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Risk management – Prepare for the global economic upswing

22 July 2009 PricewaterhouseCoopers (PwC)

The global economic slump has caused significant focus to be placed on risk management in all sectors of the economy. However, many organisations are struggling to shake off perceptions that the function is more of a compliance exercise than a crucial component of front-line decision making. PricewaterhouseCoopers (PwC) conducted research related to the shift in focus on risk management in a wide range of sectors.

Globalisation and connectivity have ensured that risk is no longer confined to one company, country or continent. The sub-prime mortgage crisis is just one prime example of how quickly risk can spread. The regulatory burden is also growing as new laws are introduced and older laws — like the Foreign Corrupt Practices Act — are more rigorously enforced throughout the world.

Some of the risk management systems that have been put in place have actually made companies more vulnerable. They have been designed to address what went wrong yesterday, not what might go wrong tomorrow. Many companies have also adopted a piecemeal approach to risk management and this problem is compounded by the fact that risk management is seen purely as a matter of avoiding risks, rather than balancing risks with returns. Leading companies ensure that an analysis of risk is balanced with an analysis of potential rewards by addressing both factors during the annual business planning process. In this way, risk limits and controls can be set at the highest level of the business.

Zahid Fakey, PwC’s partner in KwaZulu Natal South Africa, head of the IT Auditing, Data Management and Forensic Technology Solutions plays a key role in risk management and internal audit services. Fakey says, “The economic downturn has increased risks relating to fraud and liquidity in global and local economies. This situation has positioned fraud and liquidity risk as a key item on the agendas of the board and its governance structures meetings within the private and public sectors.”

“To deal with the escalating fraud related risks, governance structures within organisations should establish a corporate risk management committee. This committee is tasked with gathering vital information from sources, such as forensic hotlines, related to fraudulent activity. This information can be used to identify and counteract possible risks,” emphasises Fakey.

An experienced corporate risk officer should be actively involved fraud risk assessment and should also assist the risk management committee to implement processes to counter possible threats to the organisation. The role of the corporate risk officer is becoming more important in assisting organisations to meet their strategic objectives.

Risk managers and finance directors have a shared agenda in embedding a holistic risk management strategy across the business. After all, clear guidance on the risks a company faces, and on acceptable risk limits, are crucial for accurate forecasting and financial planning. In turn, accurate non-financial and financial indicators are essential components of a coherent risk management strategy.

When identifying liquidity risks, where for example organisations are unable to pay overhead commitments due to the general slowdown in business, the finance department should become proactively involved. Feedback should be provided to the risk management committee on a monthly basis. One of the key factors that the finance department should consider is to identify new opportunities that will facilitate growth of the businesses cash flow.

Fakey concludes, “Even though the economic downturn presents a real threat to organisations, facing risks head on and working proactively to implement strategies will position the company positively when the global economies start to recover.”

How PricewaterhouseCoopers can help you manage your risk more effectively

PwC approaches every assignment holistically. They listen to your specific concerns and advise you on how best to address these concerns, given your risk appetite. PwC can help you:

  • Define the kinds of risk and amount of risk you’re willing to tolerate;
  • Link your risk appetite to your business strategy and operations, so that you can choose the risks which offer the greatest commercial potential without adversely affecting the level of compliance you have set for your organisation;
  • Make the changes required to ensure that every business unit and function in your organisation consistently makes decisions about risk that conform to your risk appetite; and
  • Improve the consistency and efficiency of your systems and processes for controlling risk.
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