Financial Reform And GRC

I was able to catch pieces of live testimony in front of the House Financial Services Committee yesterday on the Lehman Brothers collapse (covered via live blog by the Wall Street Journal). It was interesting to watch former Lehman head Richard Fuld reluctantly attempt to explain to an understandably skeptical audience, “We were risk averse,” in the period leading up to the company’s collapse.

Meanwhile, Goldman Sachs is back in the spotlight after the SEC leveled charges of fraud against the company last week related to alleged misstatements and omissions in the marketing of specific financial products. While this seems like a relatively small initial shot at the large financial firms, the SEC appears to be reasserting its authority after a series of embarrassing stories have come out about failures of oversight including Madoff, Stanford, and now Lehman.

So what does all this mean for governance, risk, and compliance professionals?

It’s hard to tell what might come of the fraud charges against Goldman Sachs, but if anything, this appears to build a case for more rigorous compliance policies and manual oversight. It’s hard to see how automated controls could have helped here, but the case could involve substantial e-discovery to determine how certain marketing decisions were made.

The Lehman discussions are good reminders of how difficult it can be to translate risk appetite (“We were risk averse.”) into practice. The company’s assumptions about which markets represented conservative investments seemed to ignore early warning signs. For risk managers looking to expand the way they approach such responsibilities, the World Economic Forum weighed in last week with a report on what lessons they can learn from other industries such as aviation, immunology, telecommunications, and even fisheries. Recommendations included increasing diversity, driving transparent innovation, and empowering the front lines. Perhaps nothing new, but a good collection of ideas.

And of course (perhaps not coincidentally) this all comes as Congress looks to move forward on financial reform. There are still many issues up for debate here, but the smart money is still on more strict oversight, requirements for better documentation and transparency, and more formal risk management program requirements.

As these debates continue, the GRC vendors I speak with are seeing very promising rebounds in their sales pipelines. Likewise, governance, risk, and compliance professionals are seeing their corporate roles continue to rise as well.

As always, I’m curious to hear your perspective on these events.

Posted by Chris McClean

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