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QUESTION: Many CFOs are frustrated by how often their companies face significant new business threats, a study by the Financial Executives Research Foundation suggests. Of the 55 financial executives of Fortune 500 companies interviewed for the study, 24% said they don’t see significant changes and unknown threats to the business until it is too late. “The level and speed of disruptive risk is providing a challenge for executive teams to recognise the sources of disruption and how it will drive potential risk and opportunities for the company,” said Mark Frigo, CPA, CGMA, professor of strategy and leadership at DePaul University and the director of DePaul’s Center for Strategy, Execution, and Valuation. The financial executives interviewed for the study ranked sources outside the company as the most telling about new business trends and disruptions, followed by customers and competitors. Sources inside the company ranked fourth. Even more important than seeing the business threat, study respondents said, is the ability to link a change to the business model and strategy. To provide strategic leadership, expertise in accounting, finance, and strategy is not enough, according to the financial executives interviewed for the study. CFOs also need the following skillset: Ask the right questions. To know what matters and to envision new markets or business models, CFOs need to have deep knowledge of what drives the market, what customers expect, and what competitors are doing. Collect the right information and share it. Processes and tools are available to collect risk information, but CFOs need to understand the limits of the data. Identifying risks and labelling some as strategic is not sufficient. A thorough strategic risk analysis leverages enterprise risk management (ERM) frameworks, such as the one developed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Sharing the data, rather than just sharing conclusions, helps others in the organisation understand the analysis and why managing identified risks is important to them. Identify risk/value drivers in the data and help others understand them. Intangible assets, such as monthly digital users, can be early indicators of a change in the competitive landscape. CFOs need to be able to identify them and explain why they are important. Develop a culture committed to mitigating risk. To focus on how risk management can help achieve business objectives, CFOs should start a conversation at the executive or board level about changes, strategy, risks, business model, and the company’s future. ERM frameworks help increase risk awareness on the board. Given the efforts of COSO to highlight strategic risk dimensions, for example, CFOs following COSO should expect board members to ask more strategic risk questions and be prepared to address them. Align the company’s business model and strategy with the risks. An analysis of the data generated within an ERM process helps determine whether a risk management strategy is on track or whether a change in strategy is necessary. CFOs need to apply their financial expertise to determine any adjustments or realignments. Fail fast and shift gears quickly. A change in direction can create new risks for a company or raise the significance of established risks. To respond promptly, CFOs need to understand how a business strategy is executed operationally, for example, in product development and sales. It helps to get various business units together a couple of times a year and have a conversation about risks and/or business models. By staying on top of how risk management strategies are working, CFOs can exit businesses before they collapse. The stance may take courage, but having thought through key aspects of risk management makes the decision easier. REQUIRED:- With reference to the above, discuss the roles of management accountants, the required skills and possible management accounting tools that can provide business intelligence to support strategy and influence decision-making, driving their organisations to mitigate and adapt to change. The answer scheme should also include real life company examples, where relevant. Requirement: 2000 words (Total: 100 marks)
Expert Answer
Management Accountants have a great role in managing risk for their organisation. Risk management is an essential activity for every organization. Although proper risk management cannot completelt eliminate the chance of a negative event, it can reduce the probabiltity of negative events and furthermore it can help reduce the amount of loss resulting from a negative event.
Management accountat play a huge role in predicting , analyzing and mitigating a risk as their role is very crucial when it comes to manging risk of an organisation. Risk can be classified in various ways and they are as follows
– Strategic Risks: These are risks that exist on a global macro level . Strategic risks such as industry factors, competitor actions and the overal economic climate global market conditions. These risk cannot be mitigated so easily as the external dependencies are high for this risk.
– Operations Risk: Risks that resulting from inadequate or failed itnernal processes , people or systems. Operations risk can be mitigated by proactive measures by the organisation. Risk that are under the control of the organisations. they needs to be predicted or expected in advance in order to mitigate.
– Finance Risk: Risk connected to the financial health of a company. Finance risk is usually paying high debt through paying high interest where the returns will be less from that debt. it can also result from foreign exchange, liquidity risk , solvency risk and trading activities. Financial riks can be mitigated by changing the capital structure, more of equity instead of Debt.This will reduce pressure on the financial burden of a company.
– Hazard Risk : Hazard risk that can be insured against , such as natural disasters, death of an CEO or any important employee in an organisation. Insurance can only be the solution to mitigate hazard risks
Volatility and time are the main elements of risk . Longer the time , bigger is the risk . Higher the volatility rest assured the risk will also be higher.
Management accountats have a role in the Risk management process and the steps are as follows
1.Risk Identification
Fist Step is to identify possible risk that can impact an organisation . Identifying all possible risks that might impact the company from acheving its objectives.
2. Risk Assessment :
Whatever the risks that was identified or predicted must be assessed . Its the process of quantifying the identified risks . Its measured by the loss Frequency & severity. How frequent the risk is occuring and quantum of the risk should be assessed
3.Risk Prioritsation:
Rsik can be priortised by the following means
– Expected Loss : Expected loss is the amount that management expects to lose a given year
– Unexpected Loss: amount that lost in excess of the amount budgeted for the expected loss
– Maxmum probable loss: largest loss that can be occur under forseeable conditions
– Maximum Possible Loss : Catastrophic loss is the worst case scenario. It represents the greatest possible loss from an specfic event or a risk.
4. Response planning : a company can choose how it can choose to respond to an risk , either they can avoid the risk , 2. they can reduce the risk , 3 they can transfer the risk 4. they can retain the risk . 5 they can accept the risk .
5. Risk Monitoring : How well the risk has been faced and monitoring is the phase where they match the results with expected and actuals
