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September 20, 2020

Is It Time to Audit the Auditors?

Summary:

Before 2020, did any auditor or risk manager ever mention a pandemic risk to any regulator, carrier, prospect or client?

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In early 2007, I was an instructor for three days of risk and insurance training for KPMG. In each class, there were about 30 consultants – everyone from newly minted MBAs, who had not yet worked with a client, to senior partners in the firm. One of the rookie consultants asked for an example of a carrier going bankrupt and an example of a rock solid financial institution. 

I used Louisiana-domiciled Champion Insurance as an example of failure. Champion was the manifestation of corruption, malfeasance, failed regulation (the Louisiana commissioner of insurance during this time ultimately went to jail partly because of this debacle) and other sins committed by some members of our industry.

For the rock solid company, I named AIG. Many of the senior partners at KPMG consulted with AIG or other national carriers, and I asked each experienced member of the class if he or she agreed with my assessment. To a person, they quickly said yes. Before the year was out, AIG was declared bankrupt.  

“AIG turned out to be ground zero of the crisis, the most interconnected of all the financial services companies, in large part because it had foolishly decided to insure many of the risks in the system. Its collapse on Sept. 16, 2008, caught nearly everyone by surprise.” (www.institutionalinvestor.com, April 7, 2010.)

Where were the auditors?

Well, my late cousin Martin, who was an auditor with the Centers for Disease Control and Prevention, often told me, “An auditor is the person, after the war is over, who steps onto the battlefield and bayonets the survivors.” Martin was a very wise man.  

See also: Chaos in a Post-Yesterday World!

When I worked from 1988 to 1993 for a bank agency, I once asked the bank’s independent auditor, “What is an audit?” His response: “It is an objective snapshot of your financials/operations at a specific point in time.” I then asked him to describe his CPA firm. He said, “We are very conservative.” My response was, “The minute you put VERY in front of conservative, your statement IS NO LONGER OBJECTIVE.” 

I continued, “Your audit results will be a benchmark for our next year. If you are too conservative, your report will result in us beginning the next 12 months a few steps behind our competitors.” I suggested that he take responsibility for his “objective snapshot” of our starting point. If the future proved that his audit had forced us into too conservative a position, his CPA firm would pay damages. When I left the conversation, he was still stuttering.  

Our yesterday was a marketplace working through incremental change (baby steps). Risks were comfortable for us. Tomorrow is about the unknown unknowns. It will require transformational change (giant steps). There are risks and damages that exceed our ability to understand. We as agents, consultants, experts and risk managers are very smart about yesterday, but for tomorrow and the transformational risk – MAYBE WE’RE NOT SO SMART. 

Before you get all upset with me, answer this one question: Before 2020, did you ever mention a pandemic risk to any regulator, carrier, prospect or client?

In closing, consider the following: 

Is it time to audit the audit function? Not make it any easier on financial statements but make the audit function include our/your:  

  • Marketplace (is it in ascendancy or decline?) – Are you in Austin or “Podunk” America? 
  • Client relationships (if your audience is Laotian millennial business owners and your agency is exclusively old white guys (I am one), the match does not make you a sure winner).
  • How stable are the market niches you serve? The oil and gas industry made a lot of agencies rich. Unfortunately, that was yesterday – not tomorrow!
  • Regulation and legislation – the government is always ready to extend its reach. Over the long term, government intervention will not make your life/agency better.
  • Staffing/technology balance – (Warren Bennis, a very smart man, wrote in 1994 in “New Work Habits for a Radically Changing World”: “The factory of the future will have only two employees, a man and a dog. The man will be there to feed the dog. The dog will be there to keep the man from touching the equipment.” I believe this will prove right in our future.)
  • Product offerings – will tomorrow demand what you are selling like yesterday did?  
  • Are Amazon, WalMart or GM becoming your direct competitors? Are you sure?

Choose your chest pain du jour and add what else keeps you up at night.

Douglas Adams offers the following wisdom: “Anything that is in the world when you’re born is normal and ordinary and is just a natural part of the way the world works. Anything that is invented between when you’re 15 and 35 is new and exciting and revolutionary, and you can probably get a career in it. Anything invented after you’re 35 is against the natural order of things.”  

As Joe Gray tells me, “Squint your ears.” Be less sure of yourself and more inquisitive about what you don’t know, not braggadocious about what you do. Coronavirus created for each of us and all of us a NEW REALITY. The industry tomorrow will be more for Tesla’s and less for your “daddy’s Oldsmobile.”  

See also: ‘Repent, the end is near…’ for Insurance

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About the Author

Mike Manes was branded by Jack Burke as a “Cajun Philosopher.” He self-defines as a storyteller – “a guy with some brain tissue and much more scar tissue.” His organizational and life mantra is Carpe Mañana.

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