Unit 3: Innovation and Scepticism

Systematic Thinking

As decision taking and problem solving issues became more complex over time, various
organisations developed models or frameworks to promote the efficiency of sequential thought
processes.

For example, during the 1960s, the Coverdale Organisation, a multinational consulting firm,
introduced its ‘Systematic approach to getting things done’, set in steps.

Systematic Thinking

However, while such models can be very effective ways of creating a common process or language in
task management, they assume that creativity and innovation will be harnessed at each stage if the
effectiveness of the team is to be optimised.

To linear thinkers, many business issues rely on logic. Just as we learn mathematical and scientific
methods, we try to apply them to everyday issues.

Linear thinkers start at stage 1 and then complete that aspect of the task to the best of their ability
before moving to stage 2, and so on. One problem here is deciding the starting point from which it is
necessary to proceed.

Lateral thinking

The term ‘lateral thinking’ was first widely used by Maltese academic and author Edward de Bono,
who subsequently went on to write several books on the subject, as well as lecturing on it in many
countries.

This is how de Bono himself summarises what he meant by lateral thinking:

'Lateral thinking is concerned with the generation of new ideas...

Lateral thinking is also concerned with breaking out of the concept presence of old
ideas. This leads to changes in attitude and approach; to looking in a different way at
things which have always been looked at in the same way. Liberation from old ideas and
the stimulation of new ones are twin aspects of lateral thinking.
Lateral thinking is quite distinct from vertical (or linear) thinking, which is the
traditional type of thinking. In vertical thinking one moves forward by sequential steps
each of which must be justified...

Lateral thinking is not a substitute for vertical thinking. Both are required. They are
comple-mentary. Lateral thinking is generative. Vertical thinking is selective.'

De Bono favours the application of various techniques to accelerate lateral thinking:

 Challenging assumptions by thinking ‘outside the box’.

 Playing ‘devil’s advocate’ by generating alternatives, even if there is an apparently

satisfactory solution (there may be even better ones).

 Suspending judgement by pausing for further thought, using techniques such as

brainstorming to mine the collective thoughts of others in a group. People coming
together in groups is one of the most powerful media for creative thinking, and in such
situations there is more likely to be one or more persons who will think through
something in a less conventional manner. This is especially true if the people making up
the group are from diverse backgrounds with different experiences.

 Applying analogies with parallel situations from a different context. Can we have an
example?

Lateral Thinking Exercise

What Methods did you try?

Trial and error is a valid way of problem solving, and this may result on one, two or many attempts,
which may eventually resolve it, but may not. It is unlikely in this case that trial and error could be
used for very long, because there is quite a limited range of permutations.

You may have sought help from a friend or colleague, perhaps somebody who likes trivial mind tests
or is used to dealing with them.

You may have seen the exercise before, in which case you will know the mental leap that has to be
taken, and may have resolved it first time, or after practising a few times.

The problem encountered by many when attempting to solve the puzzle is that the eyes (and
therefore the brain) see a square, and therefore may assume that the solution must lie within the
boundary of the square.

In fact, if attempts are made to join all of the insects with four straight lines without lifting the pen by
limiting the lines to the four corner insects, it cannot be done!

To resolve the problem, the lines have to go BEYOND the limits of the perceived square.

Summary

Lateral thinking essentially involves looking at decisions, problems and issues from a fresh
perspective or different angle. It implies the need for creative thinking, and to some extent challenging
assumptions, accepted methodologies and the status quo. In some situations, this may require
patience and courage, especially if colleagues maintain embedded views.
Carl Friedrich Gauss

Legend has it that Carl Friedrich Gauss (1777 - 1855) was given this task as a punishment for
misbehaving by a school teacher. He solved the problem correctly within seconds. How?

Gauss realised that by adding pairs of numbers at each end of the range gave the same result:

1 + 100 = 101
2 + 99 = 101
3 + 98 = 101
and so on.

Therefore, realising that there were 50 pairs of numbers (100/2), he multiplied 101 by 50, and
almost instantly arrived at the correct solution, 5,050.

