Monthly Archives: November 2013

Archived Posts

2013-11-29 by: James Bone Categories: Risk Management Group Think: Why Risk Management failure is inevitable


Everyone fails on occasion but why do really smart people fail to recognize what appear to be obvious errors in judgment?  On April 1961, President Kennedy famously asked, “How could we be so stupid?”  What was the occasion for this retrospective question?  President Kennedy approved the ill-fated Bay of Pigs mission to send 1,400 CIA trained Cuban exiles to overthrown President Fidel Castro of Cuba. 

Many of Kennedy’s closest advisers would later say that they did not believe the plan would work nor did they think that Fidel Castro’s control over Cuba could be challenged by these mercenaries.  So why did President Kennedy approve such a poorly devised plan?   Why didn’t Kennedy’s advisers’ Secretary of Defense, Robert McNamara, or Arthur Schlesinger Jr, Special Assistant to the President speak up about their concerns? 

Everyone wrongly assumed consensus. 

Fast forward to our modern day debate about the launch and roll-out of the Affordable Care Act (“ObamaCare”) and website.  President Obama’s press conference to apology to the American people sounded a lot like President Kennedy’s more sync “How could we be so stupid?”

Group think is a very powerful yet subtle mistake we are all subject to make.   It is inevitable that we will find ourselves in situations where a group has formed an opinion or made a decision without robust debate or listen to dissenting views.  Households, corporations, and even governments make this mistake and the consequences can be devastating on occasion.   Consider the 2008 toxic mortgage debacle!

We all recognize the symptoms of group think.  It starts with a lack of clarity of mission or outcome of the project followed by superficial details to accomplish the goal.  We feel it in the pit of our stomachs yet we are afraid to challenge the assumptions because they were derived from well-paid international consulting firms or expert advisers to senior management.  There are times when we can clearly see “The Emperor has no Clothes”! 

The short tale by Hans Christian Andersen is about two weavers who promise their new Emperor the finest, best suit of clothes from a fabric invisible to anyone who is unfit for his position or hopelessly stupid.  The Emperor’s ministers cannot see the clothing themselves, but pretend that they can for fear of appearing unfit for their positions and the Emperor does the same.  As the Emperor parades before his loyal subjects a young child proclaims, “But he isn’t wearing anything at all!”

It is said that President Kennedy asked each of his advisers in the meeting their thoughts on the Bay of Pigs invasion with the exception of the one person he knew had misgivings about the mission.  Does that ever happen in your meetings?  Do we tune out the dissenters or naysayers? 

President Kennedy wanted to learn from his mistake and asked former President Dwight Eisenhower how he could avoid the same miscues in preparation for the Cuban missile crisis.  Eisenhower’s simple advice is summarized as, “you need spirited debate”. 

It takes a great deal of courage and leadership to allow for debate and disagreement while listening to all sides before forming an opinion.  This small investment may allow time for the simplicity of the message from the young child in the crowd to come through loud and clear.  “But (he) isn’t wearing anything at all”!

The impulse to listen to the “experts” is overwhelming when the odds are high and failure appears to have dire consequences.  It is in these times that one must look beyond the numbers and analysis to listen to the coherence of the arguments on both sides.  Then make the most informed decision you can.

Sounds simple?  Here is your mental check list.

·         Understand why dissenters disagree – is it fact or experience based or fear

·         Does consensus mean agreement?  What won the argument; informed responses or the loudest voice?

·         Are you really convinced?  Don’t overlook your own intuition!

·         What are the consequences if you are wrong?  Minimize failure.

Be the child……

2013-11-27 by: James Bone Categories: Risk Management Does CEO tenure lead to risky behavior? Dr. Gloria S. Castro

Dr. Globia Castro 

Goodwill impairment according to recent researches can be considered risky management.  Recent research on the issuance of SFAS No. 142 Goodwill and Other Intangible Assets suggests that CEO behavior may be encouraged to use goodwill impairment as a new tool for earnings management (Masters-Stout, Costigan, & Lovata, 2008).  The following paragraphs discuss the relationship of CEOs tenure and earnings management after the issuance of SFAS No. 142 in June 2001.


SFAS No. 142, was issued in June 2001and became effective on December 2001 states that goodwill impairment is tested for impairment on an annual basis rather than treated as a pro-rata expense.  Prior standard prescribes a write-down of goodwill if it was no longer considered a wasting asset.  Thus, contrary to previous standard, SFAS No. 142 notes goodwill impairment could occur at an unprecedented amount and rate (Davis, 2005).  As a result, CEOs could manipulate goodwill impairment as a tool to manage earnings performance.

As mentioned, the test consists of evaluating the fair value of goodwill and making adjustments as appropriate on an annual basis or periodic annual tests, if warranted, at the reporting level.  The fair value of goodwill, according to FASB (2001) is done at a reporting level.  Two steps on impairment tests were promulgated by FASB (2001) for specific testing procedures.  First, the fair value of a reporting unit is compared to its book value that is, if the book value is more than the fair value, impairment may be present.Step two involves determining the appropriate impairment to goodwill, as required, based on management judgment.

