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A. Strategic – from outside environment, long term effect:

o Business risk – decisions on products supplied (Tech. changes, Macroeconomic ~)
o Non-business – collapse in trade due to adverse event, natural disaster
B. Operational risks – day-to-day business, failure of internal business and controls:
o internal controls, audit inadequacy, regulations, internal procedures, IT failures, human error, fraud, loss of key person, business

Treats in - Competitors – new products, decrease of price

SWOT - - Product – become old-fashioned, need to improve, quality
Business - Supply – shortages, increase price
risks - Stakeholders – poor relationship
- Product – become obsolete

- Compliance and regulations

- Financial
o Structure of finance – debt/equity base in long term, providing finance
o Currency
Transaction, Translation, Economic (effect on international competitiveness)
o Interest
o Market – stock, bond price down
o Financial records and reports
- Trading
o Physical (lost), trade (refuse order), liquidity (not pay)
- Investment
o Wrong assessment, cost of capital, NPV, time horizon, data
- Property/physical
- International
o Trade, credit, tax, FX
o Cultural – misunderstanding
o Political – nationalization
o Legal - not meet regulation
- Information systems and controls
- Fraud
- Reputation

Risk management model

1. Risk appetite – shareholders, management and culture SEVERITY
2. Risk analysis LOW HIGH
a. Identification F Accept Transfer
R LOW Risks not significant. Insure risk. Reduction of severity
b. Assessment – severity, frequency E Keep under review will minimise the premiums.
c. Profiling and prioritisation ------------------ Q Control or reduce Abandon or avoid
d. Quantification – loss, frequency, probability... U Take some action, eg Take immediate action eg
E enhanced control changing major
3. Risk management –develop response
systems to detect
a. Accept
C problems, to reduce
b. Transfer
Y impact
c. Control/reduce – contingency plan, back-up
d. Abandon, avoid
4. Review and feedback

Develop response
Identify Assess with respect to appetite

Implementing, and monitoring risk controls and reviewing their effectiveness

Management control systems (MCS)
Organisation as a system – SCAN PICTURE PAGE 48

Control – ensuring that activities lead to desired outcome

Problems of traditional management accounting
- Timing – 85% of the cost is “defined” at design stage. ↑↓ Accountants however, continue to direct efforts to production stage
- Controllability – 10 % direct cost and 30 % overhead are controllable in short term. Accounting spend 3 times more on direct cost.
- Customers – most of the cost driven by them but not recognised by cost accounting. – e.g. after sales, number of transactions, quality issues
- Costing method – in JIT system, small batches result in thousand s of transactions that serves nothing. Back flush as alternative.
- Absorption costing – ABC rather than labour hours or machine hours
- Standard costing – More appropriate in large scale production but less when flexibility or customisation needed
- Performance indicators properly set – may produce wrong response – if “cost of scrap, return factor” is KPY production may be tide up with reworking
(in order to decrease returns) instead of trying to “get it right first time”
- Investment appraisal – problem with assumptions

Control systems
- Single and double loop
- Feedback and feed forward Good INFORMATION
- Relevant
- Management accounting control - scorekeeping, directing attention, used for problem solving - Accurate
o Standard cost accounting - Reliable - user confidence
o Cost allocation – ABC, machine hours - Timely
o Lean accounting – focus on value and waste of recourses - Well communicated
o Lifecycle costing - Cost – effective
o Target costing Management accounting information
o Back-flush costing - Forward–looking
o Investment appraisal - Fin and Non-financial
- Controlling H Recourses - Free from bias
- Budget and budgetary control - Comparative
- Balanced scorecards


Control environment controls
– Attitude of the :management
policies and on
procedures to ensure
significance of control:
values effective and efficient conduct of business:
style Safeguard of assets
structure Regulatory compliance
responsibilities Prevention & detection Fraud and Errors
Accuracy and completeness of accounting
Timely and reliable financial information

