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Role of Accountants in Risk Management

By Edited May 23, 2014 0 0

Role of Accountants in Risk Management
The role of the accountant in today’s business world is ever changing and is a far cry from what it would have been just a few decades ago. With the ever increasing levels of white collar crime and lax management conduct, the accountant’s role is more important in identifying risks in terms of the finances of the company. The accountant must then assess the source of the danger, assess the actual danger that these risks pose and be able to communicate that danger to management. The risks will then be categorized in terms of urgency or response and a response can then be settled on. It is up to the accountant to suggest different responses and advise the best response (Dellaportas, 2005).

Once a response has been settled, it is important to create an appropriate system to monitor and manage the risk. The accountant must be able to see whether or not the risk has been properly averted. Should the risk not be contained or averted, the accountant needs to explain this to management and needs to give advice on a new plan of action. This leads to higher levels of corporate governance, compliance accountability and reporting and the accountant must have a system in place to cope with these.

The Response

The accountant will have to determine what the best course of action is in dealing with the risk. The risk can be avoided, accepted, transferred or controlled. When deciding on a strategy to deal with a particular risk the accountant will have to determine exactly how damaging this risk could be. For example, the risk of cash differences of a few cents at the cash register is a lot less pressing than the risk of those of a few hundred dollars. In the first instance, the risk could be accepted. In the second instance, the risk must be brought under control to avoid losses mounting up.

Avoid Risk

Most people automatically think that it is best to avoid all risk. This is not necessarily true. We all know that if we invest money we have to incorporate some element of risk in order to see better returns. The same is true in business. It is not a good business practise to completely avoid all risks. When deciding which risks to avoid, the accountant must weigh up those that could cause substantial loss and incredible gain because it is through risks that businesses move ahead. It is the accountant’s job to minimize take precautions when a business decides to take a certain business path (Borockhovich et al, 2001).

Accept the Risk                          

If the accountant feels that the risk is minimal and does not critically endanger the company, the cost of managing or avoiding the risk must be weighed against the actual danger itself. If it is going to cost more to rid the company of the nuisance than it would cost if the nuisance was seen through, accepting the risk is the most sound principle.

Of course, where the potential rewards are deemed to outweigh the risks, a risk may be accepted. Naturally the accountant would have to properly weigh up and assign a value to both outcomes. Other accountants may actually transfer the risks. In this case, transferring the risk means moving it to a section where less damage can be done (Dellaportas, 2005).

Controlling the Risk

Again, this can be a little difficult and also largely depends on how great the risk is. In ideal world, all risks would be controlled. Monitoring strategies are especially important for risks that are being controlled as these are generally those risks that can have a critical impact on business operations but that cannot be completely avoided.

The difference between a good accounting system and a poor one for the company could mean the difference between insolvency and success. It cannot be overstated how important the accountant is when it comes to identifying risks to the business. A risk can be defined as the chance that the result of a decision will not be exactly as hoped for and that the project will fall short of its goals as a result (Borockhovich et al, 2001). The outcome can be affected by various things – including a misunderstanding of the process, deliberate deception or simply a bad choice being made.

Staff Defalcation and White Collar Crimes

In general, the accounting department is put in place in order to monitor and safeguard the financial well-being of the firm. Top on the list of priorities of any accounting department is to rout out any discrepancies that may indicate that some sort of fraud has been perpetrated on the company. In the movies, it is always exciting and relatively simple to find the fraud (Gaffikin, 2008). In reality, someone who has worked for the company for a while and who is familiar with the internal systems may be able to hide the fact that they are defrauding the company for quite some time.

This is where the accounting department comes in is to check for discrepancies. Any defalcation leaves some sort of trail, whether in the form of glaringly obvious differences or  

Shareholder Demands

One of the challenges a business faces is to placate shareholders who can often be demanding. Shareholders not only require a good return on their investment but also require high levels of well-managed corporate governance (Smith and Tulz, 1985).  Compliance, accountability and transparency become key in dealing with shareholders. On the bright side, such compliance is likely to increase the probability that discrepancies are caught quite quickly but this comes at a cost. These increased costs directly affect the bottom line.

The end result though, is a company that is more competitive and costs that are completely transparent. Take, for example, an apparel firm – costs are not necessarily easy to notate but shareholders will want to receive a complete breakdown of costs and will want to be kept informed about the company’s profit margins. The costs of keeping an accounting department on hand can be greatly reduced by the implementation of accounting software (Gaffikin, 2008).  

Mergers and Acquisitions

Global markets are largely being driven by brand valuation and, as a result, accounting standards have to change. There is more need than ever before to concentrate on risk management. A poor risk management strategy can leave a company vulnerable to a merger or acquisition. With global markets coming into play, accounting is no longer necessarily simple. As a result, more specialised competencies and accountability-based functions are needed (Bonnie and Merton, 1995).  

Increased Competition in the Market Place

If one company hits on a great idea, it will not be long before others follow suit. Staying competitive in such an environment requires rock solid accounting practices to ensure that the company’s expenditure is kept to a minimum and that its product is priced appropriately for both the market and shareholders.

The Most Important Aspect

The most important aspect is that these systems must be able to run independently of management’s control. No one should be above the law and this is true for executives as well. There are instances where senior executives have been found guilty of wrong-doings and where they have put their own interests ahead of those of the companies. The risk management systems must be allowed to run independently in order to reduce the risk of management blocking them.

The systems must also be set up in such a way as to appropriately measure the effectiveness of management’s response to the risks. Ineffectual response should be done away with as quickly as possible and replaced with more effective ones.



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