Techniques for Risk Managing a Firms Liability Exposure - Essay Example

Techniques for risk managing a firm’s liability exposure Department Techniques for risk managing a firm’s liability exposure What is risk management? Risk management basically comprises of identification, analysing as well as taking appropriate steps of reducing or eliminating the various exposures to loss that an individual or organisation may be facing. The process of managing risk assumes several techniques and tools, including insurance, that are used in managing a broad range of risks. It is a fact that every business comes across risks, some of them predictable and under the control of management and others uncontrollable as well as unpredictable (Hopkin 2010). Management of risk is especially significant for small firms, because majority of common forms of losses-for instance theft, flood, fire, injury, disability as well as legal liability can devastate the entire business in minutes what could have taken business owner years to put up. Thus, such liabilities and losses can permanently alter daily operations, diminish profits, in addition to causing severe financial hardships, bad enough to bankrupt or cripple a firm. Whereas several firms employ permanent risk managers to aid in identification of risks as well as take appropriate steps to mitigate the company against them, some firms seldom have that luxury. The phrase risk management is a comparatively new (within the last 2 decades) advancement of the phrase “insurance management” (Hopkin 2010). However, the notion of risk management includes a much wider range of activities as well as responsibilities in comparison to insurance management. Thus risk management is currently a broadly accepted depiction of a field within majority of huge firms. Simple risks such as windstorm, fire, automobile accidents and employee injuries in addition to more complicated exposures like environment impairment, product liability as well as employment practices, are the territory of risk management division in a characteristic firm (Chapman 2011). Even though risk management has typically been concerned with casualty and property exposures to loss, recently it has been expanded to comprise of financial risk management, for instance, derivatives, interest rates and foreign exchange rates. Liability exposure generally involves a potential future loss and not necessarily a loss that has already taken place. It is important to note that every liability exposure has 3 dimensions; the risk causing loss, the value that is exposed to loss and the financial repercussions resulting from the loss. If there is a change in any of the 3 dimensions of liability exposure alters the exposure. All firms are faced by exposures to loss; hence the recognition of those exposures is usually the very first stage in the risk management procedure (Chapman 2011). The following are techniques for risk managing a firm’s liability exposure; 1) Customer communication and selection When a customer appears to be pushy in regard to “coming up” with a specific value or trying to get the firm to reduce their fee, or they appear vague regarding the reason for their engagement with the firm, it is the time to raise the red flag. Engaging with such clients will lead to future regrets and the only appropriate solution is turning down their work or refusing to allow the assignment till the customer‘s background has been checked thoroughly by use of other mechanisms. It is also important for a firm to be vigilant with their current clients as well, even if the firm has done business with them for decades. Mostly financial issues or change of management team may lead to a firm’s possible liability to arise. A firm should always be certain that they have accurate information regarding their dealings with a given client. 2) A firm should also get rid of troublemakers or high risk customers A firm should not continue doing business or serving customers, who are risky, require regular hand-holding, uncooperative or those that are constantly arguing over limiting of fees, efficiency of CPA firm staff in addition to constantly creating a crisis culture. Such clients ought to be discouraged since they build a portfolio of poor quality customers, in the process increasing the possibility of lawsuits (Hopkin 2010). 3) A firm should also ensure that the in-charge engagement leaders and accountants are aware of what they are charged with. Because of business growth, employee turnover, or other causes, staff personnel are in most cases promoted to take over such leadership positions devoid of adequate training and experience. A firm, thus, should ensure effective training as well as experienced leaders are promoted to these sensitive positions so as to safeguard the firm against possible future malpractice which may lead to a big loss (Hopkin 2010). 4) Tailor made engagement practice-a firm ought to ensure that it engages in tailor made products for its customers. This is because professional judgment is nowadays a necessity for both reviews and audits. In reality, professional judgment would not be exhibited by primarily completing all checklists and forms from a set of practice aids. It is essential therefore for a firm to have documentation of reasoning and thinking. 5) A firm should always be on its guard and must advocate for professional skepticism-Basically, being familiar with a customer can improve professional judgment. However, extreme familiarity can weaken professional skepticism. As the old adage goes; familiarity breeds contempt. This calls for staff personnel to be trained on how to grow a questioning attitude in addition to maintaining a high degree of professional skepticism in each and every engagement with clients . 