6learning outcome 6 (2)

8/8/2019 6learning Outcome 6 (2)

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TYPES AND SOURCES OF RISKS

INDICATIVE CONTENT 6.1 (CONT)

2. Compliance risk` Compliance risks are those associated with the need to

comply with laws and regulations.

` They also apply to the need to act in a manner whichinvestors and customers expect, for example, by ensuringproper corporate governance.

` For instance, it is wise to consider legislative risks to thebusiness. Whether the products or services you offer could bemade less marketable by legislation or taxation - as has

happened with tobacco and asbestos products.` For eg, concerns about the increase in obesity may prompt

tougher food labeling regulations, which may push up costs orreduce the appeal of certain types of food.


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TYPES AND SOURCES OF RISKS

INDICATIVE CONTENT 6.1 (CONT)

3. Operational risks` Operational risks are associated with the business' operational and

administrative procedures.

` These include:

i. Recruitment risk

ii. Product/market risk diversification and overstretch

iii. transportation risk

iv. accounting controls risks

v. Technology and production risks skills and success factors, reaction tocompetition.

vi. Regulations/legal risk

vii. board composition/managerial ability risk transferability and loss of keystaffs

viii. Reputational risk adverse environmental impact, hostile public opinion.

ix. Malpractice risk- fraud, employee malpractice, loss of data

x. Environmental risk - pandemic, natural disasters, green issues.


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TYPES AND SOURCES OF RISKSINDICATIVE CONTENT 6.1 (CONT)

` These operations should be analysed in turn, prioritisethe risks and make provisions for such a risk happening.

` For example, IT risk and data protection are increasingly

important to business. If hackers break into the IT

systems, they could steal valuable data and even moneyfrom your bank account which at best would be

embarrassing and at worst could resulting in insolvency. A

secure IT system employing encryption will safeguard

commercial and customer information.


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4. Financial risks

` Financial risks are associated with the financial structure

of your business, the transactions business makes and the

financial systems it already have in place.

` Identifying financial risk involves examining the dailyfinancial operations, especially cashflow, level of gearing,

refinancing strategies and so on.

` If your business is too dependent on a single customer

and they are unable to pay you, this could have seriousimplications for your business' viability.


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Financial risks include:

i. Capital risk initial capital invested may be lost.

ii. Currency risk fluctuation in foreign currencies.

iii. Liquidity risk is the risk that a given security or asset

cannot be traded quickly enough in the market to

prevent a loss.

iv. Interest rate risk is a risk borne by an interest

bearing asset, due to variability of interest rates.

v. Credit risk the risk associated with the borrower

going default.

vi. Fiscal risk (income tax and corporation tax)


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INTERNATIONAL OPERATIONSINDICATIVE CONTENT 6.2

1. Political Risk

` The political actions and instability may make it difficult

for companies to operate efficiently in these countries

due to negative publicity and impact created by

individuals in the top government.` A firm cannot effectively operate to its full capacity in

order to maximize profit in such an unstable country's

political turbulence.

` A new and hostile government may replace the friendlyone, and hence expropriate foreign assets.


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INTERNATIONAL OPERATIONSINDICATIVE CONTENT 6.2 (CONT)

2.Country Risk

` The culture or the instability of a country may create

risks that may make it difficult for multinational

companies to operate safely, effectively, and efficiently.

` Some of the country risks come from the governments'policies, economic conditions, security factors, and

political conditions.

` Solving one of these problems without all of the

problems (aggregate) together will not be enough inmitigating the country risk.


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3.Terrorism Risk

` These are attacks that may stem from lack of hope;

confidence; differences in culture and religious philosophy,

and/or merely hate of companies by citizens of host

countries.` It leads to potential hostile attitudes, sabotage of foreign

companies and/or kidnapping of the employers and

employees.

` Such frustrating situations make it difficult to operate inthese countries.


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4. Economic Risk` This comes from the inability of a country to meet its

financial obligations.

` The changing of foreign-investment or/and domestic fiscal

or monetary policies.

` The effect of exchange-rate and interest rate make it

difficult to conduct international business.


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5. Environmental Risk` Air, water, and environmental pollution may affect the

health of the citizens, and lead to public outcry of the

citizens.

` These problems may also lead to damaging the reputationof the companies that do business in that area.


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6. Regulatory risk` The risk of a change in laws and regulations that will

materially impact a security, business, sector or market.

` A change in laws or regulations made by the government

or a regulatory body can increase the costs of operating abusiness, reduce the attractiveness of investment and/or

change the competitive landscape.

` For example, if the tax rate on dividends were to be

treated as regular income the return to investors ininvestments paying dividends would decrease.


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TECHNIQUES USED TO EVALUATE

ENVIRONMENTAL RISKINDICATIVE CONTENT 6.4

1. RISK MAPPING

` It shows the risk a company faces if it adopt a certain

strategy based on history.

` Prioritisation of risks to handle is carried by taking two

factors into consideration:

i. Significance or impact of the risk if it materialise.

ii. Likelihood or probability of the risk materialising.


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RISK MAPPING

Prioritisation process


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ENVIRONMENTAL RISKINDICATIVE CONTENT 6.4 (CONT)

2. Contingency planning

` An alternative plan to be put into operation if needed,

especially in case of emergencies, or if a primary plan fails.

` Such plan primarily focuses on high significance/impact

incidents or risks which could undermine the survival ofthe organisation.


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ENVIRONMENTAL RISKINDICATIVE CONTENT 6.4 (CONT)

3. Gap analysis` Gap analysis is a tool that helps a company to compare its

actual performance with its potential performance.

` At its core are two questions:

i. Where are we?

ii. Where do we want to be?` The goal of gap analysis is to identify if they the gap between

the optimized allocation and integration of the inputs, andthe current level of allocation.

` This helps provide the company with insight into areas

which could be improved.` The gap analysis process involves determining, documenting

and approving the variance between business requirementsand current capabilities.


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TECHNIQUES TO MANAGE RISKSINDICATIVE CONTENT 6.5

Treatment ofrisks:i. Avoidance ( e.g. Avoid penetrating new markets)

ii. Reduction (e.g.Outsourcing, developing strategies

incrementally, acquisition)

iii. Retention (accepting low significance risk)

iv. Transference (sub-contracting, outsourcing, franchising,

joint venture, insurance)


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TECHNIQUES TO MANAGE RISKSINDICATIVE CONTENT 6.5 (CONT)

1. ENTREPRISE RISK MANAGEMENT (ERM)` The methods and processes used by organizations to manage risks

and seize opportunities related to the achievement of theirobjectives.

` ERM provides a framework for risk management, which typicallyinvolves identifying particular events or circumstances relevant to

the organization's objectives (risks and opportunities), assessingthem in terms of likelihood and magnitude of impact, determining aresponse strategy, and monitoring progress.

` By identifying and proactively addressing risks and opportunities,business enterprises protect and create value for their stakeholders,including owners, employees, customers, regulators, and society

overall.` ERM is evolving to address the needs of various stakeholders, who

want to understand the broad spectrum of risks facing complexorganizations to ensure they are appropriately managed.

6learning outcome 6 (2)

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