Excellent business results of INA may have triggered relaxation instead of introducing stronger analyses

In a situation where the media is flooded with various theories, it is difficult to discern which information is true. Therefore, it is not easy to determine what the thought process and actions of controlling were regarding this specific case. But let us try to imagine how it could have been.

One of the most important tasks of controlling is the protection of business results. Controlling is not control or inspection supervision, but its task is to analyze business events to determine whether the company is utilizing its resources well in accordance with business goals and plans.

However, things become significantly more complicated in volatile times when market prices fluctuate significantly. The problem arises if controlling has an established, predefined reporting system that does not adapt sufficiently agilely to new opportunities such as large price oscillations, where the automatic risk of manipulation is significantly increased, and therefore a whole range of new ‘deeper’ analyses needs to be introduced very promptly.

However, an important moment must be taken into account here, namely that the company’s business result in 2021 was far better than the previous year, and it seems that in 2022 it is even better. This is certainly a possible trigger for the opposite action – for relaxation instead of introducing stronger analyses. It is possible that this favored the underestimation of new risks. This is certainly not good, but unfortunately, it is possible.

How does controlling usually discover situations like this in the observed example?

One of the most basic, always present controlling analyses is that of achieved RUC (difference in price, i.e., the difference between the cost price of production and the selling/market price). In normal times, this indicator is compared with historical and planned values to determine deviations. However, with large fluctuations in selling prices, there is a possibility that it is not immediately clear what is a normal deviation and what is not. Therefore, controlling must set its analyses across various dimensions of monitoring – e.g., down to the customer level. Especially when there is no uniform sales contracting, as customers may have different contracts depending on when they were concluded. The risk here is much greater, and if this is not set by management, controlling must carry it out itself as part of its independent analyses.

I am not aware if there was reporting down to the customer level (at least for the large ones) in this case, but it is very likely that there was not, as otherwise it would have been quickly determined that one customer has a significantly (negative) deviation from the others, and that would have been a ‘red flag’ for further analysis. Monitoring of that customer would likely have intensified in the first few months and quickly determined that the negative trend continues.

In a situation where there is no system that reports RUCs by customers on a monthly basis, reports for the entire sector (to which the mentioned customer belongs) are analyzed. Large amounts can be immediately noticed and on strange deviations in the results of the entire sector. It should be seen in this case how it is that controlling did not notice this. The amount in question is indeed not small and surely left a mark.

Perhaps we can interpret this by saying that actually – as it seems – the money did not disappear here, but simply did not arrive. This means that the business result should have been even better, but it was not. How much better it should have been in conditions where it is almost impossible to have coherent planned sizes is not easy to determine. And this may be one of the reasons why the alarms did not go off.

What are other practical reasons that can lead to inefficiencies in controlling?

We must know that in practice things are not always set ‘by the book’ and many factors can influence controlling not seeing what it should see. In large companies, especially those operating in groups, controlling often gets the task of focusing on ‘rougher numbers’, and has fewer resources for deeper analyses, which is a significant oversight. Unfortunately, controlling can thus turn into a cumbersome apparatus that does not go much beyond the given frameworks. For someone with bad intentions, this is fertile ground because they know exactly what is being monitored and what is not. And therein lies a great danger. The same thing happens with internal audits and controls.

Many times it happens that controllers receive orders from all levels of management for numerous (perhaps less important) ad hoc analyses that they can barely deliver. In such conditions, they do not have time to engage in their own independent analyses, they cannot see the forest for the trees, and they do not have a clear picture of the whole of individual parts, which is a significant risk in itself.

Also, in practice, it happens that controllers are tasked with focusing on optimizing processes, i.e., on costs, and therefore pay too little attention to revenues and RUC (the one that covers costs). Thus, absurd situations occur where they deal with real flies while on the other side – as we see – elephants pass by.

I repeat, I do not justify this, I am just trying to conclude what possible (objective and subjective) reasons there are for such an outcome. And of course, these are just some of the possible causes.

This current example should serve as a warning to everyone to raise their level of attention – the more unusual the business conditions, the greater the possibility for manipulations, and this means that increased attention and depth of analysis are necessary.

The larger the company, especially when the business result is getting better, the greater the risk of omissions of this kind, and those with unethical intentions are always several steps ahead. I cannot emphasize enough the importance of independent action by controllers outside and beyond the reports set by management, as well as the importance of lifelong learning. They must have enough resources (time, IT support, education) to act as deeply as possible and thus truly be guardians of business results.