However, little guidance was presented by FASB in measuring a reporting unit’s fair value; hence, it is asserted that quoted market prices are the best source of fair value.  Further, in the absence of market value, present value techniques, cash flow estimates, and multiples of earnings may be used (Masters-Stout st al., 2008).  Subsequently, when step one shows a decrease in goodwill, a need for a more comprehensive testing is warranted.  The result may determine if a decrease in the reporting unit’s overall fair value was the result of goodwill impairment or a decrease in other assets.  Since goodwill and some intangible assets will no longer be amortized, the reported amounts of goodwill and intangible assets will not decrease in the same manner resulting in irregular reporting and increased volatility in reported income.


The flexibility allowed by FASB on the estimation of goodwill impairment opens a window of risky management.  Goodwill impairment could be used by the CEOs to smooth earnings. According to Masters-Stout et al., (2008) CEOs should exercise prudent judgment  and implement robust procedures for taking impairments in accordance with appropriate changes in business objectives and asset performance.  However, a transition from a predecessor CEO to a successor CEO involves a period of potentially heightened risk which could lead to more aggressive treatments in goodwill and intangible assets.  Radical change in standard procedures should be vetted by the Board’s Audit Committee to ensure appropriate marks are validated.   Notwithstanding the ulterior motives of CEOs to commit fraud (i.e., opportunity, personal ambitions, and realization), internal auditors should be aware of in the potential for fraud risk and perform assessments during the early stage of each audit process.    Recent research noted that the study of goodwill impairment should include explanatory variable of potential significance by the audit firm (Carlin & Finch, 2007).  Hence, future empirical research is needed to examine in detail the relationship of CEOs in committing fraud through impairment.


              Recent studies noted that tenure and earnings management should be the focus of compliance auditors and internal auditors when red flags are noted during the early stage of audit.  The issuance of SFAS No. 142  on the reporting level of impairment on an annual basis could be a loophole for CEOs to manipulate net profit to their personal advantage. As such, impairments could pose great danger to the public.   Firms should establish procedures for evaluating impairments with input from finance, compliance and audit to reduce risks.  Board involvement in changes to material accounting practice helps to provide checks on CEO behavior that could lead to earnings management.  The mechanics of SFAS No. 142 on goodwill impairment testing has yet to be updated to IFRS framework to be well understood globally. Hence, empirical studies to test the theories of prior researchers will contribute to updated standards for international guidance.

           Prior theories such as Gynther (1969) residing theory, which is viewed as the balance of the legitimate vales of the various identifiable assets of the business taken individually. Another theory of Miller (1973), the aggregation theory suggests that goodwill be immediate written off against earnings, since according to this view, goodwill results, literally, from faulty measurement (Carlin & Finch, 2001). These competing theories could be the bench mark of empirical research as to amend standards that can lead to manipulation of financial reporting. This article could open up scholarly research in focusing to risky management during the early assessments of audit.



Carlin, T.M., & Finch, N. (2001). Towardsa theory of goodwill impairment testing choices under IFRS. Journal of Theoretical Accounting Research.  Vol 3, pp. 74-95.

Davis, M. (2005) Goodwill impairment improvement or boondoggle?  Journal of American Academy of Business.  6(2) pp. 230-237.

Financial Accounting Standards Board (FASB).  (2001).  Goodwill and other Intangible Assets, Statement of Financial Accounting No. 192.(Stanford, CT; FASB).

Maters-Stout, B., Costigan, M.L., & Lovata, L.M. (2008).  Goodwill impairments and chief executive officer tenure.  Critical Perspective on Accounting.  19. Pp. 1370-1383.

Dr. Gloria S. Castro is a Behavioral Risk Consultant out of Las Vegas, Nevada.

2013-11-04 by: James Bone Categories: Risk Management TheGRCBlueBook launches new GRC Vendor comparison tool!



Lincoln, Rhode Island; November 4, 2013 – TheGRCBlueBook .com, the largest online directory of GRC vendors on the web, will launch November 10th its newest tool in the GRC Tools & Reviews database.   The GRC Tools & Reviews will allow users to compare thousands of GRC solutions with the click of a key stroke!

Research firms such as Gartner and Forrester sell information and promote a small percentage of GRC vendors for thousands of dollars!  TheGRCBlueBook provides a complete listing of GRC vendors absolutely FREE or charge with no conflicts of interest.

More recently the Open Compliance & Ethics Group or (“”) in collaboration with Michael Rasmussen has jumped in the “pay to play” game for GRC tools!

TheGRCBlueBook is the only web portal with thousands of GRC vendors offered for FREE to its membership!” said James Bone, Executive Director.  Others may try to copy TheGRCBlueBook but why pay for information that is FREE!  TheGRCBlueBook members receive discounts and benefits to events and conferences for risk professionals and new services and products.