Gauss became an eminent mathematician, making contributions to numbers theory, algebra,

geometry and differential geometry. The speed with which he found the solution could have been
natural ability (as in the case of many geniuses), luck, knowing the solution in advance from
someone who was similarly punished previously, or a case of approaching the problem in a
different way.

The four P's of innovation

The four Ps of innovation provide a framework through which an organisation can be viewed from the
perspective of innovation. Just as marketing specialists use the four Ps of the marketing mix to
analyse and plan distinctive marketing activities and judge how to combine them, the four Ps of
innovation offer a similar method.

The four Ps of innovation are:

Product

In the 1980s, the chief executive officer of Johnson and Johnson famously said ‘You have to believe
that there is no limit to the value that can be added to any product’. Innovation in products and
services is necessary in order to bring about added value.

Consider an automatic washing machine. The first automatic machine was launched by Bendix
Corporation in 1937, but it was not until the 1950s that a mass consumer market was developed:

The basic product is the machine itself, and the customer would naturally expect the washing
machine to serve its main purpose, which is to wash clothes and other textiles. Sixty years ago,
however, the washing machine that consumers bought was very different to the ‘product’ today:

 the purchaser would often have to make their own arrangements to collect it from the retailer,
or pay a delivery company to do so
 the washing machine would often be supplied without a plug attached, and the consumer
would often have to fit the plug themselves or get someone to do it for them
 the washing machine would probably have to be connected to taps in the kitchen or utility
room, and not have a facility to plumb it into the water supply
Manufacturers quickly understood that they could achieve competitive advantage over their rivals by
addressing some of these limitations, offering free delivery and supplying it with an electrical plug
already fitted.

In this way, the basic product became the expected product. If a retailer offered a washing machine
without these value added features, the customer would often go elsewhere.

However, innovation did not stop there. With developments in technology, manufacturers were able to
harness the benefits of microprocessors so that machines could be programmed to carry out graded
tasks (a basic wash, or a basic wash followed by spin drying).

Note that washing machine manufacturers did not invent microprocessors, but were able to take
innovations elsewhere and use them to their advantage. Intangible features could also be offered,
such as a guarantee lasting 1, 3 or perhaps 5 years. In this way, producers of washing machines
could exploit the potential of the enhanced product.

Longer term, product development teams look to trends in consumer tastes, future technological
advances and enhancements in distribution channels to improve their offering further. In doing so,
they are looking at the potential product.

Process

A process is a series of actions or steps taken in order to achieve a particular end result.

Process innovation occurs when organisations introduce methods of doing things:

 To a higher quality
 At a lower cost
 At a greater speed

In the case of the washing machine manufacturer, but could apply to any product, this can be
achieved in several ways:

 Outputs of research and development can be brought to fruition quickly by deploying

computer-aided design (CAD)
 Improvements may be made up upstream logistics, such as ordering materials, including just-
in-time systems and quality management
 Linked processes can be enhanced by robotics, as well as improving the efficiency of training
of the workforce
 Channels to market may be improved through delivery tracking
 Back office efficiencies may be achieved by developing new or improved accounting systems,
including management of accounts payable and receivable

Some of these processes are purely internal, as they relate to the way things are done within the
company.

Others relate to dealings with external stakeholders, such as customers, suppliers, distributors,

agents and others. This is important, as all organisations must recognise they work in an open
system. If it focuses purely on internal processes, the benefits of innovation will not be fully exploited.

Position
Position is concerned with the perceptions of the organisation by different groups or firms. Perception
may arise from observation of facts, such as inferior quality goods, unfavourable product reviews and
inefficient delivery. However, they may also be profoundly affected by what people think, which may
or may not actually be true.

Some of the factors that impact on position include:

 the views of customers on the product or service

 whether the company has a good reputation for paying its bills on time
 how the company treats its workers
 its relationship with stakeholders
 the profile of the company in the media
Position can be affected by different factors over time. For example, many modern consumers are
concerned about the impact of a product or service on the environment, and the social footprint of the
company in matters such as working conditions and standards of business practice (especially in
developing countries). These matters are far more important (and sensitive) today than only 20-30
years ago

Paradigm

This term refers to a typical pattern of something, or a model. In the context of innovation, it relates to
how thing are done by the organisation and how they change over time.