Internal controls – example

- Variance analysis
- Stock recording system
- Fixed assets register
- Customer satisfaction
- Employee turnover
- Product wastage
Non-financial qualitative
- policies and procedures
- physical assets control
- structure of authority and reporting
- HR controls – contracts, job description, performance appraisal
Corporate governance – system by which organizations are directed, managed and controlled
Features of poor corporate governance:
a) Domination by a single individual:
b) Lack of involvement of board:
c) Lack of adequate control function:.
d) Lack of supervision.
e) Lack of independence – auditors not independent:
f) Lack of contact with shareholders:
g) Emphasis on short term profitability
h) Misleading accounts and information:

Benefits of good corporate governance:

a) Reduces risk
b) Shows transparency/accountability
c) Stimulates performance
d) Improves access to capital markets
e) Good PR to all stakeholders
f) Imposes leadership

Directors and Board - issues

- Chairman <> CEO
- Board balance - Non-executives, independence fro operations, balanced position
- Responsibilities and role
o Non-executives – Strategy; Performance; Risk; Directors – remuneration and change
- Remuneration – dependent on performance, clear policy

Internal control and Audit committee

- Participation of independent non-exec.
- Responsibilities:
o Review of financial statements and systems
o Liaison with external auditors
o Review of internal audit and auditors
o Review of internal controls
o Risk management policy review

Internal audit
Audit committee – helps the board, review risk policy and internal controls

- Risk policy and strategy review
- Accounting system review
- Internal controls review
- Review finance and operational information
- Compliance review – law, regulations, internal procedures
- Safeguarding of assets
- Implementation of corporate objectives – review

Type of audits
- Accounting system
- Operational system
- Value for money
- Management audit – examine management performance
- Social &Environment audit

- Transactions
- Systems
- Risk-based audits
- Internal
- External
Financial risks
Type of risks
- Financial structure - Currency
- Credit risk - Interest rate
- Liquidity
- Cash management

- Sensitivity analysis and NPV
- Certainty-equivalent cash flows approach – cash flows * probability
- Expected values – forecast * probability
- Standard deviation of NPV – higher deviation – higher risk
- Value at risk – maximum loss at given probability level
- Regression analysis
- Decision tree and matrix
- Scenarios
Futures vs Forward
+ Lower transaction cost
Exchange / Currency RISK + Exact date not have to be known
- Economic risk – exchange rates impact competitiveness + Available to smaller companies, no credit rating required
o Match assets and liabilities (loans) + Can be closed at any time
o Diversify suppliers and customers - Contract can not be tailored nor negotiated
o Diversify world-wide - Inefficiency – size and time standardized, basis risk (backwardation)
- Transaction risk – adverse exchange rates movement - Limited number of currencies
o Matching receipts and payments - For both non-USD currencies – procedure twice complex
o Invoice in own currency
o Leading and lagging of payments Options vs Forward and Futures
o Netting receivables and payables + Possible profit
+ Support tenders
o Forward contracts
+ Where uncertainty exist
o Money market hedging – borrow in foreign currency
o Futures and options - Additional premium cost
- Translation and accounting risk - Premium paid immediately
o Not a cash flow - Not negotiable
- Not in every currency

International risks
Trading & Credit risk
- Physical
- Credit
- Trade – customer refuse to accept goods
- Liquidity – not able to finance the creit
- FX

Exchange / currency risk – discussed above

Cultural risk

Political risk
- Quotas
- Tariffs (import, export)
- Legal standards (non-tariff barriers)
- Nationalization
- Min or max shareholding
- Exchange control – blocked funds, limit in-out transactions

Legal risk
- Export/import control through bureaucratic procedures (environment, health…)
- Favorable trade status e.g. EU
- Monopoly and mergers legislation
- Law of ownership – e.g. majority of local shareholders
- Taxation law – discourage import / export
- International trade mark acceptance, intellectual property recognition
- Pricing regulations