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Improving Risk Management

Previously I have written about management and its risks and how best to categorise it through your business to ensure your risk management system is thorough and relevant to requirements of the business. Risk Management is all about what risks the business owner or management will take into the business, which of these will be insured against, and which risks will be managed or eliminated. Underpinning sound risk management systems is the willingness to embrace a positive and open attitude to asking (or being asked) tough and confronting questions. To assist with this process I have put together some ways you can assess or improve your internal systems.

Management risk is a value add
It is not a separate process – Integrate it into your decision making processes
It is a tool to help implement your business strategies
Ask what you need to get right to successfully manage your business and achieve your goals

Establish your business and personal priorities

Set the risk thresholds for your corporate and operational strategies
Clear priorities mould your organisation’s culture and its attitude towards the business stakeholders
Incorporate measurement of the businesses risk profile at regular Director / Senior Management meetings
Decide you your business risk appetite

Establish the type and level of risk your business will carry
Communicate this to the relevant senior management within the business
Reconsider the Company’s risk appetite in conjunction with changes in the business environment
Ask questions constantly

Probe Company management regarding business performance and management in conjunction with each other
Questioning highlights the desire to be proactive towards risk management
Be open minded when asking questions and receiving the responses
Integration of risk management

High business performance and good risk management to have same emphasis
Consider risk management implications to current and new business activities
Management reports to include risk management report as well as all other activity and performance reports
Use all information sources

Get all levels of the workforce to provide information on potential risks
Talk to external stakeholders such as auditors, financiers, key customers and suppliers
Robust risk assessment can also uncover hidden opportunities to improve your business
Allocation priorities to identified risks

Identify major risks and work on these first (e.g. WHSE&T, excess debt)
Accept that you cannot manage all risks facing the business at one time
Understand the risk management processes for each of the major risks and report regularly
Risk benchmarks and indicators

Use the Company audit reports (internal and / or external reports)
Indicator information come from financial data, customer / supplier communication and scanning the business environment
Align the reporting process to the agreed indicators
Use lead and lag indicators
Use software tools to assist in risk identification, management, reporting and review

Risk management structure

Match the structure to business size and complexity
Appoint one person or small group of people to be responsible for structure, operations, effectiveness, reporting and review
Challenge management, management activities and Director activity
Have a clear agenda and policy for risk management.

Risk Management in Accounting Firms: Overview of The New Australian Standards

INTRODUCTION

At its most basic level, risk is defined as the probability of not achieving, or reaching, certain outcomes (goals). Risk is measured in terms of the effect that an event will have on the degree of uncertainty of reaching stated objectives. Risk is commonly thought of in this context as a negative connotation: the risk of an adverse event occurring.

This article discusses the risks faced by accounting firms in Australia, and gives an overview of the new risk management standard (APES 325) issued by the professional standards board.

WHAT IS RISK IN ACCOUNTING FIRMS?

In the context of the professional Accounting Firm, risk is not a new concept for practitioners: it has been attached to the profession for as long as accountants have offered services in a commercial setting. However, as the number and size of legal claims against professional public accountants has increased over the years, so too has the issue of risk and risk management also increased in importance.

Risk management is the system by which the firm seeks to manage its over-arching (and sometimes, conflicting) public-interest obligations combined with managing its business objectives. An effective risk management system will facilitate business continuity, enabling quality and ethical services to be supplied and delivered to clients, in conjunction with ensuring that the reputation and credibility of the firm is protected.

WHY IS A STANDARD REQUIRED?

The Accounting Professional & Ethical Standards Board (APESB) recognised that public interest and business risks had not been adequately covered in existing APES standards, notably APES 320 (Quality Control for Firms). In releasing the standard, the APESB replaces and extends the focus of a range of risk management documents issued by the various accounting bodies. Accordingly, APES 325 (Risk Management for Firms) was released, with mandatory status from 1 January, 2013.

The intention of APES 325 is not to impose onerous obligations on accounting firms who are already complying with existing requirements addressing engagement risks. All professional firms are currently required to document and implement quality control policies and procedures in accordance with APES 320/ASQC 1. Effective quality control systems, tailored to the activities of the firm, will already be designed to deal with most risk issues that arise in professional public accounting firm. However, APES 325 does expect firms to consider the broader risks that impact the business generally, particularly its continuity.