An example of a paradigm shift in the washing machine manufacturer example would be a decision to
move away from distribution through retail outlets in favour of an exclusively online channel to market.

In the financial services industry, several banks have adopted a completely new approach by
establishing purely online operations, without branch offices or ATMs. This may result in a long-term
paradigm shift through which the conventional banking model today may eventually become the
exception rather than the rule. Fintech is the latest example of how the financial services industry
have used information technology to enhance and digitalise their services.

To innovators, attempts to influence the paradigm require a degree of courage, as it is necessary to

challenge assumptions of the status quo.

Alexander Fleming

The oldest example on our list of innovators, Alexander Fleming was the scientist who famously
discovered penicillin, which provided a base for the development of antibiotics and a multi-billion
dollar pharmaceutical market for related drugs.

Fleming’s place on the list is pertinent because in carrying out his research, he applied all of the tools
of linear thinking, assumptions, experimentation, observation and conclusions. However, his discovery
of penicillin in 1928 did not arise from this process at all.

He had left some cultures of a bacterial substance overnight and observed a fungus on them the next
morning which had an effect on neighbouring cells. The anecdote confirms that in innovation, chance
can play a significant role.

Marie Curie
Marie Curie was a Polish-born physicist and chemist and one of the most famous scientists of her
time. Together with her husband Pierre, she was awarded the Nobel Prize in 1903, and she went on
to win another in 1911.

The Curies worked together investigating radioactivity, building on the work of the German physicist
Roentgen and the French physicist Becquerel. In July 1898, the Curies announced the discovery of a
new chemical element, polonium. At the end of the year, they announced the discovery of another,
radium. The Curies, along with Becquerel, were awarded the Nobel Prize for Physics in 1903.

The Curie's research was crucial in the development of x-rays in surgery. During World War One
Curie helped to equip ambulances with x-ray equipment, which she herself drove to the front lines.
The International Red Cross made her head of its radiological service and she held training courses
for medical orderlies and doctors in the new techniques.

James Dyson

An inventor who launched the dual cyclone bagless vacuum cleaner to widespread acclaim, but only
when he formed his own company, his invention having been spurned by many manufacturers for fear
it would destroy the market for conventional vacuum cleaners.

Dyson claimed he developed the technology underpinning his product by observing operations in a
saw mill. In Dyson’s case, innovation was clearly product-led.

Steve Jobs

One of the best-known entrepreneurs of modern times, Jobs co-founded the Apple Corporation in
1976 and launched the Apple II and Apple Macintosh computers in 1977 and 1984 respectively.

Further innovations include the iPod, the iPad and the extremely successful iPhone. Though regarded
by many as an inventor, Jobs claimed he was not, and had harnessed technological developments
that already existed.

Distinctive product design and operating systems, as well as visibly recognisable products, suggest
that Apple has secured its position in the market through exploiting all four P

Bill Gates

In a 2004 survey, over 50% of business executives regarded Bill Gates as the most important
innovator of the last 75 years (Steve Jobs was second at 47%). Gates co-founded Microsoft in 1975
and it has grown into the largest provider of proprietary software systems for IBM-compatible
computers in the world.

The personal computer was first mass marketed in 1985, but it was the emergence of Windows-based
systems that provided Microsoft with the ability to capture market share from what was then a
fragmented software market with Corel dominating spreadsheet package sales (through Lotus 1-2-3)
and a wide range of companies competing for sales of word processing packages.

Ostensibly product-led, Microsoft’s innovation is also driven by paradigm, which envisaged integration
and connectivity at its core.

Mark Zuckerberg

As co-founder of Facebook, the world’s largest social networking platform, Mark Zuckerberg
transformed a small idea of providing connectivity between fellow college students into a mass market
product.
The development of Facebook was probably one of the best examples of lateral thinking, by building a
facility for apparently-free multilateral communications through a marketing-driven platform.

Facebook became a dominant force within a relatively short time of its foundation, despite the
presence in the market of many other established sites, including MySpace, Bebo and Friends
Reunited.

