Example #2: Cycles in Business Oversight
Early in 1999, in response to public complaints by then-U.S. Securities and Exchange Commission chairman Arthur Levitt about the inadequacy of some audits of large businesses, the Public Oversight Board (at that time the self-regulating body for auditors in the U.S.) created a Panel on Audit Effectiveness. This panel, made up of eminent people from business, government, academia, and accounting, undertook, supposedly, an objective investigation of Levitt’s charges and developed a comprehensive response to them.
Their undoing was in seeing this "return to governance" environment as a swing back on a pendulum that had swung too far in the direction of license and conflict of interest. In its final report, delivered in May 2000, the Panel said that "While many specific recommendations are made for improvements in the conduct of audits and the governance of our profession, our report demonstrates that both the profession and the quality of its audits are fundamentally sound." In other words, while there might on rare occasions be inadequate or flawed audits, this was a minor problem that could be remedied by going back to the basics of auditing.
As we all know, in 2002, along came the Enron, WorldCom, Tyco, A&P, Merck, and Xerox auditing debacles (among others).
The Panel appeared to believe that if auditors just went back to their old basic principles of auditing—really only a few minor readjustments—everything would be OK. But it couldn’t be because too much had changed.
For one thing, there were formerly only a handful of dominant organization types. They tended to have set, prescribed, comparable processes and structures. Their operations generally conformed to widely-held principles. Thus, we could develop entire constructs of law, regulation, accounting, worker benefits—all the bits and pieces that added up to the social contracts between the organization and its stakeholders and the greater society at large. This was true whether considering family farms, the guilds, trade associations, merchant entrepreneurs, or megacorporations.
In the 21st century, however, it is clear that there will be no "typical" organization of any kind. Instead, whether small or medium or large, we are diversifying and multiplying and morphing into hyborgs—hybrid organizations that have inner and outer workings in common with few others, perhaps only themselves.
For example, operational structure today could include any permutation of
Centralized versus decentralized control
Virtual versus permanent versus contract employees
Intangible versus tangible assets
In-sourced versus outsourced work
Wholly-owned subsidiaries versus majority stakes versus minority stakes versus joint ventures versus strategic alliances versus licensing versus leasing
Local versus national versus regional versus offshore versus transnational versus global operations
Businesses less and less resemble each other or the models taught in business schools. They are more and more ad hoc and fluid, each one creating its own unique template, which can transform itself into something else as circumstances require. Auditing such organizations, especially when they engage in questionable practices, as Enron showed so clearly, demands an ability to think outside the box and a clear-eyed capacity to see the differences between today’s and yesterday’s business organizations.
Our comparing and controlling systems cannot go back to where they were. They will continue to be inadequate until we devise new ones that are calibrated to a unit of one. For example, just as there is talk of medicine’s evolving to address each person’s specific genotype (with individually timed and targeted pharmaceutical delivery and diagnostic processes), so too will management and technology and law and accounting principles be required to focus on the specifics of the hyborg rather than a generalized class of organizations.
Organizations will increasingly need to build, take apart, rebuild, and reconfigure their structures while simultaneously being able to respond quickly to feedback driven by success, not by processes. The Lego-Bio organization is an emerging model that combines the reconfiguration quality of Legos with the adaptability of a biological model. In such an organization, the pendulum is never an alternative. Operations are on continuing and multiple spirals.
For the accounting profession, thinking pendulum instead of spiral had disastrous consequences. Public outrage over accounting scandals forced even friendly legislators and regulators to expressions of concern and ultimately to stricter oversight. In June 2002, the SEC implemented an order requiring CEOs and CFOs of billion-dollar-plus companies to swear under oath that the numbers in their financial reports are correct. This, as the Wall Street Journal noted at the time, could subject the executives to both civil and criminal penalties. In July 2002, Congress enacted, and the president signed, the Sarbanes-Oxley Act, a comprehensive corporate fraud law that, among other things, imposed an independent regulatory authority on auditors. There is no pendulum here; there is no way to ever go back to the same point at which this all began.