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Risk and reward

Role of accounting in risk

Effective risk management starts on the finance ‘shop floor’ and should embrace the whole organisation, according to a recent ACCA study.

The day-to-day activities of financial controllers and other accountants on the business shop floor have a vital role to play in successful risk management and finance professionals stand ready to do more.

This is one of the main findings of recent ACCA research looking at the role of accountants in risk management. Based on a survey of more than 2,000 members from all over the world, the research reveals a statistical relationship between good accounting practice – such as properly executed forecasting and budgeting – and a reduction in ‘dysfunctional behaviour’. Such behaviour includes a general lack of risk awareness in decision-making, playing down risk to get approval for proposals, overstating  business benefits and underestimating costs.

Accountants in the survey reported a high level of dysfunctional behaviour around decision making. Almost all reported the ‘gaming’ of forecasts. Others mentioned treating forecasts as targets, providing optimistic forecasts to avoid criticism and pessimistic ones to reduce expectations. The survey also found that such behaviour was commonplace – fewer than 1% said no dysfunctional practices occurred at their organisation.

Paul Moxey, ACCA’s head of risk management and corporate governance, says the findings highlight the importance of integrated risk management – the identification and management of risks as part of a core management process rather than left to a compartmentalised team or individual. ‘Risk happens at all levels of business and for all types of business functions,’ he points out. ‘It doesn’t sit in neat silos. Risk management needs to be something everyone in an organisation does.

‘Our survey showed that accountants, particularly at the shop-floor levels of a business, have an excellent grasp of the  risks faced by their organisation and the steps needed to negate those risks. Businesses need to make sure that they use the abundant risk awareness and risk management skills of their qualified accountants, and not miss an opportunity to effectively integrate risk management.’

As accountants offer decision support, such an approach puts them in an important position – after all, most ‘risky’ business decisions contain a financial element. And in most organisations accountants outnumber formally designated risk managers. As one respondent to the survey put it: ‘Although not always appreciated, the contribution of the finance section to risk management is huge and necessary in any organisation.’

Another finding of the research is that those in mid-level roles such as financial controllers and management accountants are much more aware of both risks and dysfunctional behaviour than are their board-level colleagues – including non-executives.

Most non-executive directors said that over-optimistic forecasts to avoid criticism were never made in their own organisation, but only 20% of financial controllers or accountants agreed. Non-execs also seemed less aware than everybody else of problems with persistent quality issues.

There are several possible explanations for this. Those at more senior levels are less involved in the day-to-day running of an organisation, and so are less aware of detail, taking a broader view of the business. It could also be that the information they are presented with by their teams is sanitised in some way. And, as the financial crisis showed, there are often plenty of incentives for not asking challenging questions or rocking the boat.

One respondent, a financial controller in Ireland, told the researchers: ‘Decision analysis is sometimes hijacked by higher-level political motivations, leading to poor decision-making and adverse impacts.’

The study also shows clear support among accountants for ‘challenging senior people’ as part of an ideal business culture. A questioning approach can help avoid the kind of cultural bias or ‘groupthink’ that leads to risks being missed.

The study found that input from accountants in the decision-making process had a number of beneficial effects. Some 95% of respondents said that accountants’ input always made people more aware of the uncertainties involved. A similar number said it helped people think more widely about the possible consequences of a decision, and only marginally fewer said it encouraged decisions that reflected the interests of all relevant stakeholders. In times of global economic uncertainty, it is this kind of quality input that could make the difference between success and failure.

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This article originally appeared in Accountancy Futures issue 5 2012.

Published: 6 Nov 2012