For a Safe Tomorrow – January 2021

This bulletin is available for download as a PDF.

Preparing for Crises When There Is No Crisis and Being a “Resilient Business” 

I have a proposition for the economic culture of our country, I don’t know if you would agree: Excess cash or high profitability is a thick curtain that hides potential risks in businesses. Likewise, “obese growth”, which depends on instant market conditions rather than strategic planning and whose sustainability is controversial, is an additional handicap.

When we say crisis, we understand special periods such as the COVID 19 pandemic, which we are still in, and special periods that require quick and unexpected decisions to be taken. When we look at the types of economic crises from different types of crises such as operational, sectoral, macroeconomic, climatic, reputational, etc., most of us finally think of macroeconomic crises that usually emphasize cash management. 

Looking at the developments so far in the context of the COVID 19 pandemic crisis, which will pass with the lessons to be learned and we are in, we can state the following: The pandemic caused a decrease in total production and expenditures, while reducing the turnover of the tourism and transportation sectors, it increased the turnover of sectors such as e-commerce, cargo transportation and information technology. We can predict that the events will have lasting effects on company strategies, talent management, work-life balance, workplace culture and training methods. 

In fact, there are “leading crisis indicators” that we have not named and that are difficult to measure and are not only caused by cash management but also by incorrect, incomplete or outdated practices when things are thought to be going well. My purpose in this article is to point out such situations that lead to macroeconomic crises and that are reflected in the economic figures over time, not immediately, and to bring them to the attention of SMEs and family businesses in particular. 

It is a critical issue to make realistic decisions as much as possible by keeping personal business ambitions and uncalculated desires under control, as behavioral finance, which has been heard more recently, is trying to explain, but it is not the subject of this article.

Success Concept and Crisis Leading Indicators 

When we look closely at the concept of “success” in business life, we see that a significant part of business people and managers, especially SME shareholders, refer to basic indicators such as sales, profitability, growth and collection rate as a basis for their decisions. 

There are also “crisis leading indicators” such as “if I knew then what I know now”, which cause us to be caught unprepared for crises when they are not fulfilled, and whose absence is hardly noticed when things are going well, but which comes to mind more in times of crisis or when competition intensifies. Let us take a closer look at these structural indicators: 

1. Establishment of professional and institutional infrastructure, having a functional board of directors, preparing the strategic plan and budget, and policies, procedures and processes, not reflecting the special situations, relationships and personal cash needs of the family to the company management, in this sense, keeping the implementation principles to standards as well as a Family Constitution,
2. Blending the spirit of the entrepreneur with the corporate infrastructure and developing a written culture without being overwhelmed by bureaucracy, giving importance to corporate culture and ethical environment, 
3. Generating clean data and reliable information in the business, development of decision support and management reporting system at all levels, 
4. Establishing the right enterprise resource planning (ERP) and document management systems, which are the elements of the decision support system, and monitoring the implementation, 
5. Systematic measurement of strategic, operational, financial, legislative, information technology, reputation and corporate culture risks, providing correct answers to risks, establishing and updating necessary internal controls, taking precautions against fraud and abuse risks, Preparing “best, good, medium, weak, bad, worst” scenarios by making sensitivity and scenario analyzes and making decisions to accept/reject/share/reduce possible risks, Preparing the monthly Cash Flow Plan and balance sheet asset-liability structure in different scenarios and creating opportunities to access equity and necessary credit/fund resources in good times of the company, In normal times, even if the profitabilityEEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is high, cash problems can lead to the end of the life of the businesses. In times of crisis, businesses generally experience problems such as collections and payments, sudden rise in costs, sudden decrease in demand due to lack of cash and credit, and these situations may even lead to the cessation of the business’s life. 
6. Getting to know the customer and their needs closely, monitoring customer satisfaction, correct brand management and measuring the cost of goods sold, 
7. systematic industry, competitor and regulatory analysis, continuous monitoring of current customer performances, especially turnover and collection, and linking the results to actions, 

Legislation follow-up is extremely vital in terms of tax planning, incentives, regulatory audit, business conduct and similar issues that companies are subject to. 

