RISKS
A. Strategic from outside environment, long term effect: Business risk decisions on products supplied (Tech. changes, Macroeconomic ~) on!"usiness collapse in trade due to adverse event, natural disaster Operational risks da#!to!da# "usiness, failure of internal "usiness and controls: internal controls, audit inade$uac#, regulations, internal procedures, %T failures, human error, fraud, loss of ke# person, "usiness interruption &ompetitors ne' products, decrease of price (roduct "ecome old!fashioned, need to improve, $ualit# )uppl# shortages, increase price )takeholders poor relationship (roduct "ecome o"solete
B.
Treats in S$OT % Busines s 3isks
- &ompliance and regulations - *inancial )tructure of finance de"t+e$uit# "ase in long term, providing finance &urrenc# Transaction, Translation, ,conomic (effect on international competitiveness) %nterest Market stock, "ond price do'n *inancial records and reports - Trading (h#sical (lost), trade (refuse order), li$uidit# (not pa#) - %nvestment -rong assessment, cost of capital, (., time hori/on, data - (ropert#+ph#sical - %nternational Trade, credit, ta0, *1 &ultural misunderstanding (olitical nationali/ation 2egal ! not meet regulation - %nformation s#stems and controls - *raud - 3eputation ),.,3%T9 2:F R E Q U E N C 2:ACCE!T 3isks not significant. =eep under revie' CONTROL OR REDUCE Take some action, eg enhanced control s#stems to detect pro"lems, to reduce impact
RISK MANAGEMENT MODEL
4. 5. 3isk appetite shareholders, management and culture 3isk anal#sis a. %dentification ". Assessment severit#, fre$uenc# c. (rofiling and prioritisation !!!!!!!!!!!!!!!!!! d. 6uantification loss, fre$uenc#, pro"a"ilit#... 3isk management develop response a. Accept ". Transfer c. &ontrol+reduce contingenc# plan, "ack!up d. A"andon, avoid 3evie' and feed"ack
;%<;
TRANSFER %nsure risk. 3eduction of severit# 'ill minimise the premiums. A"ANDON OR A#OID Take immediate action eg changing ma>or
7.
;%<;
8.
RISK MANAGEMENT
Identify Assess Develop response with respect to appetite
Implementing, and monitoring risk controls and reviewing their effectiveness
MANAGEMENT CONTROL S STEMS &MCS'
Control ensuring that activities lead to desired outcome
!ro(le)s of traditional management accounting - Ti)ing ?@A of the cost is BdefinedC at design stage. DE Accountants ho'ever, continue to direct efforts to production stage - Controlla(ilit* 4F A direct cost and 7F A overhead are controlla"le in short term. Accounting spend 7 times more on direct cost. - C+sto)ers most of the cost driven "# them "ut not recognised "# cost accounting. e.g. after sales, num"er of transactions, $ualit# issues - Costing )et,o- in G%T s#stem, small "atches result in thousand s of transactions that serves nothing. Back flush as alternative. - A(sorption costing AB& rather than la"our hours or machine hours - Stan-ar- costing More appropriate in large scale production "ut less 'hen fle0i"ilit# or customisation needed - ![Link])ance in-icators properl# set ma# produce 'rong response if Bcost of scrap, return factorC is =(9 production ma# "e tide up 'ith re'orking (in order to decrease returns) instead of tr#ing to Bget it right first timeC - In/est)ent appraisal pro"lem 'ith assumptions Control s*ste)s Goo- INFORMATION )ingle and dou"le loop - 3elevant *eed"ack and feed for'ard - Accurate Management accounting control ! scorekeeping, directing attention, used for pro"lem solving - 3elia"le ! user confidence - Timel# )tandard cost accounting - -ell communicated &ost allocation AB&, machine hours - &ost effective 2ean accounting focus on value and 'aste of recourses Manage)ent acco+nting 2ifec#cle costing information - *or'ardlooking Target costing - *in and on!financial Back!flush costing - *ree from "ias %nvestment appraisal - &omparative &ontrolling ; 3ecourses INTERNAL CONTROL S STEM Budget and "udgetar# control Balanced scorecards Control en/iron)ent Attitude of the management on significance of control: Internal controls 0 e1a)ple values *inancial Internal controls: policies and procedures to st#le - .ariance anal#sis ensure effective and efficient conduct of "usiness: structure - )tock recording s#stem )afeguard of assets responsi"ilities - *i0ed assets register 3egulator# compliance on!financial (revention I detection *raud and ,rrors - &ustomer satisfaction Accurac# and completeness of accounting - ,mplo#ee turnover Timel# and relia"le financial information - (roduct 'astage on!financial $ualitative - policies and procedures - ph#sical assets control "[Link] o. Goo- Corporate - structure of authorit# and reporting Go/ernance3 - ;3 controls contracts, >o" description, performance appraisal a) 3educes risk
