Discuss the principles and objectives of Risk Management from the perspectives of both company directors and Auditors, explaining how you consider the appropriate assessment and prioritisation of recognised and documented risks could have possibly have prevents or minimised the impact of any of the recent prominent corporate failures worldwide.
Table of Content
Executive Summary 04
Veiling Some Concepts regarding Risk 05
Why Should Firms Manage Risk? 06
An Example of Merrill Lynch 07
The Aims/Objectives of Risk Management 09
The Current ...view middle of the document...
For better utilization of risk management in management’s decisions, risk analyst’s reports must be based on the latest and best available information. The cause behind the mentioning of the Chinese proverb above is that risk management is the only tool which differentiates good management with bad. From a bank’s standpoint, the term is usually used synonymously with specific uncertainty because the usage of statistics allows us to quantify the uncertainty which is called the measure of dispersion.
My objective is to define what risk is all about and then see why firms need risk management and its main objectives and from the viewpoint of directors of the company and the auditors of the company. I will provide a list of recommendations to overhaul on the problems. I have included one old and one new example of the default of the industries, one is of Merrill Lynch and my second example is Royal Bank of Scotland.
Veiling Some Concepts regarding Risk
Risk, which we define as the uncertainty surrounding the outcome of an event, is an integral and inevitable part of business. Companies and governments operating in the complex economic environment of the 21st century must contend with a broad range of risks. Some do so in an adhoc or reactive fashion, responding to risks as they appear, whilst others are proactive, planning in advance the risks that they wish to assume and how they can best manage them. Since it has become clear over the past few years that risk can be financially damaging when neglected, anecdotal and empirical evidence suggests that institutions increasingly opt for formalized processes to manage uncertainties that can lead to losses. Risk can be classified in a number of ways and though we do not intend to present a detailed taxonomy of risk, a brief overview is useful in order to frame my discussion. To begin, risk can be divided broadly into financial risk and operating risk. Financial risk is the risk of loss arising from the movement of a market or performance of a counterparty and can be segregated into market risk (the risk of loss due to movement in market references, such as interest rates, stock prices or currency rates), liquidity risk (the risk of loss due to an inability to obtain unsecured funding or sell assets in order to make payments) and credit risk (the risk of loss due to non-performance by a counterparty on its contractual obligations). A rise in funding costs, an inability to sell financial assets at carrying value or the default by a counterparty on a loan are examples of financial risks. Operating risk, in contrast, is the risk of loss arising from events that impact non-financial business inputs, outputs and processes. Lack of electricity needed to power assembly lines, collapse of a computer network, disruptions in the sourcing of raw materials or misdirection of payments or orders are examples of operating risks. Risk can also be classified in the pure or speculative form. Pure...