They Say You Want A Revolution

In a 2008 edition of Nature – the international weekly journal of science – Jean-Philippe Bouchaud has a great essay titled Economics Needs A Scientific Revolution.

As McLeod Governance read through each passage in the waiting room of our doctor’s surgery, it was difficult to think that Bouchaud was not also challenging the world of internal audit and the independent assurance that she seeks to provide to interested spectators.

Rockets fly to the moon, energy is extracted from minute changes of atomic mass without major havoc, global positioning satellites help millions of people find their way home. What is the flagship achievement of economics, apart from its recurrent inability to predict and avert crises, including the current worldwide credit crunch?

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What exactly is the flagship achievement of internal audit or for that matter risk management?

There was an internal audit function at Enron.

There was ample risk management skill sets within Lehman Brothers.

That being the case, was it not the skill sets that let the disciplines down but the frameworks against which they operated.

As Bouchaud notes:

Classical economics (read here internal auditing / risk management) is built on very strong assumptions that quickly become axioms – the rationality of economic agents, the invisible hand and market efficiency etc (read here COSO / ERM and any number of national standards on risk management).

Physicists, on the other hand, have learned to be suspicious of axioms and models. If empirical observation is incompatible with the model, the most must be trashed or amended, even if it is conceptually beautiful or mathematically convenient.

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Where post Enron and Lehman has there been an examination of the underlying frameworks upon which our independant assurance is based?

We have always held the truths to be self evident that a strong control environment is one where there are policies and procedures – but what if that isnt the case?

What if the tone at the top is overrated? We have all seen the many studies that show that corporate governance may or may not correlate to strong economic performance.

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McLeod Governance is of the view that we have the right framework but that we lose the opportunity with each case study of distress to retest the frameworks for ongoing relevance.

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