The 3 key roles of the Accountant in Business Risk Management

The Accountant is the primary expert relationship with the business owner.

The 3 key functions are:

1. Identifying the appropriate risk management strategy

2. Quantifying the problems

3.Managing implementation of the solution

Today we will quickly cover:

a.What is risk

b.How to measure it

c.Strategic choices

d.Quantifying impact

e.Managing solutions

Do all this = Good Parenting

Risk – The possibility of an adverse outcome

Measuring Risk & Choosing Strategy

Avoiding Risk

refuse to accept risk for a moment. Simply do not engage in it.

Example: Currency risk in exporting exclusively to USA.

Problem: it is a negative management technique. Essence of business growth is calculated risk taking – so potentially growth-inhibiting.

Advantages: often low direct cost. Can be self-managed (appeals to DIY clients). Eliminates entire element of risk, enabling focus on other areas. A valid strategy if used on a considered basis, and selectively.

Retaining Risk

Often a default choice through ignorance – that is, no deliberate decision has been made to either avoid, transfer or mitigate, so it becomes retained. However, it can be a viable strategy for low frequency/low severity events.

Example: over-reliance on few key staff managed by increased training and development of internal procedures manuals (“turnkey” operations)

Problem: often unconscious choice, therefore the risk not considered.Advantages: generally good way of managing risks of low severity but relatively high frequency. If a considered approach however, can lead to improved business performance (profitability & value) through application of risk minimisation tactics together with built in pricing provisions for risk adoption. Generally when a known risk is retained, it follows that mitigation techniques are applied

Transferring Risk

Essentially it consists of passing the risk on to another party who is willing to assume it. The key principle is that the client takes a known loss (premium) that can be tolerated to remove the cost of the unknown loss that cannot be retained

Example(s). Insurance policies, currency hedging, futures contracts

Problem: to pass the risk consequences off you incur a known loss. Biggest problem is often knowing who to pass it to – seek specialists.

Advantages: loss is minimised and known, creating certainty. Bulk of uncertainty transferred, freeing up business resources for growth & development.

Mitigating Risk

Two methods of mitigation: reducing probability of event or minimising impact/severity of event

Example(s): adoption of safety equipment and machinery guards to reduce probability of event occuring. Or, installing sprinkler system to minimise impact of fire.

Problem: betwixt & between – some retention, some avoidance, some transferrence means can be more difficult and costly to implement appropriate strategies. Tends to take some time to implement also.

Advantages: often relatively cost effective overall; can enhance business efficiency and value; can improve ongoing costs; can improve employee relations

Quantifying the problem

Quantifying the problems

Recap: A. Probability of occurrenceB. severity of outcome

Accountants-only functions:

Valuation methodology – what is appropriate. Or what range of methods?

Identifying vital components of value creation. Attributing value to those.

Assessing optimal strategy – Retain? Avoid? Transfer?Providing professional recommendation to clientManaging other specialists during implementation. (Project manager)

Already too much to do?

Managing the Solution

Overview of risks to consider

Some general types of risks worth transferring: property; liability;personal impact (life, health, disability); negligence & omission

Some not worth transferring, but worth Reducing (mitigating impact of) or Retaining:

Business succession; Capital/cashflow strain;OSH & ACCGrowth/control issues (e.g. operational procedures, HR, leverage,

etc)

Show the road ahead...

For more information or to contact www.strictlybiz.co.nz

TonyVidler