COLLEGE OF OUR LADY OF MERCY OF PULILAN FOUNDATION,

INC. ACCOUNTANCY AND MANAGEMENT DEPARTMENT

Introduction to
Risk M anagement
Governance, Business Ethics, Risk Management, and Internal Control

Limuel R. dela C ruz M s. Jillene

Bachelor of Science in C astro
Accountancy Instructor
Overview

• Risk Management

• Basic Principles of Risk Management

• Process of Risk Management

• Elements of Risk Management

• Risk Management Framework

• Steps in the Risk Management Process

Back to
Overview

Risk
Management
• Process of measuring or assessing risk and
developing strategies to manage it.
• It includes risk planning, assessing risk
areas, developing risk handling options,
monitoring risks to determine how risks
have changed, and documenting overall
risk management program.

Source: International Organization of Standardization (ISO 31000)

 It should
Basic Principles o Create value

of Risk o Address uncertainty and

assumptions
Management o Be an integral part of the
organizational processes and
decision-making

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Overview
It should Back to
o Be dynamic, iterative, Overview

transparent, tailorable, and

responsive to change
o Create capability of continual
improvement and Basic Principles
enhancement considering
the best available of Risk
information and human
factors
Management
o Be systematic, structured,
and continually or
periodically reassessed
Process of Risk 1. Establish the Context.
a. Identification of risk in a selected
Management domain of interest
b. Planning the remainder of the process
c. Mapping out the following:
i. The social scope of risk management
ii. The identity and objectives of
stockholders
Back to iii. The basis upon which risks will be
Overview evaluated, constrains
Source: Standard ISO 31000
 Back to
Overview

d. Defining a framework for the activity and an

agenda for identification Process of Risk
e. Developing an analysis of risks involved in the
process Management
f. Mitigation or Solution of risks using available
technological, human and organizational resources

Source: Standard ISO 31000

Process of Risk 2. Identification of Potential Risks
a. Objective-based risk

Management b.
c.
Scenario-based risk
Taxanomy-based risk
d. Common-risk checking
e. Risk charting

3. Risk Assessment
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Overview
Source: Standard ISO 31000
 Back to Overview

Elements of Risk
Management
1. Identification, characterization, and assessment of threats
2. Assessment of the vulnerability of critical assets to specific threats
3. Determination of the risk
4. Identification of ways to reduce those risks
5. Prioritization of risk reduction measures based on a strategy
Relevant Risk
Terminologies
1. Risks Associated With Investments

Business Risk Financial Risk

The uncertainty about The firm’s capital
the rate of return caused structure or sources of
by the nature of the financing determine Interest Rate
Default Risk
business. financial risk. Risk
Probability that some or
The fluctuations of
all of the initial
interest will cause the
investment will not be
value of an investment to
returned.
fluctuate.
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 Liquidity Risk Purchasing
Power Risk
Associated with the
uncertainty created by Inflation erodes the
the inability to sell the purchasing power of the
investment quickly for peso and increases
cash. Management investor risk.
Risk
Decisions made by a
firm’s management and
board of directors
materially affect the risk
faced by investors.
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1. Risks Associated With Investments
2. Risks Associated With Manufacturing, Trading, and Service Concerns
A. Market Risk
• Product Risk
o Complexity
o Obsolescence
o Research and Development
o Packaging
o Delivery of Warranties
• Competitor Risk
o Pricing Strategy
o Market Share
o Market Strategy
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B. Operations Risk
• Process Stoppage
• Health and Safety
• After Sales Service Failure
• Environmental
• Technological Obsolescence
• Integrity
o Management Fraud
o Employee Fraud
o Illegal Acts
 D. Business Risk
C. Financial Risk • Regulatory Change
• Interest Rates Volatility • Reputation
• Foreign Currency • Political
• Liquidity • Regulatory and Legal
• Derivative • Shareholder Relations
• Viability • Credit Rating
• Capital Availability
• Business Interruptions

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2. Risks Associated With Manufacturing, Trading, and Service Concerns
3. Risks Associated With Financial Institutions Back to Overview

Financial Non-Financial
Liquidity Risk Operational Risk
 Systems
- Information Processing
- Technology
 Customer Satisfaction
 Human Resources
 Fraud and illegal acts
 Bankruptcy

Market Risk Regulatory Risk

 Currency  Capital Adequacy
 Equity  Compliance
 Commodity  Taxation
 Changing laws and policies

Credit Risk Environment Risk

 Counterparty  Politics
 Trading  Natural disasters
 Commercial  War
- Loans  Terrorism
- Guarantees
 Back to Overview

Financial Non-Financial
Market Liquidity Risk Integrity Risk
 Currency Rates  Reputation
 Interest Rates
 Bond and Equity Prices

Hedge Positions Risks Leadership Risk

 Turnover
 Succession
Portfolio Exposure Risk

Derivative Risk

Accounting Information Risk

 Completeness
 Accuracy
Financial Reporting Risk
 Adequacy
 Completeness

3. Risks Associated With Financial Institutions

Potential Risk
Treatments

Risk
Avoidance
Eliminates any exposure to risk
that poses a potential loss
Risk
Reduction
Mitigating potential losses by
reducing the likelihood and
severity of a possible loss.

Back to Overview Source: Investopedia

Back to Overview Potential Risk
Treatments

Risk Risk
Sharing Retention
Shifting of risk to Decision to take responsibility for
a third party. a particular risk it faces, as
opposed to transferring the risk.
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Areas of Risk Management

1. Enterprise risk management
2. Risk management activities as applied to project management
3. Risk management for megaprojects
4. Risk management for information technology
5. Risk management for techniques in petroleum and natural gas
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Risk Management Framework

Risk Management System Top Management Involvement
Oversight Activities:
Define goals and objectives, roles and
Set management policy, establish context, set limits
responsibilities, common language, and oversight
and tolerance, etc.
structure
Risk Management Process

Step 1: Assess Risks Ensure that process captures all business risks

Ensure that all available tools and methodologies

Step 2: Design Action Plans
are used

Step 3: Implement Action Plans Review effectiveness of plans and check capabilities

Step 4: Monitor and report risk management Review and evaluate regular reports on
performance performance

Step 5: Continuously improve risk management

Evaluate recommendations for improvement
capabilities
Steps in the Risk
Management
Process
1. Set up a separate risk management committee
chaired by a board member.
2. Ensure that a formal comprehensive risk
management system is in place.
3. Assess whether the formal system possesses
the necessary elements.
4. Evaluate the effectiveness of the various steps
in the assessment of the comprehensive risks
faced by the business firm.
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5. Assess if management has developed and
implemented the suitable risk management
strategies and evaluate their effectiveness.
6. Evaluate if management has designed and
implemented risk management capabilities.
7. Assess management’s efforts to monitor
overall company risk management
performance and to improve continuously the
firms' capabilities.
 Steps in the Risk
Management
Process

8. See to it that best practices as well as

mistakes are shared by all.
9. Assess regularly the level of sophistication of
the firm’s management system.
10. Hire experts when needed.

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References Back to Overview

International Organization of Standard

ization (ISO 31000)
Investopedia
ACQ Notes
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