MZUMBE UNIVERSITY

SCHOOL OF BUSINESS
DEPARTMENT OF ACCOUNTING AND FINANCE

ACC 324: GOVERNANCE AND PROFESSIONAL ETHICS

RISK MANAGEMENT

Question 1
You are a partner in an accountancy practice. One of your clients, Widmerpool, has
expanded significantly over the last few years and is likely to seek a listing in a
couple of years' time. You have been contacted by the Chief Executive, Mr Kenneth,
for advice on areas relating to the control and risk management systems.

Up until recently, the main board has dealt with all significant issues relating to the
company. In view of the current plans to seek a listing, Widmerpool has recently
appointed three non-executive directors, and has used them to staff the audit
committee that has just been established. Mr Kenneth is also wondering whether to
set up a separate risk committee. Ideally he would like the audit committee's brief
to be restricted to the accounting systems. There have recently been various
incidents that appear to indicate problems with the ways Widmerpool's employees
deal with risk.

In one incident a worker was trapped in a machine. A fellow worker tried to help and
both were seriously injured. A subsequent investigation found that safety
instructions appeared to be adequate and there was sufficient safety equipment
available. However staff had not been using the right equipment, appeared ignorant
of safety issues and seemed unwilling or unable to comply with instructions.

In another instance one of Widmerpool's most significant suppliers, Stringham, with

whom Widmerpool has been trying to develop much closer relations, supplied
Widmerpool with confidential information concerning its operations. Two of
Widmerpool's managers discussed these details in a local restaurant, but left the
documentation relating to Stringham behind when they left the restaurant. Another
customer removed this information and offered to sell it to one of Stringham’s main
competitors. The competitor declined the offer, and reported the situation to the
police and Stringham. As a result Stringham has decided to terminate its
relationship with Widmerpool. Widmerpool's organizational handbook stresses the
need to keep sensitive business information confidential, but does not provide
detailed guidance.

Widmerpool recently carried out a staff satisfaction survey. One of the comments
made was that as the company has grown bigger, the board has become more
distant from operations and seems primarily concerned with ensuring profits
increase each year. As a result staff have become laxer in following internal
procedures, as they believe that they are being judged solely on whether their
department fulfils its financial targets.
Required
a. Explain why Widmerpool's internal guidance and control procedures
have failed to ensure that Widmerpool's employees deal carefully
with business risks.
b. Explain the ways in which the board of directors can, by their own
example, promote a better risk culture than has recently been
apparent at Widmerpool.
c. Evaluate the case for Widmerpool establishing a separate risk
committee, staffed by non-executive directors.

Question 2
Pacific Group Ltd (PG) is a publisher of a monthly magazine 'Sea Discovery'.
Approximately 70% of the magazine's revenue is derived from advertising, the
remainder being subscription income.
Individual advertisements, which may be quarter, half or whole page, are priced at
TZS 750,000 TZS 1,250,000 and TZS 2,000,000 respectively. Discounts of 10% to
25% are given for repeat advertisements and to major advertising customers.

PG's management has identified the following risks relating to its advertising
revenues:
a. Loss of revenue through failure to invest in developments which keep the
presentation of advertisements up to date with competitor publications (such
as 'The Deep').
b. Due to unsuitable credit limits being set, business is accepted from a small
proportion of advertising customers who are uncredit worthy.
c. Published advertisements may not be invoiced due to incomplete data
transfer between the editorial and invoicing departments.
d. Individual advertisements are not charged for at approved rates – either in
error or due to arrangements with the advertisers. In particular, the editorial
department does not notify the invoicing department of reciprocal
advertisement arrangements, whereby advertising customers provide PG
with other forms of advertising (such as website banners).
e. Individual advertisers refuse to pay for the inaccurate production of their
advertisement.
f. Cash received at a front desk, which is significant, may not be passed to
cashiers, or be misappropriated.
g. The risk of error arising from unauthorized access to the editorial and
invoicing systems.
h. The risk that the editorial and invoicing systems are not available.
i. The computerized transfer of accounting information from the invoicing
system to the nominal ledger may be incomplete or inaccurate.
j. The risk that PG may be sued for advertisements which do not meet the
Standards Authority's 'Code of Advertising'.

Risks are to be screened out, as 'non-applicable', if they meet any of the following
criteria:
1. The effect of the risk can be quantified and is less than TZS 5,000,000.
2. The risk is mitigated by an effective risk strategy eg insurance.
3. The risk is likely to be low or its effect insignificant.