COR!ORATE GO#ERNANCE
)#stem "# 'hich organi/ations are directed, managed and controlled *eatures o. !oor Corporate Go/ernance: a) Homination "# a single individual: Internal control an- A+-it co))ittee ") 2ack of involvement of "oard: (articipation of independent non! c) 2ack of ade$uate control function. e0ec. d) 2ack of supervision. 3esponsi"ilities: e) 2ack of independence 3evie' of financial Auditors not independent: statements and s#stems f) 2ack of contact 'ith shareholders: 2iaison 'ith e0ternal g) ,mphasis on short term profita"ilit# auditors h) Misleading accounts and information. 3evie' of internal
-
Directors an- "oar- % iss+es
") )ho's transparenc#+accounta"ilit# c) )timulates performance d) %mproves access to capital markets e) <ood (3 to all stakeholders f) %mposes leadership
&hairman JK &,: Board "alance ! on!e0ecutives, independence fro operations, "alanced position 3esponsi"ilities and role o on!e0ecutives )trateg#L (erformanceL 3iskL Hirectors remuneration and change 3emuneration dependent on
INTERNAL AUDIT
A+-it co))ittee helps the "oard, revie' risk polic# and internal controls
O(2ecti/es 3isk polic# and strateg# revie' Accounting s#stem revie' %nternal controls revie' 3evie' finance and operational information &ompliance revie' la', regulations, internal procedures )afeguarding of assets %mplementation of corporate o">ectives revie'
T*pe o. a+-its Accounting s#stem :perational s#stem .alue for mone# Management audit e0amine management performance )ocial I,nvironment audit Transactions )#stems 3isk!"ased audits %nternal ,0ternal
FINANCIAL RISKS
T*pe o. risks
);:3T *inancial structure &redit risk 2i$uidit# &ash management 2: < ! &urrenc# ! %nterest rate
Q+[Link]
INTERNATIONAL RISKS
Trading I &redit risk
-
)ensitivit# anal#sis and (. P 2o'er transaction cost &ertaint#!e$uivalent cash flo's approach cash flo's M pro"a"ilit# P ,0act date not have to "e kno'n ,0pected values forecast M pro"a"ilit# P Availa"le to smaller companies, no credit )tandard deviation of (. higher deviation higher risk rating re$uired .alue at risk ma0imum loss at given pro"a"ilit# level P &an "e closed at an# time 3egression anal#sis ! &ontract can not "e tailored nor negotiated Hecision tree and matri0 ! %nefficienc# si/e and time standardi/ed, )cenarios "asis risk ("ack'ardation) ! 2imited num"er of currencies E1c,ange 4 C+rrenc* RISK ! *or "oth non!O)H currencies procedure - ,conomic risk e0change rates impact competitiveness t'ice comple0 o Match assets and lia"ilities (loans) o Hiversif# suppliers and customers Options /s For5ar- an- F+t+res o Hiversif# 'orld!'ide P (ossi"le profit - Transaction risk adverse e0change rates movement P )upport tenders o Matching receipts and pa#ments P -here uncertaint# e0ist o %nvoice in o'n currenc# o 2eading and lagging of pa#ments ! Additional premium cost ! (remium paid immediatel# o etting receiva"les and pa#a"les ! ot negotia"le o *or'ard contracts ! ot in ever# currenc# o Mone# market hedging "orro' in foreign currenc# o *utures and options - Translation and accounting risk o ot a cash flo' o (h#sical &redit Trade customer refuse to accept goods 2i$uidit# not a"le to finance the creit *1
F+t+res /s For5ar-
,0change + currenc# risk discussed a"ove &ultural risk (olitical risk
6uotas Tariffs (import, e0port) 2egal standards (non!tariff "arriers) ationali/ation Min or ma0 shareholding ,0change control "locked funds, limit in!out transactions ,0port+import control through "ureaucratic procedures (environment, healthN) *avora"le trade status e.g. ,O Monopol# and mergers legislation 2a' of o'nership e.g. ma>orit# of local shareholders Ta0ation la' discourage import + e0port %nternational trade mark acceptance, intellectual propert# recognition (ricing regulations
2egal risk