Dr. Shirley Jackson

Dr. Shirley Ann Jackson, a theoretical physicist and famous black inventor, has been credited with
making many advances in science. She first developed an interest in science and mathematics during
her childhood and conducted experiments and studies, such as those on the eating habits of
honeybees.

She followed this interest to the Massachusetts Institute of Technology (MIT) where she received a
bachelor, and doctoral degree, all in the field of physics. In doing so she became the first African-
American woman to earn a Ph.D. from MIT.

Jackson conducted successful experiments in theoretical physics and used her knowledge of physics
to foster advances in telecommunications research while working at Bell Laboratories. Dr. Jackson
conducted breakthrough basic scientific research that enabled others to invent the portable fax, touch
tone telephone, solar cells, fiber optic cables, and the technology behind caller ID and call waiting.

Competitive advantage

Companies that constantly innovate have greater potential to stay ahead of their competitors through
their unique selling proposition.

They may enjoy patent rights if the product is their own invention, effectively giving them a quasi-
monopoly position if close substitutes are not available in the market. This is an established method of
harvesting revenues for an initial period in the pharmaceutical industry.

Additional revenues may be generated by offering licences to third parties.

Innovation suggests that the company will be ‘ahead of the game’ in respect of research and
development, and should therefore be able to explore further opportunities by product development,
and by stretching the brand.

Competitive advantage

Examples of product development and stretching a brand through innovation were demonstrated with
the iPod:

Primary product development stages of the iPod

Parallel products
Peripheral hardware – headphones, docks, wireless speakers, adaptors.

Collaborative developments
Sales of iPods by Hewlett Packard under licence.
Sales of iWatch with Nike running and fitness App.

Development of retail channels (e.g. Walmart).

Competitive advantage

The iPod has demonstrated a passage through various stages of the product life cycle.

Within six months of launch in 2004, Bloomberg estimated that iPods enjoyed a 72% market share for
MP3 music players.

By 2007, 48% of Apple’s first quarter revenues came from iPod sales, with research indicating that
purchasers of iPods would be inclined to buy other Apple products, such as an iPhone or an Apple
Mac.

By the fourth quarter of 2008, Apple reported that only 14.21% of total revenues were from sales of
iPods.

This was not surprising: ‘We expect our traditional MP3 players to decline over time as we cannibalize
ourselves with the iPod Touch and the iPhone.’ It was decided that there would be no new model of
the iPod for 2013, perhaps recognising that Apple customers were migrating to using the iPhone for
many of the functions for which they previously relied on the iPod.

Benefits of being a fast second

Conventional wisdom suggests that by being the ‘leader of the pack’ in innovation it will automatically
result in medium-term financial advantages. This has been challenged by an alternative view that the
skill-set of many established companies is better suited to scaling up newly-created markets
pioneered by others.

Research by the Harvard Business Review suggests that organisations that capture new markets are
often those which time their market entry so they appear when the dominant design is about to
emerge. These fast second firms are referred to as consolidators.

This is not a new phenomenon. The 35mm camera was invented in 1923 by an employee of the Ernst
Leitz Company in Germany (now Leica), but Japan’s Canon is widely credited as being the innovator
that brought the 35mm camera to the mass market.

Similarly, mainframe computers were originally developed by government agencies. IBM

supported the development of these machines both immediately before and after the Second
World War in order to keep in touch with developments.

UNIVAC brought the first commercial mainframe to the market, but in 1953 launched its first
products. At the time, UNIVAC had an installed base eight times larger than IBM, but by 1960 the
market share ratio had reversed. IBM was able to drive market share through close business
connections and deployment of its sales force.

More recently, the Virgin Group has followed a similar strategy, with Sir Richard Branson
admitting that if the company spots a good idea or concept, it will mobilise to capitalise on it by
seeking to add value, supported by the power of an established brand. Branson also recognises
that the company has to identify boundaries. When quizzed about whether the market for electric
cars attracted him, he replied ‘I think Tesla are making a pretty good job of developing that
market’.