THE NEW REQUIREMENTS

The process of risk management in the Professional Accounting Firm requires a consideration of the risks around governance, business continuity, human resources, technology, and business, financial and regulatory environments. While this is a useful list of risks to consider, it will be risks that are relevant to the operations of the practice that should be given closest attention.

Objectives

The ultimate objective for compliance with the Risk Management standard is the creation of an effective Risk Management Framework which allows a firm to meet its overarching public interest obligations as well as its business goals. This framework will consist of policies directed towards risk management, and the procedures necessary to implement and monitor compliance with those policies. It is expected that the bulk of the Firm’s quality control policies and procedures, (developed in accordance with APES 320) will be embedded within the Risk Management Framework, thus facilitating integration of the requirements of this standard and that of APES 320, and ensuring consistency across all the Firm’s policies and procedures.

A critical component of the Risk Management Framework is the consideration and integration of the Firm’s overall strategic and operational policies and practices, which also needs to take account of the Firm’s Risk appetite in undertaking potentially risky activities.

Whilst the standard allows for the vast majority of situations that are likely to be encountered by the accounting firm, the owners should also consider if there are particular activities or circumstances that require the Firm to establish policies and procedures in addition to those required by the Standard to meet the stated aims.

Establishing & Maintaining

Ultimately, it is the partners (or owners) of the Accounting Firm that will bear the ultimate responsibility for the Firm’s Risk Management Framework. So it is this group (or person if solely owned) that must take the lead in establishing and maintaining a Risk Management Framework, as with periodic evaluation of its design and effectiveness.

Often times, the establishment and maintenance of the Risk Management Framework is delegated to a single person (sometimes not an owner), so the Firm must ensure that any Personnel assigned responsibility for establishing and maintaining its Risk Management Framework in accordance with this Standard have the necessary skills, experience, commitment and (especially), authority.

When designing the framework, the firm requires policies and procedures to be developed that identify, assess and manage the key organisational risks being faced. These risks generally fall into 8 areas:

Governance risks and management of the firm;
Business continuity risks (including succession planning, and disaster recovery (non-technology related);
Business operational risks;
Financial risks;
Regulatory change risks;
Technology risks (including disaster recovery);
Human resources; and
Stakeholder risks.

The nature and extent of the policies and procedures developed will depend on various factors such as the size and operating characteristics of the Firm and whether it is part of a Network. In addition, if there are any risks that happen to be specific to a particular firm – caused by its particular operating characteristics – these also need to be identified and catered for. At all times, a Firms public interest obligation must be considered.

A key factor in any risk management process is the leadership of the firm, as it is the example that is set and maintained by the Firms leadership that sets the tone for the rest of the firm. Consequently, adopting a risk-aware culture by a Firm is dependent on the clear, consistent and frequent actions and messages from and to all levels within the Firm. These messages and actions need to constantly emphasise the Firm’s Risk Management policies and procedures.

Monitoring

An essential component of the Risk Management process is monitoring the system, to enable the Firm overall to have reasonable confidence that the system works. The system works when risks are properly identified and either eliminated, managed, or mitigated. Most risks cannot be entirely eliminated, so the focus of the system needs to be on managing risks down (preventing occurrences as far as practicable), or mitigating the risk (handling the event should it occur).

As part of the system, a process needs to be installed that constantly ensures that the Framework is – and will continue to be – relevant, adequate and operating effectively, and that any instances of non-compliance with the Firm’s Risk Management policies and procedures are detected and dealt with. This includes bringing such instances to the attention of the Firm’s leadership who are required to take appropriate corrective action.

The Framework needs regular monitoring (at least annually), and by someone from within the Firm’s leadership (either a person or persons) with sufficient and appropriate experience, authority and responsibility for ensuring that such regular reviews of the Firm’s Risk Management Framework occurs when necessary.

Documentation

A Risk Management system needs to be properly and adequately documented, so that all the necessary requirements can be complied with, and referred to (if necessary). The form and content of the documentation is a matter of judgment, and depends on a number of factors, including: the number of people in the firm; the number of offices the Firm operates, and; the nature and complexity of the Firm’s practice and the services it provides.

