On a recent trip to Canada, I was reading through the in-flight magazine to help pass the time.  I was surprised to read an article saying that with all the radars, GPS, instrument landing systems and other technology available, pilots still rely heavily on good old fashioned VISIBILITY.

Similarly, when building a strong governance and risk management culture, senior management visibility is also critical.  Just like an aircraft, an organisation can have the latest technology and the best crew, but unless senior management continue to promote the importance of risk management, the long term success of ERM will be at risk.

Enjoy this issue of InTouch.

Tony Harb

Director, InConsult

• US audit firms have increased their scrutiny of clients to ensure compliance with Section 404 of the Sarbanes-Oxley Act.  As at May, a total of 586 companies had reported material weaknesses in their internal controls compared with 313 for all of 2004.

• After being found guilty in on 9 counts of fraud, conspiracy and filing false returns, former WorldCom chief, Bernie Ebbers was sentenced to 25 years jail, the harshest penalty yet in America's crackdown on corporate crime.

• The Australian government has created a specialist team to plan for "doomsday" terrorist attacks on the country's most vulnerable computer networks such as a terrorist strike on air traffic control computer systems causing aircraft to collide, which isn't covered by current national counter-terrorist strategies.

• According to experts, the London terrorist attacks will create a boom in security spending in Australia by both government and business and alter corporate governance priorities.  In one scenario, if a major terrorist incident occurred in Australia, spending could hit $13.1 billion by 2010.

• Proposed tough new anti-money-laundering laws have been delayed until next year after a finance industry backlash prompted the federal government to redraft key elements of the proposed regime which the finance sector claims will increase compliance costs by more than $100million.

• According to a study by KPMG, most of Australia's largest companies are not disclosing information to shareholders on the effectiveness of their risk management.  It found:

  - only 44% of companies had disclosed that their boards had received attestation with signatures of both the chief executives and the chief financial officers confirming the integrity of risk management and internal controls

  - only 32% disclosed a detailed description about the company's risk management system

  - only 18% disclosed their risk profiles

• Business will hear a lot more about corporate responsibility.  An inquiry is looking into whether business should give more consideration to stakeholders and not just shareholders.  Another federal parliamentary committee  will look into corporate responsibility and triple bottom-line reporting. The Australian Stock Exchange Corporate Governance Council is also reviewing its principles on risk and stakeholders.

• According to new research, many of the top 200 sharemarket-listed companies fail to disclose how they manage ethical risks.  The study found 83% of companies had no board oversight of unfair business practices such as price-fixing or insider trading, and companies penalised for bad behaviour did not necessarily improve.

• COSO has released draft Guidance for Small Businesses aimed at small public companies to assist them in implementing Sarbanes-Oxley Section 404, which requires management to assess, and auditor's to attest to, the effectiveness of internal control over financial reporting.  Larger public companies and private companies may find the COSO Guidance for Small Businesses useful as well.

• Company directors  in NSW will not be able to claim ignorance as a defense against breaches of environmental rules under proposed new laws.  New laws will make board members directly accountable for environmental damage caused by their company.

• Similarly, recent developments in OH&S laws aim to overcome the difficulties in proving manslaughter by gross negligence against directors. The ACT has legislation that makes industrial manslaughter a crime and NSW is also intending to introduce a criminal OH&S offence for directors. Both the ACT legislation and the NSW draft Bill make it clear that an omission can be an offence.

• Despite annual losses of more than $200 million, Australian banks still regard internet fraud as relatively small when compared to billions of dollars of bad debt costs. One report says that  "Internet banking fraud is on the increase with the . . . industry under siege from criminals who are using increasingly sophisticated ways of capturing customers' personal details."

• APRA has released revised draft “fit and proper standards and guidance notes for authorised deposit-taking institutions, general insurance and life insurance institutions. The standards and guidelines outlines proposals for APRA regulated institutions to:

- Be responsible for assessing the fitness and propriety of persons to act as a director, senior manager, auditor or actuary;
- Develop and document appropriate policies for making fit and proper assessments;

- Require responsible persons to co-operate in the process of gathering information for such assessments
- inform APRA of changes in responsible persons

• The new insurance code of practice is expected to improve claims management standards, extend the code from personal to commercial product lines and provide a better response to disaster situations.  It will be compulsory for all 50 or so members of the Insurance Council of Australia to adopt the code.  Members include IAG, Promina, QBE and Suncorp.

• Although the new code of practice mow covers business policies, law firm Clayton Utz warned that property, casualty and professional indemnity programs, which were either fully or jointly written by unauthorised insurers offshore, would continue to remain outside the industry code. In the past,  APRA has also  warned policy holders against using unauthorised insurers. 

• ASIC has again expressed concerns about the ASX's poor oversight of the fast-growing warrants market, which has an estimated annual value of $4.9B.  According to ASIC, the arrangements for supervision of the warrants market require substantial improvement.  However, ASIC was happy with other areas including conflict of interest.

• With unrelenting winds of 180km/h, Hurricane Dennis has caused severe flooding and tornados in the southern states of Florida, Alabama and Mississippi is estimated to cost insurers between $US1 billion and $US8 billion. 

• QBE's forecasted performance is likely to improve because of strong cash flows, maintaining good pricing and higher investment yields.  Citigroup believes QBE's forecasts could be enhanced further if QBE makes a major acquisition. Although Allianz and Zurich are the rumored targets, QBE recently signed an agreement to acquire National Farmers Union Property and Casualty Company and its subsidiary for about $US140 million ($185.5 million). 

In terms of claim cost, according to QBE's CEO, the incurred losses from the London bombing tragedy are expected to be relatively small and within the allowances for large losses and catastrophes.

• Deutsche Bank is being investigated by the ATO over research and development deductions.  Because of the risk of tax adjustments,  Deutsche Bank has booked a $60 million provision in last financial year's accounts to cover an expected settlement.

• Germany's financial-markets regulator  is investigating accounting practices of around 10 life insurers as part of a broader examination into accounting practices involving reinsurance contracts.

• One of Australia's oldest and biggest remaining mutuals, Australian Unity, is considering a $500 million-plus sharemarket listing.   Australian Unity has 204,000 members and the float would be the largest listing of a mutual since AMP in 2001.

Brings together Corporate Governance,

Compliance, Risk Management

and Internal Audit.

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