Pre-requisites for being a fast second

Markides and Geroski identified several conditions for being an effective fast second:

 it is necessary to get the timing right, in order to embark upon entry when a critical mass of
demand is likely to be achieved
 the company must see some slowing in the rate of innovation indicating that the new
technology is beginning to mature
 there must be a growing sense of legitimacy and consumers seek out the product and
readily accept it
 there must be signs from competitors or producers of complimentary products of
interest in developments in the product
 the second fast company must be confident that they can add value and bring their own
product to market at a credible price
 the target market must be clearly identified
 it is necessary to have channels to market in place, or perhaps achieve differentiation
through unique market interfaces (such as Dell Computers choosing not to distribute
through retailers)
 willingness to forge alliances if this is a necessity to engineer an effective entry
 the fast second company needs the confidence to drive its initiative forward.

Introduction

The following video will tell you about three brothers who are professionally qualified accountants and
how they learned and studied towards their qualification in three different technological eras of
instruction.

Listen to the video and read the text carefully because you will be asked some questions about it
later.

Workplace innovation activity - feedback

There were TWO main drivers of the changes:

Technology

Projectors for PowerPoint presentations were available before Klaus started to study, but only
became more readily accessible to colleges around 2000, due to the prohibitive costs of equipping
meetings rooms and the size of the equipment. The hardware became cheaper and fully portable.
Online communications were also possible, but fewer homes had access to fast broadband.

Social and economic factors

Jobs confined to the regular 6-8 hours a day became less common, with many students adopting
more flexible working hours, and often expected to work at least some evenings of the week. The
ability of students to commit to attending lectures at fixed times decreased, and employers found it
more difficult to justify block release teaching and revision courses, which disrupted the working week.
The colleges themselves saw class numbers diminish except in their largest teaching centres, and
had to explore new delivery systems.

Students also found it more usual to communicate by way of online media, as social networking
platforms developed.

Momentum vs inertia

Not everybody faced with innovation reacts positively.

Those who embrace innovation will:

  consider the ‘bigger picture’, visualising the end result and the benefits that will ensue

 regard innovation as a process that adds value

 identify opportunities for themselves and others to be more productive

 relish the challenges

So why does innovation sometimes create a negative response, or even outright resistance?

 it may threaten the ‘comfort zone’ of some, who may not feel ready for the changes it will
bring

 it can affect everyday routines that people enjoy

 it may diminish the quality of working life, if interesting work is replaced by repetitive and
boring work in order to benefit from efficiencies

 it may threaten jobs, as some innovation will enable the same or greater output with fewer
people

 there is a fear factor arising from doubts that individuals and teams will be able to cope

 some skills currently valued may be rendered obsolete or in less demand

Groupthink

Over time, the more a team becomes integrated and stable, the more individuals will tend to play a
predictable role in its success or failure.

If there is an accepted leader, or such a leader emerges, the team will take on the persona of that
person, sometimes resulting in them aligning their thoughts, mental processes and even values with
that person.

One negative consequence of this is that the constructive dissent necessary for independent thinking
is diluted. Team members become less prepared to challenge or criticise for fear of stepping outside
the party line.

While groupthink can be beneficial in maintaining the team’s morale and increasing its solidarity, it can
stifle innovation and inhibit progress.

Illusion of invulnerability
No dissent and excessive optimism.

Collective rationalisation
Conviction that the team view is right, even if there is evidence to the contrary.

Inherent morality
Team believes in its own cause, and may ignore ethical consequences.

Dissenters pressurised
Members are pressurised not to dissent and may be penalised psychologically by the other group
members.

Stereotype outsiders
Outsiders who dissent are considered inferior to the group and their point of view is considered
unnecessary and irrelevant.

Self censorship
Doubts and dissention from the group norm are not expressed.
Illusion of unanimity
Silence is taken to mean that everyone agrees.

Self-appointed mind guards

Members and the leader are protected from information which is contrary to their known views.

Average score
4

High scores (approaching 4 or 5) suggest a natural desire to challenge others constructively and for
constructive debate, while low scores suggest an acceptance of groupthink and preference for not
‘rocking the boat’.

