Why are accountants and other money managers not always included as core players in crisis planning and preparedness? Why are they sometimes seen simply as tactical contributors, maybe concerned more with business continuity and system recovery?
The reality is that their full participation is vital. Crises cause a variety of impacts — organisational, reputational, operational and political — but no crisis impact is typically as immediate as the financial fallout.
The cost impact of a major crisis can be staggering. Think no further than BHP Billiton which lost $8.9 billion of market value in a single day when the Brazilian government announced a mega-claim against the company arising from the Samarco dam collapse. Or think of the Costa Concordia disaster off the coast of Italy, where refloating and removing the sunken cruise ship took total costs to well over £1 billion. Or the Volkswagen emissions crisis which has already cost the company more than $20 billion . . . and counting.
It might be tempting to think that such massive crises are exceptional and only apply to big multinational corporations. But a study of Australian crises over a ten year period showed one in four crises cost the organisation affected in excess of $100 million and more than 25% of the organisations went out of business or ceased to exist in their current form.
In the face of such stark numbers you would hope that any organisation’s bean counters were intimately involved in crisis planning. But here again the facts suggest otherwise.
One indication of the worrying reality can be seen in a survey of financial analysts and investor relations officers at companies across Canada and the United States. Of responding analysts, 85% said a corporate crisis — fraud resulting in accounting restatement — has the greatest negative impact on a company’s value, yet over 50% said their company plan prepared them only for an operational crisis. Furthermore, 50% didn’t even know if their company conducted crisis simulations.
Commenting on these conclusions, Tom Enright, President of the Canadian Investor Relations Institute, said investment relations officers needed to play a much larger role in developing the crisis communications plan, executing crisis drills and regularly updating the document. He said they should be involved in the process from beginning to end, but our question is: why isn’t that always so?
Anyone who doubts the importance of this challenge need only look at the dark history of financial and accounting-related crises. Accounting fraud and financial mismanagement represent very high levels of risk, sometimes with massive losses, yet resulting crises continue to grab the headlines — choose your favourite example. And most often, such cases go right to the heart of the new concept of Crisis Proofing, with its increased focus on prevention.
The Crisis Proof organisation demands executives and managers at all levels who understand that crisis management is not just about what to do when a crisis strikes but how to identify potential crises and how to act to reduce the chances of a crisis happening in the first place.
While companies have auditors, fraud units, risk assessors and forensic accountants, these activities are typically seen as part of asset protection and risk management rather than as core elements of crisis preparedness. However, industry experts know that most crises are preceded by red flags, and the detection of warning signs should be a vital role for accountants and financial managers. If they are not intimately involved, then it’s time for a major rethink.