​​Risk and Control Issues Commonly Overlooked by Internal Auditing 5: Management

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​​​​In an earlier post, I mentioned that sometimes people fail to perform because their managers are ineffective. Let's explore this further.

Managers at an operating level, even first level su​pervisors, can raise or reduce the effectiveness of their staff — not only those reporting directly to them, but other groups who have to work with the group. A failure to manage can lead to:

  • Poor operating results. For example, de-motivated employees are poor salespeople, less dedicated in their pursuit of purchasing opportunities, and less willing to put in the extra effort to optimize performance in general.
  • Inconsistent operation of controls. Poor management can deprive staff of required training, information required to perform their assigned duties, and a reduced level of supervision.
  • Compliance failures. Lack of training and supervision, together with de-motivated employees (who are also more likely to steal), increases the risk of non-compliance. De-motivated employees are also more likely to bypass controls that are there for their safety.


As you take poor management practices up a level, the problem gets worse. More people are affected and you start to see a worsening of the general mood, the culture of the organization.

Ineffective management at the top of the organization can destroy it. I have had the misfortune of working with CEOs that had one or more of these problems:

  • Did not trust others, delegated little, and stifled both initiative and decision-making.
  • Encouraged competition and tension among his direct reports. This led to the executive team failing to work together, even hiding information from each other; duplicate initiatives; the inability to optimize information technology across the organization (everybody looked out for themselves); and a corporate culture that reflected all of the above. We even had different divisions competing with each other for the same customer deal.
  • Pampered the executive team with a million dollar office renovation (even to the point of an expensive espresso machine limited to officer use), and awarded millions in no-cost stock options, at the same time as more than a thousand employees were fired for cost-cutting purposes. The corporate culture was poisonous.
  • Failed to see the inability of a long-time associate to perform. This individual was responsible for the development of new products, but was unable to deliver cost-effective, quality products on time. Even though revenue was falling (and the company lost its #1 position in the market), the CEO stuck by his man until both were fired by the board. The new CEO was excellent, but it was too late to save the company.
  • Did not have a vision for the company. He was rooted in his prior success and unable to see the change that was coming to the market.
  • Was unable to make the hard decisions. Even though the business was using less than 50 percent of factory capacity (it had over a hundred manufacturing locations), he could not make the decision to close and consolidate.


I am sure you could add to the list, probably tripling it with examples of top management failure.

But, as internal auditors we need to ask whether we are awake to the failure to manage — at all or any levels. If we see it, what action are we taking? Are we assessing it? Are we reporting it — to the audit committee, if necessary?

Are we assessing and providing assurance on the risk of poor management?

Are you?​​


 

 

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