JimWes Thinks

May 29, 2010

21st Century Credibilitism

Filed under: credibility, government, Uncategorized — Tags: , , , — jimwes @ 7:32 am
(Prepared for the Mexican Institute of Internal Auditors 25th Anniversary. Published originally in Spanish)

We live today at a great turning point in world history.  The world of the 20th Century is gone.  Very little will ever be the same again.

We hear a great deal these days about 21st-century socialism but not very much about 21st-century capitalism.  The former is primarily developing in Latin America along the lines of historical Marxism adapted to the region. The latter is primarily holding forth in China, India and Russia. It is often referred to as state capitalism as the state involves itself in owning and running businesses on the capitalistic scheme. (Note: these are three of the four “BRIC” countries currently being heralded as probable future major world powers).

How will this affect internal auditors? Will 21st-century socialists and capitalists still need auditors? How will auditors’ work be affected by these new systems?

We are presently in the midst of the worst economic and financial collapse since the Great Depression that occurred early in the previous century…now being called the “Great Recession.” While many people think that the current situation will gradually improve as it has in many prior similar circumstances, others believe that there will be continual up-and-down yoyo-like swings in the economies of the countries of the world with a gradual tendency to edge permanently either upward or downward.  Many believe that we will not any time soon, perhaps ever, see the level of prosperity that some nations achieved during the 20th Century.

We cannot forecast what is going to be happening in the future but one thing for sure the next 25 years will be quite different from the past 25 years both as far as the world economy is concerned and as far as auditors are concerned.

Some things we may reasonably expect in the near future could be:

  • Because of the simultaneous jarring shocks, dramatic crises and astonishing technological changes we are experiencing and will continue to experience, it is no longer possible to rely upon past tendencies as a means of forecasting the future, nor to be able to plan usefully more than a short time ahead.
  • Because they believe they have been deceived, there will be a massive lack of credibility among citizens, investors and almost everyone in so far as the activities of business and government are concerned.
  • Because they are inherently insolvent, most of the world’s governments will be experimenting with many varieties of creative economics and undergoing severe periods of readjustment and austerity accompanied by great social unrest.
  • Because of vast demographic shifts and varying population compositions the capability of governments to provide social safety nets for the poor and comfortable retirement for the aging will become virtually impossible.
  • Because they have heretofore unrealistically inflated asset and security values, those of the world’s great businesses that survive will be obliged to change many things about the way they do business.
  • Because they have failed miserably, the entire mechanisms and structures of all worldwide financial institutions and systems will be overhauled.
  • Because of the accelerating worldwide cultural and ethical decline exacerbated by hard economic times, unemployment and severe need, the present upsurge of fraud, crime and corruption in the public and private sectors will continue unabated.
  • Because of the vastly increasing volume of flows of information of all kinds exacerbated by the grievous deception of citizens and investors by people in whom they formerly had faith, there will be a very high degree of skepticism regarding the reliability of any and all information published whether it be financial or of any of the nature, especially including that furnished by the media.
  • Because of the worldwide loss of confidence in political parties, parliaments and judiciary systems, the current trend toward more authoritarian governance, thus weakening, if not devastating, democratic principles, yet retaining their cosmetic appearance, could morph into a form of government that some have called “dictocracy” whether or not it emerges under the banner of 21st-century socialism or 21st-century capitalism.
  • There is no real paragon for guidance over the next 25 years, or  the next five years, or the rest of this century.

What will be the role of the internal or external auditor in this drastically changed world?

There will certainly be a drastic need for someone to try to restore credibility to institutions and the information they produce. This clearly should be the role of an auditor.

One of the few things that will not change during the remainder of Century 21 is the continued growth and sophistication of fraud and corruption.  There will be an even greater need for forensic auditors to continue the role of investigating, obtaining evidence and disclosing cases of fraud and corruption so long as there exist a free press and prosecutorial will.

Many have lost faith in democracy and it is under fervent attack in many countries.  One of the main reasons for this is that democratic practices have been severely tainted and confidence in them undermined by financial scandals, conflicts of interest, criminally tainted money, excesses of financial transactions (collections and expenditures) beyond statutory limits, delinquent and/or fraudulent reporting and internal fraud among political parties and campaign treasuries.