It is important to encourage team members to understand that their input is valued and they should
feel free to contribute without fear or negative consequences. Every team member should have the
opportunity to be recognised and success is not defined purely by the norms, values, beliefs and
opinions of one person.

People are inclined to be attracted to rewards and deterred by punishment, and both can be
psychological. Creative ideas should be welcomed even if outlandish, and if recognised this can be a
form of reward. By ‘putting people down’ or refusing to acknowledge their alternative view, this may be
perceived as punishment.

If differences of opinion are embraced and critical thinking encouraged, this can result in value added
business solutions, using all human resources in the team to the full.

Some contemporary thoughts on creativity and proactivity at work

‘We need an active performance concept for modern workplaces. Such modern workplaces
need flexible and responsible employees who go beyond narrow task requirements and who
approach work proactively.

Also, individual careers have changed in the last decade. Employees tend to change jobs more
quickly and more often and they often carry out a wider range of tasks within the same
organisation to increase flexibility.

This reduces the role of any specific employer in managing employees’ careers and increases
the need for employees to take care of their careers themselves.’

Michael Frese

What do we mean by scepticism?

You receive a personal email which somehow escaped the spam filters operated by your ISP. It
purports to come from an individual located in a far distant country who wants to offer you the
opportunity to share in $500,000 which he needs to move out of his country urgently.

However, time is of the essence, so he needs you to provide your bank details in order to facilitate the
transfer. He will then trust you to retain your 20% and transfer the remainder to him.

Would you disbelieve the email?

Would you be sceptical if you received this email?

Of course you would! But why?

Several factors will (or should) make you sceptical of the email:

 You have seen several, or even many, such emails before, or read of experiences of others.
This will make you sceptical when you have read them often enough, with the result that you
will click ‘delete’ immediately, without examining any further evidence.

 A complete stranger is offering you something for nothing. It is obviously too good to be true.

 If there is even a remote chance of it being a genuine offer and you followed it through, you
would almost certainly be contravening anti-money laundering and terrorist financing laws.
You have probably never come across such a case that is genuine. There may be other
indicators too, such as the email may use poorly worded phrases, grammar and spelling.

Only slightly more plausible is the telesales operative who starts a call with:

‘Am I speaking to Mrs ______? (yes)

‘Don’t worry, I am not calling to sell you anything. We are carrying out a survey...’
You are instantly on your guard. Why?

Your observation from previous experience and possibly knowledge of the law will tell you:

 You have heard this opening before.

 This opening is frequently used to distance the caller from the stereotypical sales person
(survey).

 In some countries, it is illegal to use cold calling to sell certain products, such as investments,
mortgages and pensions, but if your responses to survey questions indicate an interest, it is
believed to circumvent the rules.


Why is scepticism important?

Scepticism is necessary in order to arrive at the true situation, which can often be distorted not only
by what is written or said, but what has been omitted.

Scepticism supports independent judgement, which of necessity must be objective.

Scepticism is necessary to fulfil legal obligations. In some jurisdictions, non-executive directors are
obliged by law to exercise independent judgement, free from bias and undue influence. In the UK, it is
a legal requirement of all directors.

For external and internal auditors, scepticism is a quality essential to do the job effectively.

When formulating business strategies, directors and other executives some pay due regard to all
material risks, which cannot be done if data, information and intelligence it taken at face value.

The following model, produced in the context of auditing, demonstrating four positions with ‘com-plete
trust’ at one extreme and ‘complete doubt’ at the other.

For professionals, it is essential to judge the appropriate level of scepticism.

Scepticism Continuum

The following model, produced in the context of auditing, demonstrating four positions with ‘complete
trust’ at one extreme and ‘complete doubt’ at the other.

For professionals, it is essential to judge the appropriate level of scepticism.

Scepticism in practice

Consider the following two examples in which you are asked to make a judgement. The first is a
personal investment scenario and the second relates to professional auditing work.

For each of them, think about:

  The level of trust you would exercise, and the reasons for your position on this.
 The extent to which you would seek to verify the assertions made.

In the second example, put yourself in the position of Anne.

Investment decision feedback

The level of trust you have will depend on:

 Your existing technical knowledge of such funds.