Proper and adequate documentation enables the Risk Management policies and procedures to be effectively communicated to the Firm’s personnel. A key message that must be included in all such communications is that each individual in the firm has a personal responsibility for Risk Management and are required to comply with all such policies and procedures. In addition, and in recognition of the importance of obtaining feedback, personnel should be encouraged to communicate their views and concerns on Risk Management matters.

In documenting the risk framework, the Firm needs to include and cover following aspects:

The procedures to be followed for identifying potential Risks;
The Firm’s risk appetite;
The actual identification of risks;
Procedures for assessing and managing, and treating the identified risks;
Documentation processes;
Procedures for dealing with non-compliance with the framework;
Training of Staff in relation to Risk Management; and
Procedures for regular review of the Risk Management Framework.

In alignment with the monitoring of the Risk Management system, all instances of non-compliance with the Firm’s Risk Management policies and procedures detected though its Monitoring process need to be documented, as with the actions taken by the Firm’s leadership in respect of the non-compliance.

Finally, all relevant documentation pertinent to the Risk Management process needs to be retained by the Firm for sufficient time to permit those performing the monitoring process to evaluate compliance with the Risk Management Framework, and also to follow applicable legal or regulatory requirements for record retention.

SUMMARY

Risk is an ever-present and growing component of delivering professional accounting services to clients, and is not confined to taking on client work that can put the firm’s reputation into decline. It is the everyday business conditions and decisions made that can weigh heavily on a firm.

The modern accounting firm is in the unique position of having all the operating risks of a main-stream business, with the addition of those imposed by the various regulators and authorities.

A comprehensive and effective Risk Management Framework will assist owners of firm in identifying deficiencies and blind-spots that can impact a firm, as well as placing a commercial assessment on the probability of an occurrence, and putting in place clear plans on what to do and when.

With more than twenty years in the fields of accounting and finance, sales and marketing, and operational activity, Michael (MK) has an extensive understanding how businesses succeed in a holistic manner.

Risk Management on Projects

Project Risk Management

How does project risk management differ from any other type of risk management? Well in most regards it doesn’t. However, as this is a project focused activity it helps simplify the overall focus by looking only at the core project fundamentals of scope – which are cost, quality and time. Remember that, I may test you later!

There are a number of good training videos available on YouTube that cover this principal. I’ve added a couple below to help bring home the point of this article. I find watching a presentation often easier to take in than reading some else’s thoughts.

Project Risk Management

So what is project Risk Management is all about? In an earlier article I talk about what risk and risk management are about. If you are still confused about what risks are and what risk management is about then read this article, it should bring you into the picture. On projects we talk about risk as any event that could cause an unplanned change to the projects scope – i.e. impact the project costs, timeline or quality of the deliverables, or any combination of the three.

What isn’t always obvious when talking about project risk management is that we also need to consider the positive impact a risk may have on a project – i.e. reduce costs, decrease the time line or increase the quality of deliverables. In reality it’s not very often that project risks present positive opportunities. Never the less, as project managers we have a responsibility to recognize and act on these risks positive or negative. That’s Project Risk Management.

David Hinde wrote a good article back in 2009 about using the Prince 2 Risk Management technique. Without getting imbedded in any particular methodology, the general approach to project risk management should follow a similar framework and this is as good as any for the purpose of this article:

David talks through a Seven Step process,

Step 1: Having a Risk Management Strategy

This means setting up a process and procedure and getting full buy-in from stake holders in how the organization will manage risk management for the project.

Step 2: Risk Management Identification Techniques

Where do you start in the identification of risks around a project? There are many risk management techniques and David suggests a few which are excellent. However, I like to take a step back and make a list of all the critical elements of a project on the basis of “if this task doesn’t happen will it be a show stopper?”. This helps be build a prioritized list of critical tasks against which I can then consider the risks – what could go wrong to impact this task.

Here’s my thought process on risk identification outlined:

List out critical deliverables
List out, against each deliverable, dependent tasks
List out against all dependent tasks and critical deliverables “any” potential event that could delay or stop the delivery to plan.
Grab a template risk analysis matrix and complete the first pass of assessment – probability v impact for each risk.
Take it to a project meeting and use it as the baseline for brainstorming.

Step 3: Risk Management Early Warning Indicators

Don’t rely on basic performance of the project as an indicator that everything is going well. Status reports showing a steady completion of tasks could be hiding a potential risk.

