The opposite of a bad system – an internal auditor’s perspective

The opposite of a bad system

I recently read this statement, and I can’t remember where I read it. It goes “The opposite of a bad system isn’t chaos. It’s a good system.” The statement got me thinking about the fallacy inherent in the current thinking about the crisis and lessons learned from the internal audit profession which may be applicable to the problem at hand.

Whenever I am talking to people about the current economic crisis, I get the feeling there is an acceptance of the inevitability of the chaos we’re descending into. People are so battered and bruised by the 2008 crisis that a certain lethargy appears to have taken hold in the minds. This is what it is, and this is what we will need to face and confront. Two issues I have with that:

  1. I’m not sure either a descent into chaos or patching the current bad system are the only two options. They appear as the only two viable options because we keep starting from the same position in our assessment of possible solutions;
  2. I’m not sure that a mere confrontation of the current chaos is the way out. Yes, conventional wisdom states “the only way out is through”. This, by the way, is a Robert Frost quote, and is not the verbatim one either. He actually puts the words “The best way out is always through”, in the mouth of one of his characters in A servant to servants. The other character agrees, but conditionally.

My issue with chaos

As the statement I started with reads, chaos is not the only alternative to a bad system. However, arguing chaos is the alternative allows for the incumbents to not have to confront the fundamental issues with the current, bad system. Putting the current, bad system in opposition to chaos is asking for a temporary solution at best. “Assist us with all your assets, then let us be, we’ll fix it. Trust us.” It’s a traditional defensive move of an incumbent who wants to stay in power.

In “So long, and thanks for all the fish”, Douglas Adams tells the story of a civilization of humans with a ruling political class of lizards. The humans only vote for lizards, not for humans, because of they would vote for a human they are afraid the wrong lizard may get in office. The book was written in 1984 and although it’s light entertainment there are some very interesting ideas and positions in it. Among which is the one about the lizards.

The erroneous assumption

The assumption now, as the assumption by the civilization which Douglas Adams refers to, is that there is no alternative to the bad system but chaos. This argument was pushed to the limit and apparently abused in 2008. The banking system as an example of the ‘bad system’ needed to be rescued by massive money infusions as a hemorrhage would lead to chaos. So we patched the system. We all did. We effectively all paid for it. Once the bleeding had stopped on the outside of the patient, further intervention was not needed. Was actually refused by the patient. No real structural changes were implemented.

Think about the comparison to a patient: he comes into the ER bleeding profusely from multiple wounds. The doctors have clear indications there is massive internal bleeding going on as well. The patient, barely conscious, submits to some tests and emergency treatment. However, after a couple of days in treatment and feeling a bit better, the patient decides to leave the hospital, right before a more in-depth assessment is made. And leaves to continue on his traditional path, without really, fundamentally changing anything essential about his behavior.

Changing the diet

The point being that a fundamental life change often do increase the chances of survival of the patient. It will require a significant adaptation in lifestyle. It will require a change of diet, at least. It may not really be that enjoyable, especially when compared to a prior life of debauchery. But it will, in the end, lead to a better quality of life and longevity of both the patient and those around him invested in him. And that’s what really matters.

So, think about it. The opposite of a bad system is not necessarily chaos. It can also be a good system.

Conditional treatment

Up to today, I have yet to see real conditional clauses being linked to treatment of a bank or a business in trouble because of lack of due diligence. That should change: we will save you, subject to certain behavioral changes on your part. Perhaps our banks, business and institutions need these clauses. Public means have been too readily available to bail out those who did not exercise due diligence. Let’s be honest, due diligence has become a very empty concept. Future treatment should be subject to clauses which are measurably leading to a good system.

The internal auditor’s approach

I’m an internal auditor. As an internal auditor, I usually see issues before they become common knowledge. I also know, from an experience point of view, how difficult it is to make people, departments and entire organizations change their behavior.

As internal auditors, our challenge is to ensure recommendations are implementable. They should not be too high level, because that makes them not implementable from a practical point of view. They should not be too distant from the daily reality either, even when concrete, because that would make them not implementable because they are not in line with current practices, which would make the change trajectory too complicated. And they should not be too determined by the incumbent responsible for the issue, as that would not create enough change to make a real difference and solve the problem.

The necessary steps – an internal auditors’ perspective

I think the move from a bad system to a good system, avoiding chaos, will require the following aspects which are an integral part of the mindset of the internal auditor:

  • We need to create awareness that a change is needed. For this, a thorough diagnosis of the entirety of the issues is needed, not based on opinion, but on facts and figures. What is going on, and how will it impact our future?
  • We need to identify the deficiencies in the current system at the right level of detail. The right level is the level at which a change in the processes and procedures will result in a reduction of the exposure to the failures of the bad system.
  • We need to co-develop solutions with the incumbents, without being influenced by their logical need to maintain the status quo. The systems needs to be improved, and in some cases it will result in a significant redefinition of the current process.
  • We need to plan the improvement actions in an overall approach to fixing the systems. These improvement actions and the overall plan needs to be transparent and communicated to all stakeholders.
  • We need to closely monitor the execution of the improvement actions.

In conclusion, there is an alternative to chaos. It will however be bad tasting medicine for the incumbent bank and business owners. They will not like the taste. However, their responsibility is social as we all partake in saving them. They therefore need to be held to very clear objectives which will structurally improve their functioning. Even if it means significantly changing their business models.