Those risks not screened out, called 'applicable risks', will require further
consideration and are to be actively managed.
Required
For each of the above risks identified by management, evaluate, with a
reason, whether it should be considered an 'applicable risk'.
Question 3
Azure, a limited liability company, was incorporated in Sepiana on 1 April 20X6. In
May, the company exercised an exclusive right granted by the government of Pewta
to provide twice weekly direct flights between Lyme, the capital of Pewta, and
Darke, the capital of Sepiana. The introduction of this service has been well
advertised as 'efficient and timely' in national newspapers. The journey time
between Sepiana and Pewta is expected to be significantly reduced, so encouraging
tourism and business development opportunities in Sepiana.

Azure operates a refurbished 35 year old aircraft which is leased from an

international airline and registered with the Pewtan Aviation Administration (the
PAA). The PAA requires that engines be overhauled every two years, putting the
aircraft out of commission for several weeks.

The aircraft is configured to carry 15 First Class, 50 Business Class and 76 Economy
Class passengers. The aircraft has a generous hold capacity for Sepiana's numerous
horticultural products (eg of cocoa, tea and fruit) and general cargo.

The six hour journey offers an in-flight movie, a meal, hot and cold drinks and tax-
free shopping. All meals are prepared in Lyme under a contract with an airport
catering company. Passengers are invited to complete a 'satisfaction' questionnaire
which is included with the in-flight entertainment and shopping guide. Responses
received show that passengers are generally least satisfied with the quality of the
food – especially on the Darke to Lyme flight.

Azure employs ten full-time cabin crew attendants who are trained in air-
stewardship including passenger safety in the event of accident and illness. Flight
personnel (the captain and co-pilots) are provided under a contract with the
international airline from which the aircraft is leased. At the end of each flight the
captain completes a timesheet detailing the crew and actual flight time.
Ticket sales are made by Azure and travel agents in Sepiana and Pewta. On a
number of occasions
Economy seating has been over-booked. Customers who have been affected by this
have been accommodated in Business Class as there is much less demand for this,
and even less for First Class. Ticket prices for each class depend on many factors,
for example, whether the tickets are refundable/nonrefundable, exchangeable/non-
exchangeable, single or return, mid-week or weekend.

Azure's insurance cover includes passenger liability, freight/baggage and

compensation insurance. Premiums for passenger liability insurance are determined
on the basis of passenger miles flown.

Required
a. Explain the business risks facing Azure.
b. Recommend how the risks identified in (a) could be managed and
maintained at an acceptable level by Azure
Question 4
Suppose you have been employed in a newly established business company as a
Risk Manager. You would like to demonstrate to senior management that you know
well your responsibilities as a Risk Manager.

Required
Enumerate eight functions of a Risk Manager.

Question 5
One of the challenges that face entrepreneurs is how to identify and manage risks.

Required
a. Elaborate various types of risks that face entrepreneurs.
b. Name and explain various ways of managing risks in a business
industry.

Question 6
Having risk policy statements and risk registers helps the organization to embed
risk into the organization’s systems by making employees at all levels aware of
possible risks. Organizations need to focus on risk mitigation and management
from the shareholders’ perspectives. The responsibility for the implementation of
risk management is that of the Board. Risks can be effectively embedded into an
organization’s systems and procedures when the process is driven from the top.

Required
Explain any five ways in which the management may embed risks into the
organization’s systems and procedures.

Questions 7
One of the major objectives of a commercial Company is to make profit, and the
Company’s strategies should be directed towards this objective. In order to achieve
this objective, effective strategies need to be designed. Any designed business
strategy involves taking risks, which can influence actual profits to be higher or
lower than expected depending on risk appetite and risk tolerance.

Required
a. Define the terms “Risk appetite” and Risk tolerance” as used in
corporate governance.
b. Show how Board of Directors is responsible for managing risks.

Questions 8
Risks are embedded in every business but they differ from one business to another
depending on the type of business. One of the major risks which cuts across all
businesses is financial risks.

Required
Name and discuss five main financial risks facing businesses
Questions 9
Risk monitoring methodologies and practices vary from organization to
organization. In general, organizations have risk committee, a risk manager, and
internal/external risk auditing system.

Required
a. Explain any five roles played by a risk committee to an organization.
b. Evaluate any five benefits of external risk auditing.