1. Close follow-up of technology and correct product development, 
2. Ensuring the trust of the employees in the justice in the workplace, measuring their loyalty to the business and giving importance to merit in recruitment, work and promotion, 
3. Conducting regular internal audits in the enterprise within the framework of assurance services, developing processes and being prepared for emergencies. In the steps to be taken in the above areas, it is useful to consider it natural to apply to a co-source or external source for the needs of expertise and experience that are not available in the enterprises. These are the “leading crisis indicators” that we have summarized in ten titles above and which will be felt more if they are not fulfilled. Essentially, it is expected to be done when things are going well. They are important in terms of increasing corporate competitiveness, and for being prepared for macroeconomic and sectoral crisis periods, which are one of the inevitable problems of the free market. 

Spirit of Time 

Sometimes the spirit of the time or the conjuncture plays an important role in the rise of business owners, as if they accidentally caught a surfing wave in the balance. If we add to this the protectionist incentives,/tax advantages, credit opportunities within the country, this process can make businesses seem successful for a long time. However, perhaps there is internal rusting/inefficiency going on at the time. Increasing international competition and the desire to be prepared for risks necessitate the development of various competencies mentioned above in order to be permanent in that place. In order not to be destroyed by another wave that will follow, it is necessary to structure, create and review strategies accordingly in “good times. 

We live in times when the generation gap has narrowed down to almost 10 years, and companies are rapidly oscillating between success and failure. As mentioned in the agency theory, we see companies that have achieved global success in a short time before their founders hand over the business to professionals. In short, we are experiencing social and economic paradigm changes more rapidly nowadays. In these periods when we are experiencing the advanced stages of globalization, the relations between money,/ trade,/ production, science need to act in a much more coordinated manner. Efficiency and effective working methods gain more importance in determining the differences between businesses in these days when law, accounting, information technology structures converge and the free market structure becomes widespread. 

In this case, our businesses are faced with realities such as difficulties in profitability brought by this competition, market shrinkage and customers who are more difficult to persuade. It will contribute to their sustainability if they realize that they need to adopt, develop and change different “management tools, methods, standards, principles and perspectives” that will take the lead in the competition, in the “good times” before the crisis times.

New Life, New Life, New Life… 

We can say that the benefits of the above-mentioned actions are long-term, when we assume that the life of institutions should be longer than the lives of individuals and that the “business legal entity” is a separate entity from “business ownership. We should not forget that organizations, whether from the public, private or third sector, create an impact that covers all stakeholders, especially shareholders, employees, customers, suppliers, financial institutions and public administrations and institutions, with the employment, production, added value and social dynamics they create in an economy. They have a responsibility to present and future generations, and within the framework of this responsibility, they must be managed with a long-term perspective. In other words, institutions// companies / organizations use the resources of the society (labor force, energy, raw materials, land, money, technology, etc.), produce output and are in a vital position in meeting the needs of the society. 

As stated in the research dated August 2020 in Footnote 1 below, good management of SMEs, which have a very important place in the national income and employment of the country, is of vital importance in terms of economic and social added value. If we try to explain the changes in the life of companies / institutions with the changes in human life, we can make the following analogy: 

When we get sick, we go to the doctor, after the disease is diagnosed, treatment is started, preventive steps such as healthy eating, proper sleep, sports, being with our loved ones, doing the activities we love, choosing and doing our hobbies, doing our job well and similar activities in companies / institutions are what we have explained above. and when the response is not fulfilled, we can say that it corresponds to 10 items that we call “crisis leading indicators”. These are preventive measures that strengthen the immune system of the body. 

Small or large-scale changes of companies over time determine their lifeline and longevity. SSometimes surgery is required as a result of diagnostic work, sometimes heart transplantation is required, sometimes the image is changed with plastic surgery, sometimes different vital organs and sometimes spinal cord transplantation are required. This situation sometimes requires a change in the objectives, risk perception, strategy and governance structure, sometimes the definition of the competitor, sometimes the operational way of doing business and sometimes the current culture in the companies. 

This change can occur in concrete terms over time, in many different ways such as changes in shareholders, changes in employees, changes in stakeholder expectations, changes in products and brands, changes in business processes, changes in business methods, changes in job descriptions and changes in procedures. Over time, the company’s mission and vision can also be updated. As an open system, the company can manage its entropy, reproduce itself and prolong its life, with the right communication with the outside world and by maintaining the internal environment balance.

Preparing for crises in good times, being competent, without relying too much on the domestic market and internal dynamics, without being swayed by profitability, position in the market, the popularity of products by customers or EEBITDA, in short, by assuming the current status quo as unchanging, without a “living dead” that will falter at the first serious shock. In other words, being in the philosophy to prepare for any crisis that may arise in good days will make the future of our businesses more robust, durable and safe. 

