substance over form

As an internal auditor I spend a reasonable amount of time learning something new. In fact a majority of my time. Whether it is about how human tissue should be controlled (for research purposes) or how carbon’s reduction should be measured and reported, or what is the best configuration for school teachers’ CPD programmes? The factor I’ve found most useful for this is to take a step back. Ignore the detailed rules, the day-to-day ‘noise’ over how something is managed and delivered, but to focus more on why is it done? What  is the purpose of this activity.

This is a relatively new approach for internal audit which has always historically focused on means rather than ends. Often though the means can be more effectively assessed for usefulness, effectiveness, efficiency and often just how sensible they are, when you take a step back. I think this approach is one that internal audit is uniquely placed to do. It has the time and remit to think through a particular challenge and is free from the day-to-day grind of doing the activity. It also has a long-term risk (rather than issue) focus.

So let’s take some examples of this in practice. I was shopping for my Christmas presents and I thought I wanted a Nike+ compatible IPod for my music. I had settled on the IPod Nano. This was small, square, had a clip to attach it to your gym clothes whilst running. Great. So imagine my dismay when I saw the ‘new and improved’ IPod Nano. Yes it is small and slim and I guess more technically capable but it’s lost its purpose. Clearly a small IPod is designed for times when having a larger device is unhelpful, like the gym. I do not want to purchase a special strap to use one at the gym. Similarly I don’t want to want video on a tiny screen. I can do that on my IPhone or IPad when on the move, or on my computer when not. Clearly someone at Apple has not taken a step back on this.

Another example. Taxation legislation in the UK and the row over the small levels of UK taxation paid by some large corporations. Clearly the purpose of transfer pricing taxation legislation is to ensure that the right level of taxation on profits earned in the UK is paid. Clearly the details of the rules matter much less than the spirit of them. Even UK Starbucks seem to agree. So why then has this approach not been applied?

As state-provided services and service providers face financial cuts, so mere efficiencies and short term changes are not going to yield the change required. Thus organisations need to re-think how they do things. The key point is think. I have recently had the pleasure to work with an organisation that links academics to public sector bodies. This is so much needed in so many businesses. Why is this new though?

Lest you think private sector business is any better at this, look at those businesses that need to take a step back and re-think. An example is HMV. My prediction is for a January closure of this business. It’s business model no longer exists and it has not adjusted. Another would be WHSmith. What is it for (except at airports and train stations)?

Let’s take the third sector, universities. What are they for? Well taking a step back I would say universities are there to discover and create knowledge and to then disseminate it, possibly via teaching but also other methods. Yet the UK and also internationally has got itself stuck into a consumerist understanding of education as a private benefit to rational individuals selecting in a market. This model makes no sense, because knowledge is not created to a market order. Second because knowledge is a public good, not a private benefit. Now if study of students is private benefit, why then have universities as charities and why publicly fund them? Why not just fund research institutions? Well because the process of study means that students move from receiving disseminated knowledge to  creating it. In others words it is not easy to disaggregate and separate the UG learner from the PG researcher. Most research universities cross fund research from teaching monies in any case. So here the legislative framework in the UK and other countries seems to misunderstand the overall point and substance of what universities do.

So what is my underlying point? Well I think all businesses need an independent think tank that is not just ideas based, but is linked to and understands the underlying capacity, capabilities and abilities of the organisation. It needs to be both thoughtful and practical. It needs to be detached enough to ask the questions back to the fundamental, why? When I trained as an accountant we learned the phrase substance over form. That is when the rules and paperwork gets too much, step back and go back to what is really going on. I think internal auditors are the people to do this for organisations, private, public or in-between. What do you think?