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Keeping risk at bay amid uncertainty
AS the global economic environment becomes more uncertain and complex, businesses need to build robust risk management systems to avoid suffering financial and reputational damage.
The rise of digital technology in particular has created a new set of challenges for businesses - from cyber attacks to money laundering. According to the 2013 study "Global Cost of a Data Breach" conducted by the Ponemon Institute, the average cost of a data breach to an organisation in 2013 ranged from US$1.1 million in India to US$5.4 million in the US.
Armed with tools such as data analytics, accountants are well placed to be at the forefront of developing robust risk management systems to mitigate such risks. Big data analysis can help management spot behaviour or patterns that may be harmful to an organisation.
However, a recent report published by the Chartered Institute of Management Accountants (CIMA) and its joint-venture partner, the American Institute of CPAs (AICPA), found that 86 per cent of businesses are struggling to get valuable insight from such data.
This is where accountants can add value by translating analytical insights so that they can be applied in areas such as planning, budgeting, forecasting and performance management, says Andrew Harding, managing director at CIMA.
"As one finance leader at Yahoo! told us, 'It's not our job to go down to the lowest level of data, but to know how to aggregate outcomes so they can be converted into an insightful report.'," he says.
To be truly effective in mitigating risk, however, accountants and finance professionals need to work hand in hand with other members of senior management.
Anthony Harbinson, chairman of the Anti-Money Laundering Task Force, UK Consultative Committee of Accountancy Bodies, says: "This involves the CFO working hand in hand with the chief information or IT officer as the threats facing organisations come from many sources."
He notes that in the area of money laundering, organised crime has been quick to take advantage of the opportunities offered by the growth in e-commerce and online banking. However, organisations are also at risk from employees who can cause damage either by accident, or by deliberate and malicious intent.
"These are perhaps the most difficult of threats as they come from those who are trusted with access to an organisation's most valuable data," he says.
Local bank UOB has been leveraging technology to boost its ability to manage its risk. Over the past five years, the bank has been integrating its regional network through a common technology platform to support its regional growth. With this platform in place, the bank is able to offer its customers a seamless banking experience and access to a wider range of products and services.
"Beyond serving our customers, this also allows us to assess and manage our risk in a holistic manner," says Lee Wai Fai, chief financial officer at UOB Group.
The bank is also investing in big data tools to strengthen its analytical capabilities in order to identify developing risks within the environment and its portfolio in order to pre-empt and mitigate such risks, explains Mr Lee, who is also chairman of the CFO committee at the Institute of Singapore Chartered Accountants.
Managing risk has become particularly tricky for the banking sector, which has undergone tremendous changes since the 2008 global financial crisis. Some of these changes include increased regulatory and compliance requirements in recent years that are having an impact on the business models of banks.
In this fast evolving environment, the CFO plays a critical role in anticipating and understanding global trends and changes and the impact these will have on the company.
"Since the finance function typically holds the key to major investment decisions, it is incumbent upon the CFO to challenge new business proposals to ensure that adequate controls and safeguards have been considered as part of the process," says Mr Lee. "As finance professionals, we play a dual role in supporting the business in their growth while keeping a close eye on the various risks which may impact our businesses."
Indeed, Mr Harbinson notes that an accountant's professional scepticism is the first line of defence in tackling risks such as money laundering and terrorist financing.
"In most cases if it looks or feels wrong then there's a very strong chance it is. In my experience, talking to colleagues when you have an inkling that something isn't right is as important as running the data and scrutinising the numbers. Seeking someone else's view, someone you trust, is important," he says.
However, a general lack of understanding of risk hampers an organisation's ability to build up a system to manage it. Therefore, accountants need to educate and advise their colleagues in the area of risk management
"Accountants would always have one eye on potential risks and will not be afraid to report them upwards to the CEO and the board," says Mr Harbinson.
He adds: "Effective risk management is both a challenge and an opportunity - there are massive gains to be had from acting as a risk advisor, alongside other colleagues, to protect and enhance the reputation of the profession and the companies or clients for which they work. In this way we are trusted advisors, looking for the opportunities that can and do come out of good integrated risk management."