 Observation of markets – for example, past performance provides no guarantees about the
future.

 Personal experience.

 Experiences of friends, colleagues and acquaintances.

Those with more specialised knowledge may also ask if the provider is registered with a regulator,
whether or not the investment is protected by a compensation scheme (if the fund becomes
insolvent), the tax treatment of capital gains and losses, the tax treatment of income from the fund,
and, if the fund appears to be a brand, who owns the brand and manages funds on its behalf.

Information presented

 Mutual funds
 Proud history
 Long-term returns
 Better returns than competitors
 As little as $100
 Management charges
What should you ask before deciding to invest?

 So can my capital go down as well as up?

 How long? Reputation? Endorsements?
 How long is long-term?
 Proofs? Comparative figures and history?
 But, how much would I need to invest to make it worthwhile, as comparative returns mean
little for small value investments
 How much? Variable? Effect on equivalent return

Last day of audit

During an audit of Fillmore Pierce, Anne Hayes, a qualified accountant and member of the audit team,
was following an audit trail on some cash payments when she discovered an irregularity. A large and
material cash payment had been recorded with no recipient named. The corresponding invoice was
handwritten on a scrap of paper and the signature was illegible.

Zachary, the audit partner, was under pressure to finish the audit that afternoon. He advised Anne to
seek an explanation from Frank Monroe, the finance director. Zachary told her that Van Buren was a
longstanding client of Fillmore Pierce and he would be surprised if there was anything unethical or
illegal about the payment. He said that he had personally been involved in the Van Buren audit for the
last eight years and that it had always been without incident. He also said that Frank Monroe was an
old friend of his from university days and that he was certain that he wouldn’t approve anything
unethical or illegal.

Anne sought an explanation from Mr Monroe and was told that nobody could remember what the
payment was for. He also reminded her that it was the final day and both he and the audit firm were
under time pressure to conclude business and get the audit signed off.

Last day of audit feedback

As a professional accountant, Anne is bound to act in a manner that is consistent with the five
fundamental principles:

 Objectivity.

 Integrity.

 Technical competence and due care.

 Confidentiality.

 Professional behaviour.
The first two of these are relevant to the example.

Objectivity implies considering the facts and evidence from a neutral perspective. She cannot ‘rubber
stamp’ her enquiries based on trust alone, and this must remain unaffected by the various pressures
to finish the audit on time, the personal feelings of her partner (intimidation threat, and perhaps self-
interest threat) and his preconceptions about the integrity of his former university acquaintance
(familiarity threat).

Integrity implies adopting the very highest moral standards at all time, so irrespective of the factors
affecting the immediate decision, she should demonstrate professional scepticism to the same degree
as any other similar instance. It is therefore possible in such circumstances to link professional
scepticism to some of the fundamental principles of ethical behaviour. The key ones to consider here
are integrity, objectivity, and professional competence and due care.

Anne cannot regard her duties as complete without seeking reasonable assurance, and the fact that
the cash payment was ‘material’ should suggest to her that further enquiries are necessary before
signing off the audit.

Skills relevant to scepticism

Questioning

In order to gather facts and other evidence, it is necessary to ask questions. They can be:

 Open questions requiring narrative responses

 Closed questions requiring definitive responses
 Leading questions to confirm existing impressions

Evaluating

The skill of critical evaluation supports positive scepticism, because it enables the individual
to consider all the facts and all the alternatives.
For example, should a new head of internal audit report directly to the finance director of a company?

Clearly not, and you can probably think of several reasons for this.

However, to critically evaluate this, think about both the case in favour of the proposition as well as
the case against.

In Favour
The new internal auditor is more likely to get up to speed if the finance director is the direct superior

The new internal auditor will be able to get answers to high level questions very quickly

Against
The new internal auditor will lack independence

The fact that the finance director will set objectives and carry out performance appraisal of the new
internal auditor creates a conflict of interest

The finance director is often the best placed person in a company to commit fraud or misrepresent
financial information

It is best practice for a head of internal audit to occupy an independent position in the organisation,
falling outside the line relationships on an organisation chart. If the position is depicted on an
organisation chart, its reporting line should be either to the board of directors or to the audit
committee.

