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Improving risk governance - and why management accountants should take the lead

Posted: Wednesday 29 July 2009 by Gillian Lees
Replies : 1
Category: Law and regulation, Management accounting, Professional development, Risk management
Keywords: corporate governance, decision-making, risk management
Gillian Lees's picture

One of the key messages that comes up time and time again in relation to the economic and financial crisis is that there was a major failure in the governance of risk, especially in the banking sector.

So it is no surprise therefore that the UK Walker Review (see www.hm-treasury.gov.uk/walker_review_information.htm) into the governance of banks devotes a whole chapter to the topic.

In a nutshell, what is happening in the UK is that Sir David Walker was asked by the government earlier this year to review corporate governance in the banking sector.  Alongside this, the Financial Reporting Council is reviewing the UK Combined Code on corporate governance, including whether Sir David's recommendations should be applied to the rest of the corporate sector(see www.frc.org.uk).

If you are a non-UK reader, you'll have to forgive me for sounding rather parochial - but actually I'm not - the UK is widely regarded internationally as a leader in this field.  I'm not saying this to boast, but just to point out that what is adopted here is very likely to find its way into governance codes across the world.  So I am very pleased to share what's happening here in the UK and I would be delighted to hear about what's happening wherever you are!

Back to risk.  What's interesting about the Walker Review is that there is a distinction between backward and forward-looking  risk functions.  So, the company board has a responsibility to ensure that known risks are properly managed and controlled.  It could do this, for example, by checking to see that there are proper processes in place.  But then there is the forward-looking dimension.  This is the hard bit and boards have the responsibility to determine the organisation's risk appetite and tolerance - and then ensure that the proposed strategy is consistent with this.  The whole idea is to spend enough time on assessing the organisation's vulnerability to hitherto unknown risks.  As Sir David has suggested, much of our recent experience can be characterised as 'marking a failure by boards to identify and give appropriate weight to risks on which they had not previously focussed'.

One possible way to address this is by establishing a separate board risk committee - at least for banks - so the audit committee focusses on the historic and the risk committee has a future-looking orientation.  Whether it makes sense for other corporates to have a separate risk committee is a matter of debate.

But putting greater emphasis on a future-looking risk orientation is great news for management accountants - wherever you work.  It plays extremely well into your core skill sets of providing forward-focussed information to support decision-making.  So it could be a good time to think about what you can do to help your organisation to understand its 'unknown unknowns' - maybe through developing possible scenarios that could be stress tested. 

Improving risk governance - and why management accountants shoul

Posted by Upeksha Mawilmada on Thursday 01 October 2009 10:09

I wonder why all CIMA qualified accountants alive in 2008-2009 could not foresee the financial crissess earlier. so may be management accountants should not be the one to lead risk management. even management accountants lead the risk management they become too late in identiying risk - the harm has done then. THIS IS THE FACT.

The loose point in management accounting risk management point is that they measure risk. but measure within narrow range in terms of enviroment-market and time. so even at small short period market level the risk management works but not in real world. because in real world all the markets infinitive future time periods affects. say using pareto analysis, benchmark, regression analysis, probability forecasting, scenario planning, gap analysis these are just suited for short/narrow markets and periods. in other words they dont work in real world. because of their logicallity we accept them in practice not in other means.

Establishing risk committees is good tactic to cope risk. in order to cope risk at broader market and period, first a central agency, can be establish , eg. the stock market committee, to identify the risk level of companies at an acceptable level. then the central agency can analyse the risk trend in the whole market. then central agency can identify the roots of risk. these roots mainly are stock brokers as by using few team up brokers to shake the market. finally central agency should identify where the real money and the share-% of money held bulkly, which means bulk money holders are the market shakers.then identifying the rate and macroly publish the market shake up range. i.e. % of market share 1-100 no.of holders in relation to market value they hold.

When market becomes to a certain level - that indicate high risk to whole market, then central agency man publish a warning. keeping a secured level of assets, investment and being more secure in finance leverage will be a risk coping method. this can be the topic for risk committee. but it should note that stock prices and book asset values, real company asset values, company loans are not perfectly correlated to each other. unrelated market forces can shakeup the market. or let a very secure level of assets, investments and f.leverage and reduce earinings. share prices can fall dramatically even with high profits, investments , assets and low f.leverage.

We almost all should understand, big brainy harvard, cima, acca, icma, aca, cma, and all mba fellows failed on finanical crisis. a fail is a fail no matter what we say. good luck.