Footnote 1: 

According to Halkbank SME August 2020 Research; SMEs were also included in the newsletter, which was prepared using the data of the Social Security Institution and the Turkish Employment Agency. 

As of August, the number of SME workplaces increased by 4.4%, 72,000, to 1,703,000 in the last year.

This increase in the number of SME workplaces was reflected in employment. Employment of SMEs increased by 508,000 in one year to 11,256,000. 

The share of SME employment among 14,021,000 people, which is the total number of employment in Turkey, was determined as 80

ALP BULUC
Teolupus Partner

alp.buluc@teolupus.com 

Our Internal Audit Project with COVID-19 Measures 

We planned and performed the internal audit service requested by our customer through outsourcing, in accordance with the Covid-19 measures. In this period, only the personnel working on the production line of our customer, whose administrative personnel partially switched to the remote working method, work in the factory. Although this situation is challenging and restrictive for the internal audit activity, an efficient audit process was completed with the support of digitalized processes and remote interviews and information document review. 

Our Remote Internal Audit Activity 

The operational processes of our customer operating in the tourism sector in Antalya were reviewed and the efficiency level of their internal controls was evaluated. Compliance with the legislation and regulations to which it is subject was examined and the risks of the processes were determined. Although we could not visit our customers during the remote internal audit process in line with the measures taken against the Covid-19 pandemic, an effective study was carried out with the data and interviews received in the digital environment.  

Internal Audit in the Real Estate Industry 

One of the changes brought about by the Covid-19 pandemic is the planning of workplace and remote work together. The efficiency of the business processes examined during the internal audit process of our customer operating in the real estate rental sector was evaluated and the risks in the processes were pointed out. Along with the proposed measures, improvement suggestions for business processes were presented. During the internal audit activity, the health of our team and customer was taken into consideration for the audit planned in accordance with the Covid-19 measures.

The Need for Remote Audit, Which Gains Importance with Covid-19 

There has been a search for remote audit approaches for several years, including the use of technology that will bring a new perspective to internal auditing. As a matter of fact, in the company surveys conducted in the last two years, it has been learned that some companies have gone beyond the testing phase in this regard. The emergence of COVID-19 and related worldwide travel restrictions, combined with the current need to carry out regulatory, legal or urgent needs-based controls, has led to a focus on efforts to find alternatives to the traditional on-site inspection now being implemented. Our article, by making use of the experiences of some organizations using remote internal audit abroad, together with the advantages and disadvantages of remote internal audit; It aims to help you in how the issues such as planning, opening and closing meetings, interviews, document review, field studies that should be done during the audit process can be carried out.

Components of Remote Internal Audit 

1.1. Planning 

1.2. Kick off Meeting with Stakeholders 

1.3. Document Review 

1.4. Site Exploration 

1.5. Sharing Findings via Remote Meetings 

1.6. Closing Meeting

Take Advantage of a Unique Perspective on Risks in 2021 

The Guide to Understanding, Aligning and Optimizing Risk will change the way organizations see and understand risk. This report not only digs deeper in these unprecedented times, but also reveals the new risk posed by the COVID-19 pandemic and increased reliance on technology. 

Remote Working Procedures and Methods 

As Istanbul Chamber of Certified Public Accountants (ISMMMO) Business and Social Security Committee, we are trying to present a roadmap to our colleagues by writing the regulations, procedures, principles, supervision of personnel and technological tools we can use in remote working to eliminate the negative effects of employment due to the COVID-19 pandemic, available at the link below.

Auditing Market Risk in Financial Institutions 

The practice guide, Auditing Market Risk in Financial Institutions, published by The Institute of Internal Auditors (IIA), aims to assist financial service organizations. Market risk has always been seen as a significant risk for financial services institutions. Regulators and regulators focus on this risk, emphasizing the need for accurate models that can measure the capital impact of market activities on the financial viability of the institution. These requirements and the expanded expectations of auditors give internal audit a more appropriate and active role in assessing market risk. 

This guide will enable internal auditors to understand: 

• The importance of market risk in the context of financial services. 
• Regulatory environment and requirements related to market risk. 
• Risk management and risk management processes surrounding market risk. 
• How to articulate the key components of market risk, including interest rate risk, equity risk, and currency risk. 
• How to apply the International Professional Practices Framework (IPPF) and risk-based internal audit techniques to assess and oversee market risk in their organizations. 

Theiia.org
ISMMMO.org.tr

Bu gönderi şu adreste de mevcuttur: Türkçe