In risk management a number of other factors need to be on the project managers radar on daily basis. Things that I always look for are delivery dates from vendors – how confirmed are they, is there a movement in delivery dates (you’ll only see this if you regularly ask for confirmation updates from the vendor), resource issues – key individuals taking sick leave or personal leave more often than normal.

Delays in getting certain approvals signed-off by the steering committee or other governance bodies – will this impact orders going out or decisions being made on critical tasks? Getting qualified people in for inspections and certification (new buildings for example require a lot of local regulatory inspections). These are just a few of the daily challenges a Project Manager will face and all can be indicators of trouble to come.

As you gain more experience in risk management you start to instinctively recognize the early warning signs and challenge the culprits earlier in the process. You’ll also finds the a good project manager will build-in mitigation for the common project ailments at the very start, sometimes seeing the tell-tale signs when selecting vendors or suppliers will be enough to select better alternatives and this is what I call dynamic risk management at work.

Also keep an eye on the world around you – economic or geological events elsewhere can have a dramatic impact on local suppliers and supplies of key project materials. For example, flooding in Thailand has impacted the delivery of various computer components that are manufactured there, causing impact in both supply lines and pricing. (Yes, I work in Asia so see this type of impact first hand..)

Step 4: Assessing the Overall Risk Exposure in Risk Management

Taken directly from David’s article as he says this quite clearly – “PRINCE2 2009 gives an approach to show the overall risk situation of a project. Each risk is given a likelihood in percentage terms and an impact should it occur in monetary terms. By multiplying one by the other an expected value can be calculated. Totaling the expected values of all the risks gives a monetary figure that easily shows the exposure of the whole project to risk.”

There are many similar ways I’ve seen risk calculated in organizations variations on risk management. Â As long as there is a common approach for showing all risks, prioritization and impact on a project then risk management will work and add value in protecting the investment in the project. Each project and each organization will have their own requirements in terms of how they want to see risks analysed and presented. By and large it doesn’t matter how this is done, as long as it IS doesn’t and it makes sense in the context of the project and organization. There are risk management tools to help organise and manage this.

In another article I’ll talk more about the Risk Management matrix and show a few examples. In my mind the only wrong way to do this is to not do it at all.

Step 5: Considering the Effect of Time on a Risk and Risk Management

The effect of time when analyzing risks is that the more imminent a risk the higher priority it may take. I say “may” as it may be that a very low priority risk with low impact may be about to happen where as a higher priority risk may be weeks or months away. How do you manage this?

Common sense (of which there is no such thing) would suggest that if the higher priority risks are still a long time away then the imminent lower priority risks should be dealt with first, as a higher priority..? Perhaps?

You’ll have to take a pragmatic view on this, every situation needs to be taken on its merits and in risk management, not being an exact science, you’ll be expected to make judgment calls and discuss options with your client and project board or steering committee. After all, the governance board of a project has a responsibility to steer such decisions so the role of a good project manager should be to collate the facts and present the data with recommendations. Let the higher paid guys make the big decisions.

Step 6: Giving a Clearer Approach to Help Define Risks in Risk Management

David gives an example in his article which I’m struggling to relate to the world of projects as I know them. I think essentially what this focuses on is the “mechanics” of the risks in such a way as to help us understand and look at the cause and effect of scenarios that could lead to the risk happening.

In this way we can focus on the lowest common denominator(s) that will generate the risk and mitigate those items. Is that a little confusing? The principal is, I believe to nip the problem in the bud by recognizing what or where the bud is. Don’t get hung up on this, I would say this is something you’d tend to do naturally as you gain experience in reviewing risks and dealing with risk mitigation (prevention).

Step 7: Focus on Opportunities in Risk Management

Finally – and last but not least, where can we make or recognize risks as opportunities. An example David talks about suggests that, for example, a new release of a software product that would offer major benefits if included in the project would be a possible “positive” risk.

This I can relate to more, with the experience of being asked to change the specification on a traders dealing system half way through a major project because the manufacturer had released a major systems improvement, a completely new model, that the bank saw as a strategic advantage.

The analysis of this risk covered the obvious change in costs, the new system was more expensive, the implementation was zero impact compared to the older system however there was a large element of re-training the trading staff and proving the system for the bank before go live. This became the biggest challenge once the cost differential had been signed-off by the project board.