Editor’s note: This article was originally published on CCI on March 25, 2010.
One of the casualties of the Great Recession is the corporate training budget. The U.S. corporate training market shrunk from $58.5 billion in 2007 to $56.2 billion in 2008, the greatest decline in more than 10 years. Average training expenditures per employee (which include training budgets and payroll) fell 11 percent over the past year.
This trend toward reducing corporate training programs in the name of cost cutting, particularly in the financial services industry, is unwise. While this may seem to be a good move in the short term, the immediate gratification is more than offset by the adverse consequences that will affect the organization in subsequent years.
The importance of corporate training
Corporate training ensures that personnel function at their best and most efficient. A firm’s investment to employees’ personal education and growth communicates an investment in their future. With the great reduction, neither goal is being met. As Bersin and Associates’ 2009 Corporate Learning Factbook reveals, the U.S. corporate training market shrunk over the last year to its lowest level in more than a decade.
Reducing training hampers organizations’ long-term competitiveness
The U.S. employment rate is currently the highest it has been since 1983. Reductions in new hiring, coupled with employee layoffs, result in fewer qualified individual to perform both specific and general tasks within a given organization. Compounding this problem is that economic constraints leave companies ill equipped to meet future growth.
Segregation of duties
Segregation of duties is a fundamental component of all effective internal control systems. A critical element of Sarbanes-Oxley compliance, known as avoiding segregation of duties conflicts, is a major concern for corporate leaders as the pressures of assuring federal regulators, auditors, boards of directors, and stockholders that corporate financial statements are accurate continue to grow.
As a security principle, separation of duty has, as its primary objective, the prevention of fraud and errors. Management financial assertions can only be achieved through appropriate division of employee responsibilities. Although it is one of the key concepts of healthy internal control system, it is costly to achieve. In the current hiring climate, the potential danger looms that traditionally divided tasks may be compromised in the spirit of cost savings.
Information technology
IT systems are used for a multitude of control functions. Systems were created with prior growth and personal assumptions that may no longer be applicable. In such a case, current systems may be rendered ineffective to support operational activities.
The ever-increasing cost of fraud
“Inadequate internal controls or compliance programs heighten the risks of fraud and misconduct,” reports KPMG in its 2008-2009 Fraud Survey. “Two thirds of executives reported that inadequate internal controls or compliance programs at their organizations enable fraud and misconduct to go unchecked.”
In addition to the trillions of dollars that have been committed to stabilizing financial institutions, injecting liquidity into the capital markets, and jumpstarting the economy through infrastructure spending programs, billions more have vanished as a result of fraudulent financial schemes such as those perpetrated by Bernard Madoff, R. Allen Stanford and Raj Rajaratnam.
Conclusions
Companies are prime vessels for fraud. Each of the three components of fraud — pressure, opportunity and rationalization — has been affected by the economic downturn. Employees likely have greater opportunity to commit fraud due to reduced hiring and impeded segregation of duties, as well as compromised control environments. Ultimately, increased opportunity, heightened financial pressure, and low morale from layoffs and reduced corporate investments in employee development will likely result in a minefield full of potentially fraudulent behavior. To ensure corporate compliance in operating effectively, firms need to consider the devastating impacts of reducing the costs of training and new hiring.
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About the Author
Barbara M. Porco, M.B.A., Ph.D. C.P.A., is director of program development for the Fordham University Schools of Business Administration and a member of the accounting faculty for more than two decades. She teaches SOX and ethics in financial reporting.
She currently serves as a consultant, educator and board member to an array of domestic and international banks, financial services organizations, hospitals, Big Four accounting firms and regulatory agencies.
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