REGULATORS, AUDITORS AND EXAMINERS --OH MY!

Q: What do you get if you cross a wild, ferocious, man-eating tiger with an internal auditor?
A: A dull tiger.


OK, by a show of hands, how many of you are excited when you receive the audit engagement letter or regulatory exam notification? Do you mark the dates on your calendar with the same enthusiasm with which you block off your two-week mid-winter Caribbean vacation?

Given what I've observed over the years, I think not. I am here to suggest that we can and should embrace those individuals entrusted with auditing and examining our Organizations--and, no, I have not lost my good sense.

I recall my days as a bank auditor, when my arrival on site appeared to suck the joy right out of the room. Mind you, in hindsight I can humbly admit that the process owners certainly knew their craft far better and more realistically than my well-studied audit manuals could have prepared me. And while I and many of my fellow auditors throughout history have long sought to conduct dispassionate audits with collegial objectivity, management frustration often bubbled just below the surface, bursting forth as certain numbered comments touched unforeseen raw nerves.

The passing of years witnessed my migration away from the internal audit function toward the risk management function via a brief passage through a regulatory agency. At each stage, I tried to bring all perspectives together into one cohesive approach to audits and regulatory exams. I do not believe that I am alone in this regard, as many Leaders more experienced than me have found themselves reconciling multiple facets of the audit/exam process throughout our careers.

What I find fascinating is how many otherwise well-balanced, seasoned Leaders bristle at the notion that they could learn from--let alone seriously consider--the noted exceptions or discussed observations during an operational audit or regulatory examination. The very same Leaders who would pay consultants handsomely to deconstruct and reorganize entire Divisions within the Organization, or who engage high-end vendors to supplant legacy technology with enterprise solutions, will balk at the suggestion that a professional committed to assuring the safety and soundness of the Organization would be any less committed to objective and sustainable improvement.

I am certainly not suggesting that we butter up, befriend or brown nose the independent auditor or government regulator charged with overseeing the thorough examination of our Organizations. I am suggesting that we, as Leaders, owe our Organizations a fiduciary duty to approach the audit/exam with an open mind and a willingness to accept that--despite our best efforts--our Teams could be performing one or more functions with greater care. Unlike the consultants and vendors we hire, our auditors and regulators are not primarily driven by a profit motive or to extract repeat business.

My first-hand experience with administering audits, especially those supported by early warning systems, was to (1) gain a better understanding of the operational processes; (2) identify remedies that had been made to previously-identified exceptions; and (3) offer best practice guidance and foreshadowing of regulatory effects that would impact the process owner's area of responsibility. Our Audit Team certainly wasn't there to one-up management or disrupt well-functioning operations.

On the Risk Management side, despite others' tendencies to view regulatory examinations as declarations of war against the various Organizations, I sought to assume the best intentions. Though it comes as a shock to some, I generally received what I had assumed: professional auditors/examiners (a) conducting objective assessments; (b) examining and documenting the sufficiency of mitigating controls; and (c) offering improvements supported either by industry best practices or foretellings of regulatory rule making. And although I had observed other Leaders come to blows in heated battle with examiners, I never found myself in that adversarial position.

We will all certainly continue to look forward to that two-week mid-winter Caribbean jaunt with much more excited anticipation than any audit or regulatory exam, but as Leaders we can certainly adopt a more collegial and consultative approach to those periodic and foreseeable occasions. You won't be disappointed.

THE CONSULTANT WHO CAME TO DINNER

"Consultants have credibility because they are not dumb enough to work at your company." ~Scott Adams (Creator of Dilbert)


Scott Adams' quote reminds me of a conversation I could imagine having with a Leader who is experiencing unacceptable levels of turnover among high-quality employees in a highly-competitive market:

HERB: "Cris, how can I improve my retention of my key Leaders? Seems like I've got a revolving door with our competition and the hiring/training costs are killing our budget."

ME: "Simple, Herb! Make them consultants--then they'll NEVER leave."

Seriously, have you ever felt like Bette Davis after six months with Sheridan Whiteside ["The Man Who Came to Dinner" (1942)] when your consultant remains AND your project remains unfinished. I have certainly overstated the case for hyperbole, but there's probably not one among us who hasn't shared at least one experience of the "permanent consultant." Some people just don't know when to say good-bye.

Consultants can serve many useful and legitimate purposes for your Organization.

• There are projects and initiatives that require a special expertise that you don't retain in-house.
• You partner with a vendor to convert to a new enterprise financial platform for which the vendor provides the consulting services.
• I am also a firm believer that some organizational change initiatives, particularly those involving massive shifts in leadership, training and development; or restructuring that involves downsizing, are appropriate times to employ an outside contractor to lessen anxiety and retain good will among the permanent Leadership and Teams.
• Finally, there are those instances where you simply cannot be "a prophet in your own village." Whereupon, an outside contractor can deliver firm--sometimes uncomfortable--messages with a compassionate detachment that internal Leaders may not be able to effectively foster.
• ...and of course I'd like to hear YOUR additional examples.

So you've got a project initiative that your Leadership Team has concluded will best be handled by employing a contract consultant.
YOU will be held accountable for the outcome, for better or for worse.
How best to proceed?

1. List the particulars with clarity in a Contract of sufficient complexity. If you can keep it to one or two pages, great! (If your Attorneys get paid by the word, it may be longer.) Include at a minimum:
• Define the successful outcome that signals the project (and, hence, the contract) have been completely fulfilled.
• Completion Date and any concrete Milestone Dates that must be met.
• Resources that each party will supply to the project.
• Boundaries and process for requesting and approving change orders.
• Billing and payment process.
• Dispute resolution process.
• ...and any additional topics that YOU or your Organization include to guard against due to industry standards or past experience.
2. Meet with the Consultant to discuss the Contract in sufficient detail to confirm that:
• All expectations are mutually understood and there has been a "meeting of the minds."
• Requested changes can be considered for adoption. [Your Consultant may have his/her own standard Contract or may have been advised to modify/add certain terms by his/her own Attorney.]
• Be exceedingly but politely clear that YOU are to be held accountable for the results and will be closely observing the Project's progress.
3. Monitor the Project's progress and meet periodically with the Consultant to:
• Confirm actual progress.
• Openly discuss challenges, limitations, and unanticipated factors that may need to be addressed.
• Provide additional information or remove Organizational roadblocks that will aid the Consultant.
4. Celebrate the successful outcome of the Project! (Who knows...you might even let the Consultant come to dinner...)

It all comes down to constant and collaborative communication and an unambiguous expectation of accountability between YOU and your Consultant. While the Consultant you hire is not an employee or a permanent member of your Team, the leadership style you employ should closely resemble how you communicate daily with your own Team and Leaders and establish accountability amongst yourselves.