The few of us involved received a lot of criticisms as a result, and some of these were not pleasant, particularly the accusations that we betrayed the free market. But I hope the way the matter has played out, and the handsome book profits that we are making, will serve as a vindication of our decisions. And, in case it has crossed your mind, luck has had very little, if any, to do with it, although I do not mind luck being on my side. The whole explosion of international finance has simply gone too far. If it were not the default by Russia, some other event would have caused yield spreads to widen sharply. If it were not LTCM, then some other hedge fund would have needed the massive de-leveraging that, had it been allowed to take place, threatened dislocation even in the largest market in the world. Some event, large or small, would have triggered all that. As some of you may remember, the sharp correction in the stock market in Hong Kong in 1973 was triggered by the Fire Brigade being sent in to inspect overcrowding on the then rather small trading floor of one of the stock exchanges before unification. Incidentally, the widening of the yield spreads that caused problems for LTCM last year actually started when we entered the market in August, according to a chart prepared by Stanley Fischer of the International Monetary Fund (IMF). It gathered momentum as Russia defaulted.
The process of ascertaining the audit scope must be robust, such that audits focus on higher risk areas as the company grows and evolves in its products and processes. Internal auditors should be constantly challenged to think beyond the scope of the audit framework and focus on the broader picture. The so-called ability to ‘connect the dots’ about the implications of the audit findings across the organisation is an important starting point to identify new and emerging risks. Secondly, internal audit should move beyond compliance to strategic auditing and to provide value-added recommendations for the betterment of the organisation. My view is that before an organisation seeks to venture into new or higher risk areas of growth, it is imperative for the board and senior management to seek assurance from the internal audit function so that the risk and control frameworks are rigorous in identifying gaps in the system. The Audit Committee should identify opportunities where the internal audit function is able to add value, through consultation and advice on business process improvements. The input from the internal audit function would also be helpful to craft initiatives to embed good behavioural norms, ethical and responsible culture within the organisation. Thirdly, the internal audit function must be supported by a strong quality assurance process. This requires internal auditors to be equipped with the requisite skills such that they are able to leverage on their expertise and experience to make sound judgement and challenge the norm.