Risk During Times of High Employment and Layoffs
We're in the midst of unusual times for the world economy. We have inflation that is deemed unacceptable by the reserve banks, and a number of companies with poor prospects are letting thousands of employees go. But, while it varies significantly by area, overall most countries have low levels of unemployment.
While some companies are laying off employees in droves, others are finding it hard to find qualified people for essential positions.
These represent times of different risks to the business than in the past. They are also times where risk and audit practitioners can add huge value by helping leaders understand and address those risks.
I am talking about risks related to not having the people you need to perform critical internal controls.
Let’s consider these two situations. They are a little different, so I will start with the situation where your company is going through a layoff process.
The Risk Involved in Letting People Go
I admit I did not handle this issue well when different companies I was with decided to trim staff counts.
The first time was with Tosco. I had been there about three years (out of the more than a decade I spent as its chief audit executive) when the company, with board approval, determined it needed to cut costs.
My priority was on protecting my staff. I cut my training and other costs but was forced by the audit committee to let one person go — a sad day.
While I worried about how the rest of the management team was going to handle the layoffs, I was assured by the CFO and others that they were being careful. They would make sure all critical areas remain adequately staffed. I trusted them (without, in hindsight, doing enough to confirm the trust was justified), and fortunately our later audits did not find that the layoffs had adversely affected operations or key controls.
Solectron was the next company. This time, I was concerned as the dictate was that every department had to release 10% of its staff. There was no concern for risk, no concern for using any kind of judgment on where the company could afford to let people go.
I was allowed to satisfy the monster by agreeing not to fill open positions, but the blanket cuts made no business sense to me.
So I asked for a meeting with the CFO and shared my concerns.
He got angry and told me that the CEO had made the decision and the board had approved it. He wouldn’t listen to my argument that it would be better to take a risk-based approach, understanding where we could and could not afford layoffs.
I talked to the chair of the audit committee. He, at least, listened. But he told me the decision was final and I should let it be.
I didn’t have a good relationship with the CFO. This altercation didn’t help — but I am satisfied that I did the right thing by talking to the CFO and audit committee.
Looking back, it wasn’t enough. I will explain why later. The company did end up having to rehire several people it couldn’t afford to lose.
Maxtor, my next company, also let people go. But its management team was far more capable and I was comfortable, after talking to them, that they were minimizing layoffs and being very careful not to impact operations or key controls. Again, I might have done more.
Learning Opportunities
At Business Objects, I did do more, but the situation was different. This time, the company had announced that it had agreed to be acquired by SAP. Many people decided they would leave rather than working for SAP. My team obtained weekly reports that showed who had tendered their resignation, and called the managers of those areas to discuss how the risks and controls would be addressed.
I wish I had taken this step in my earlier positions.
Related Article: Thriving in Turbulent Times: The Experienced Leader and the Prepared Risk Taker
The Risk of Not Filling Open Positions
The situation is a little different for a company that is finding it difficult to fill open positions.
The risk is similar: there are insufficient competent and experienced people to manage risks and perform critical controls.
My advice for audit teams in such organizations is to find out where the open positions are. Then discuss with management of those areas how they are addressing risks and performing controls in those areas.
- Get reports that show who is being let go, who is leaving and what positions are open.
- Consider the risk that key controls will not be properly performed.
- Discuss with management how those risks are being addressed.
- Where multiple people in an area are leaving, consider whether there is a management problem.
- Where positions are remaining open for an extended period — and this represents a serious risk to the business — explore why. Should management take a different approach?
Related Article: The Greatest Risk and the Greatest Asset: People
Where Risk and Audit Can Help
This is a great opportunity for risk and audit practitioners to add great value, as well as an opportunity for the two to form a partnership.
Most risk practitioners don’t have the bandwidth to assess the likelihood that controls relied upon to manage risk at desired levels will fail. They tend to assume that controls are effective. They can partner with internal auditors to upgrade their insights. The information obtained by internal audit can be used to fuel risk discussions with management and upgrade risk reporting.
Similarly, when the risk practitioner learns about related issues, they can inform internal audit who can dig a little deeper.
What do you think?
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About the Author
Norman Marks, CPA, CRMA is an evangelist for “better run business,” focusing on corporate governance, risk management, internal audit, enterprise performance, and the value of information. He is also a mentor to individuals and organizations around the world, the author of World-Class Risk Management and publishes regularly on his own blog.
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