There are advantages of the new internal auditor having a direct reporting relationship to the finance
director, but they can only be realised by compromising the independence of the function and
objectivity of judgement of the internal auditor.

Understanding the link between scepticism and risk

If opinions are formed or judgements are made without an appropriate degree of scepticism, this
exposes the organisation to risk.

This is especially important to those with responsibilities for governance, such as company directors,
those in control functions and many functional managers.

Skills relevant to scepticism

Understanding the link between scepticism and risk

If opinions are formed or judgements are made without an appropriate degree of scepticism, this
exposes the organisation to risk.

This is especially important to those with responsibilities for governance, such as company directors,
those in control functions and many functional managers.

Best practice

Scepticism is a positive personal quality, which will enable the individual to do the job better, in a
manner consistent with both the individual and employer’s best interests.
Scepticism relies on technical knowledge, but if sound judgement cannot be made based on one’s
own knowledge, advice should be sought.

Effective observation is necessary to exercise judgement effectively. Gathering evidence goes hand

in hand with this.

Sound judgement relies on considering all the relevant facts and circumstances. Verifiable truth
should be separated from opinion.

The ability to critically evaluate comes from a combination of knowledge and experience.

The Innovation and Scepticism 'Maze'

In the following exercise you will be asked to advise the Spinney Management School (SMS), who
offer MBA programmes, about how to improve the efficiency and effectiveness of its exam delivery
and marking processes.

At each point you will need to think innovatively and sceptically to decide which option SMS should
take. If you give less appropriate answers you will realise this and then need to re-think your approach
and try alternative options. The more correct solutions you provide at the first attempt, the more
quickly you will be able to complete the assignment for your client.

Spinney Management School (SMS) offers an MBA programme. The four compulsory modules and
eight optional modules are delivered through two semesters each year, with written examinations in
March and September. Students prepare through a combination of pre-recorded webinars, three live
web seminars for each module and the submission of a written assignment.

The global student base necessitates the use of several examination centres, located in capital cities
on three continents where IT infrastructure and online presence is sufficiently advanced. Over 70% of
the students come from countries other than the home country of SMS, and 80% have a language
other than English as their main language. It is compulsory to write answers in English. All exams are
of three hours duration and currently candidates write their answers in scripts, which are then sent by
courier to the administrations offices of SMS, and then onward for marking to the module directors,
also by courier.

Although the examinations are paper-based, the in course assignments are submitted by the students
on the ‘Blackboard’ online system, which is a proprietary software package used by many universities
and colleges.

In a review of MBA courses published by the government of SMS’s home country, the SMS MBA
scored impressively on most criteria, with top ten rankings for academic excellence, quality of
teaching and perceptions of employers. However, for the third year running, SMS has scored badly in
relation to administration, and specifically on how long it takes for students to receive their
examination results. Typically, the March examinations take place in the second week of the month,
but students do not receive their results until the middle of July. Many students have made explicit
comments about this, and a significant proportion state that the timescale is unacceptable because it
is impossible to plan ahead for their next modules. Some have registered for new modules but have
deferred when they have found out that they must re-sit.

The administration department of SMS has decided that the situation must be addressed urgently,
and has proposed to reduce the time between sitting the examination and announcement of results be
reduced to a maximum of six weeks.
Processing times were reduced to acceptance levels and exceeded targets. However, pass rates fell
steeply and were below accepted standards. The main reason for this was that candidates were not
able to easily navigate around the electronic exam within the system or access the exam materials in
a convenient way, which slowed down their progress and confused them, particularly those for whom
English is their second language.

Although easier in terms of understanding the English language materials, there was no improvement
in results. Instead of revising and practicing past exams and course materials broadly across the
syllabus, the students became complacent believing that they could guess what was coming up from
the pre-seen information.

Although costly and it took time to successfully implement, students were much more comfortable with
the new system as it more closely simulated their digital experience elsewhere in their personal and
work life and pass rates improved. You demonstrated an innovative and sceptical approach in
rejecting other options and arrived at the best solution.

Congratulations!