In the industrialized countries political schemers have unrelentlessly developed “legal” means of circumventing any and all legislation intended to clean up political finances.  Here is a thicket that auditors have rarely entered, but one that needs their attention unless we plan to bury democracy once and for all.  Dollarcracy has replaced democracy across Planet Earth and unless some means of auditing and controlling political funding can be put in place, democracy will surely die.  Here is a very controversial and dangerous, but badly needed, role for auditors.

21st Century Socialism or Capitalism or any other form of governance will inevitably need “21st-Century Credibilitism”…the strengthening of credibility of public and private institutions and information.

Auditors will have to be “credibilitizers”…using their talents and abilities to gather information, assess it and ascertain whether it is valid. This is basically what they have been doing all the time but primarily limited to the area of financial information and the controls over the process of gathering, recording and reporting it.

Auditors will continue to provide assurances regarding the adequacy of financial information and controls.  They have already begun to provide attestation services in other fields and this will necessarily be greatly expanded.  Unfortunately, in an information-oriented society with a historically nurtured culture of exaggeration, manipulation, and outright “spinning” of all kinds of information from balance sheets to television news, there is plenty of room for an information society to be transformed into a misinformation society.

Today we have a flow of verbal, printed and visual information greater than at any time in human history and exponentially increasing.

We are deluged by great volumes of money, statistics, reports, news, documents, books, video recordings and presentations and digital information compressing all of the above into magnetic files that few people can understand if their programs don’t work.  We are responsible for not only administering, but also understanding the flows  and meanings of trillions of monetary units. But no human being can really comprehend a numerical value in the trillions.  And soon we’ll be in the quadrillions.

One trillion seconds is more time than has existed in all recorded history…31,688 years to be exact. No auditor could physically count and verify the authenticity of $1,000,000,000,000.00 in currency:

  • A million dollars in tightly bound $1,000 dollars bills would create a stack 4 INCHES or 122 CENTIMETERS high.
  • A billion dollars in tightly bound $1,000 dollars bills would create a stack 300 FEET or 92 METERS high.
  • A trillion dollars in tightly bound $1,000 dollars bills would create a stack 63 MILES or 101 KILOMETERS high.

How would you like to count that much cash?

Now think about the number of words (or letters) in a 2000 page bill presented to the Congress and, once enacted, sent to the President for his signature. Who would read such a document?

Very soon all human knowledge will be stored, handled and reported digitally. The whole digital information storage system is measured in bits and bytes. Eight bits make a byte. The units of measurements in information storage grow through kilobyte, megabyte, gigabyte, terabyte, petabyte, exabyte, zettabyte, to finally the biggest, yottabytes. One yottabyte is equal to four terabytes.  Hard drives storing two terabytes are now available for your home computer at very reasonable prices. One zettabyte equals 1,180,591,620,717,410,000,000 bytes or 9,444,732,965,739,290,000,000 bits.

Now that you have fully and completely failed to understand the digital storage system, the purpose of this exercise has simply been to make it abundantly clear that we are now dealing with volumes of information that the human brain can no longer cope with.  Yet someone, somehow not only has to compile, summarize and report on different combinations and categories of this information but communicate the results clearly to others so that they can be understood.  What a great opportunity to manipulate any kind of information.  What a great opportunity to falsify, spin, distort or simply modify cosmetically to make more pleasant any type of information.

No business CEO or national President likes to receive bad informational or financial news. If authoritarianism grows in the coming years as well may be the case, leaders in business and government will be in positions to see that their subordinates always furnish them good news whether it relates to financial operations and position or the number of prisoners taken and soldiers killed on the battlefield.

One of the key factors in the collapse of the former Soviet Union was the fact that factory managers, in order to report that they had met production quotas, massaged and inflated the figures.  Thus government leaders were fooled into thinking things were better off than they actually were.

A very smart executive in business or government may be greatly concerned that the stockholders investors or the public receive only favorable financial and non-financial news, but will also be greatly concerned to know what the real situation is, so as to be able to take corrective measures when necessary even though they may have to be stealthy.

Now this is the bottom line.  Hopefully democracy will prevail across the planet, but whether a form of government varies from strongly autocratic to purely democratic nature or from 21st-century socialism to 21st-century capitalism, there will always be a need for someone to attest to the credibility of just about everything.

That will be the job of internal auditors and probably external auditors as well during the remainder of the 21st-century… providing credibility either to the entire public at large or to a single powerful leader or group of elites…21st Century Credibilitism.

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