6) Engagement leaders must never ever assign their responsibilities of quality control-Thus, even if the firm has other extremely experienced and qualified staff, engagement leaders should never delegate to them their duties and responsibilities. This is due to the fact that engagement leaders are tasked with development, performance as well as completion of a firm’s core activities. Continuous participation of the leaders ensures that the work is executed correctly in addition to increasing engagement productivity (Hampton 2010). 7) The firm should also integrate quality control procedures and policies into engagements-Such procedures and policies are anticipated to produce top-quality engagements as well as decreasing legal liability exposure. In addition, engagement documentation ought to include evidence of how relevant quality control procedures and policies were applied on the situation. Another significance of such documentation is reduction of time spent by peer reviewing as well as ascertaining compliance with professionally accepted standards (Hampton 2010). 8) The firm’s engagement leaders ought to deliver as well as discuss letters of engagement-letters of engagement are usually contracts whose enforcement depends on the understanding of their contents by both parties. Letters of engagement therefore when understood by all concerned parties can eradicate lawsuits against CPA firms because of misinterpretation. Engagement leaders can acquire information regarding probable economic impacts, fraud, as well as changes in a firm’s operations during conversations with client CFOs or CEOs. Effective communication of this kind of information to engagement leaders can assist in ensuring engagement quality, increased effectiveness, as well as reduced professional responsibility. 9)A firm should also provide the lowest degree of guarantee on auxiliary information whenever it is doable .Thus assembling auxiliary information for evaluating as well as disclaiming reassurance on supplementary information needed for audits decreases the quantity of the auditor’s or accountant’s workload as well as limits professional responsibility(Hampton 2010). 10) A firm should also limit usage of reports especially in extremely risky situations. Usually such limitations on reports usage are suitable when the auditor or accountant has concerns regarding unauthorized or unqualified individuals using financial statements as well as footnotes. On the other hand, reports touching on financial information in industries that are specialised ,as well as high risky situations, professional liability can be lessened by limiting usage of audit, compilation or evaluation reports(Coleman 2012). 11) A firm should also cautiously supervise cookie-cutter approaches in regard to audits. Thus standard approaches aimed at bearing out engagements without cautiously considering the circumstances and facts of each may lead to increased probability of fraud or errors going on unnoticed. Consequently, accountants and auditors ought to continually be aware of unique procedures, policies, and risks as well as other issues that may need unique attention (Chapman 2011). For the above techniques to work a firm ought to follow certain steps that include first identifying and analysing a firm’s loss exposure. A firm’s senior management should constantly hold meetings with their management staff so as to identify areas that the team feels the firm has the most risk. Thus, such areas may comprise a firm’s own premises particularly if a firm has a shop where there could be innate risk to not only the employees but also the general public. A firm’s premises could pose a serious risk especially if it is located in a place where there is a public lobby area or a company’s sales lot for the firms that are dealers (Carrel 2010). Secondly a firm must review all the available risk management techniques such as risk avoidance, risk reduction, risk transfer as well as risk retention. Thirdly a firm should select the most excellent risk management method to cover its risk exposure by weighing risk versus reward. A firm must therefore identify the best technique for its business and implement a well-balanced plan capable of protecting the firm’s assets while at the same time having a workable thriving business. The fourth step involves implementation of the selected technique. This is usually carried out by the management team as well as other key employees familiar with the choice made. Finally, the firm should constantly monitor the effectiveness of the chosen program. This is done via monitoring the plan which is a significant event in gathering of data on the efficiency of the firm’s chosen technique .If the firm realizes that the choice made is not generating the required outcome, it may consider revisiting the other options left out. In conclusion, for a firm to be able to survive as well as sustain its operations, it is required to ensure continuity of its operations as well as preservation of its assets. Firms are usually exposed to different risks and so as to maintain themselves in addition to achieving their corporate objectives; a firm ought to design a risk management policy. Thus liability to exposure alongside other aspects of loss exposure for that reason ought to be part of the general risk management policy of any given firm (Chew 2013). Reference List Carrel, P. (2010) The Handbook of Risk Management: Implementing a Post-Crisis Corporate Culture, New York: John Wiley & Sons, Inc. Chapman, R. (2011) Simple Tools and Techniques for Enterprise Risk Management, New York: John Wiley & Sons, Ltd Chew, D. (2013) Corporate Risk Management, New York: Columbia University Press. Coleman. L. (2012) Risk Strategies: Dialling Up Optimum Firm Risk, New York: Grower Publishing. Hampton, J. (2010) Fundamentals of Enterprise Risk Management: How Top Companies Assess Risk, Manage Exposure and Seize Opportunity, New York: Amacom Books Hopkin, P. (2010) Fundamentals of Risk Management: Understanding, Evaluating and Implementing Effective Risk Management, New York: Kogan Page. . Read More