Risk Management

Some experts have said that a strong risk management process can decrease problems on a project by as much as 80 or 90 percent. In combination with solid project management practices, having a well-defined scope, incorporating input from the appropriate stakeholders, following a good change management process, and keeping open the lines of communication, a good risk management process is critical in cutting down on surprises, or unexpected project risks. Such a process can also help with problem resolution when changes occur, because now those changes are anticipated and actions have already been reviewed and approved, avoiding knee jerk reactions.

Defining "Risk"

Before one can embark on a risk management process, one must have a solid understanding of some key definitions. These events can be positive or negative, so that the word "risk" is inherently neutral. That said, most of the time and focus is spent handling negative project risks, or "threats," rather than positive project risks, or "opportunities."

Risk Management Process

• identification - prepare list of potential risk
• analysis - priorities potential risk
• report to management about the risk identified
• Design risk mangement system - prepare avoidance and contingency plan
• recommend designed system for implementation
• implement - put in place the accepted system
• evaluate - monitor the progress of the system
  

Strategic Risk - is the current and prospective impact on earnings or capital arising from adverse business decisions, improper implementation of decisions, or lack of responsiveness to industry changes. This risk is a function of the compatibility of an organization’s strategic goals, the business strategies developed to achieve those goals, the resources deployed against these goals, and the quality of implementation. The resources needed to carry out business strategies are both tangible and intangible. They include communication channels, operating systems, delivery networks, and managerial capacities and capabilities. The organization’s internal characteristics must be evaluated against the impact of economic, technological, competitive, regulatory, and other environmental changes.

Operational Risk - A form of risk that summarizes the risks a company or firm undertakes when it attempts to operate within a given field or industry. Operational risk is the risk that is not inherent in financial, systematic or market-wide risk. It is the risk remaining after determining financing and systematic risk, and includes risks resulting from breakdowns in internal procedures, people and systems. Operational risk can be summarized as human risk; it is the risk of business operations failing due to human error. Operational risk will change from industry to industry, and is an important consideration to make when looking at potential investment decisions. Industries with lower human interaction are likely to have lower operational risk.

MIND YOUR ETHICS!!!!!!

The words "ethics" and "morals" have a number of meanings. Webster gives four basic meanings of the word "ethics":
1. The discipline dealing with what is good and bad and with moral duty and obligation;
2. A set of moral principles or values
3. A theory or system of moral values
4. The principles of conduct governing and individual or group

"Ethics", in all forms, is concerned wiht right or wrong, good or bad. It is either a set of principles held by an individual or group or the "discipline" which studies those principles. The task of that discipline is the analysis and evaluation of human actions and practices. Example; according to some people or groups, assisted suicide is ethically acceptable. The discipline of ethics would examine what "assisted suicide" means (analysis) and what reasons can be given in support of or against such a practice (evaluation).

Why should an accountant get involved in this study of ethics (for those candidates sitting for ACCA P1)? Doesnt every accountant already have a set of moral beliefs that he or she already follows? certainly, but even so, there are several reason for studying ethics.

• First, some moral beliefs one hold may be inadequate because they are simple beliefs about complex issues. The study of ethics can help a person sort out these complex issues, by seeing what principles operate in those cases.

• Second, is some situations, because of conflicting ethical principles, it may be difficult to determine what to do. In this case, ethics can provide insights into how to adjudicate between conflicting principles and show why certain course of action are more desirable than others.

• Third, individuals may hold some inadequate beliefs or cling to inadequate values. subjecting those beliefs or values to ethical analysis may show their inadequacy. It could be that at one time you thought some things were wrong but now you think they are acceptable, or vice-versa. In short, after consideration you changed your mind about some of your ethical beliefs.

• Fourth, and very important, reason to study ethics is to understand whether and why our opinions are worth holding on to. Socrates is known for showing that the unexamined life it not worth living. As an accountant, what are your basic goals in life? Are they compatible with other values that you have? If you need to choose between keeping a job and violating your professional responsibilities, what should you do? When your responsibility to family conflicts with your responsibility to your job, how do you resolve this?

• Finally, is to identify the basic ethical principles that can be applied to action. When faced with trying to decide what to do in difficult situation, it is often helpful to have a checklist of basic questions or considerations that need to be raised and applied to the situation to help determine what the outcome should be. Therefore, in accounting, one learns the principles of accounting in order to apply them to specific situations, so one also need to learn the principles of ethics that govern human behaviour in orderto apply them when faced with difficult situations. In that way, we can at least be sure we have examined the issue adequately by employing all the ethical principles available.

The study of ethics can make us aware of the number and types of principles that can be used in determining what should be done in a situation involving ethical matters. Because ethical issues grow ever more complex in an ever more complex world, it behooves one to have a grasp of the underlying structure of ethical reasoning (Kohlberg model) to help navigate the ethical sea.