the plant compound. Tuesday, March 29, 2011 02:20 +0900 (JST)

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.