Risks That Arise in Business Operations - Coursework Example

Risk Management Introduction Risk management is a broad term which includes identification of a problem then assessing the underlying reasons and after that prioritization of the associated risks. Once all risks have been outlined it is time to manage and make use of best resources available for minimizing the said problem. However these activities are accompanied by monitoring and control of the probability of occurrence of any uncertain event. Successful project managers realize that risk management is an important strategy for analyzing, avoiding and controlling unacceptable risks. By planning for unexpected events, a company can deal with them in a systematic way, in case such events arise. The uncertainties of the unexpected events require the need for more advance and accurate data and its analysis to make decisions which curtail the negative effects they can arise from such situations. It is now universally realized that risks in the business sector take place now more often as the global markets are interconnected. This has increased the pressure on risks managers. Operational Risk has recently become one of the most widely occurring risks due to the complications in the global market and the complexity in transactions (Crouhy, Galai, & Mark, 2000). Risks that arise in business operations due to human error are known as operational risks. Operational risks have become a strong threat to the performance of any company. They change from industry to industry. Operational Risks require proper consideration when potential investment decisions of a company are made. It has been observed that companies which have lower human interaction suffer from a lower rate of operational risks. Operational risks have become an important risk component of the management process in the banking sector and in the insurance sector of an economy. European Union legislation requires that institutions sufficiently manage and lessen the operational risk. Operational risks stem from inadequate or unsuccessful internal processes, office members and staff; systems or from external events that cannot be controlled (Das, 2006). Broad range of risk issues in the industry Following are some of the risks that occur in an industry and have affected the performance of the organizations. Systemic Risks This risk deals with the entire market and not just a particular stock. It cannot be mitigated through diversification. A correct asset allocation strategy can help. Compliance risks Compliance risks are the risks that are faced by the legal and regulatory system in the industry. It deals with control and the profession. Strategic Risks Strategic Risks are related to Economic, industry, Strategic Transaction, Social factors, Technological, Political and Organizational systems (Hassett & Stewart, 2006). Operational Risks Operational Risks are the faced by environmental factors, financial factors, continuation in business, innovation, human recourse, health and safety and the internal regulations for operations. Importance of the risk issues Risk issues are important for every organization to keep a vigilant observation on the different components that help in the better performance of an organization. Risk issues require risk management which is critical for the success of a project. Risk management must be done during the planning stages so that in case of an occurrence of a risk issue, a regulatory policy should be present. In many cases the regulatory policy is implemented even before the occurrence of the risk considering that the probability of the risk is high. Risk issues are important as a cautionary step in a project. Managing risk issues minimize the impact of project threats and seize the opportunity that occurs in such context. Due to risk issues, risk management has become an essential part of the project (Christoffersen, 2011). Managing the Risk Issue Basel II defined Operational Risk as follows “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events including legal risks.” Operational Risks adversely affects the organization in many ways. If a company is suffering from operational risk, it is important for the decision makers to have full knowledge of the risk so that they can minimize investment for a certain period of time and the cost may not arise. Risks should be accurately identified, assessed and properly controlled. Managers need good reporting system to integrate risk evaluation into benefit the operational and capital investment decisions and for the reviewing of performance (Frenkel, Hommel, Dufey, & Rudolf, 2005). Reporting of a Risk (Epstein & Buhovac, 2006) presents the steps that are taken to manage a risk issue. The most important step is the reporting of an issue by the risk manager. Reporting is a crucial step as it helps in the operational decisions and the reviewing of organizational structure. The target audience for the report is the CFO or CEO, senior management, boards of directors. In the risk management process, risk identification and measurement is of high importance as misleading information and wrong reporting may cause wrong decision making. Listing potential risks can increase the attention of employees in events that intricate risks in future events (Das, 2006). Reporting risks require that the report should include the following points of consideration: It should be decided first which risks to be reported according to their level of importance and effectiveness. Considering the audience of the report which could be internal and external. Internal audience includes the officials of the organizations and the external audience includes the regulators, shareholders and creditors. The report should be well written, well organized accurate and not biased when explaining some issues. The frequency of the risk report should be appropriate with consideration of certain time span to address situation. The content, format, communication and placement should be precise. Assessing the Risk Once the risk is identified, it is important assess the effects of the risk. The decision needs support from the stake holders, project board members in order to analyze the likelihood of the event and the impact it will have on the organization. Control Once the probability of the impact of the risk on the functionality of the organization is finalized, the steps to control the damage take place. This helps in keeping the risk under control and reviewing it regularly to assess any change that may bring unfavorable events. The board of directors along with stakeholders work together to come up with a single and appropriate decision for controlling the situation whenever it arises and minimizing the risks (Mainell, Operational risk and bank, 2002) Responses The responses to threats in the decision making are of two types: Proactive responses include implementation a changed policy to avoid risks regardless of risk occurring or not. The aim of the response is to eliminate the chances of risk from occurring. Reactive responses include the steps taken against a risk once it has occurred. The approach in such a response is the consideration of increase in cost due to a control for the elimination of risk (Regester & Larkin, 2008). Improved decision making is facilitated if the managers apply different analytical approaches for different situations. Proper discloser of the risks involved in a working of the organization allows the shareholders and the financial analyst to value the company’s’ share accurately (Frenkel, Hommel, Dufey, & Rudolf, 2005). Role of Risk Managers Risk Managers play a very important role. Corporate governance has become a compulsory part of their duties. Risk Managers are involved now in the corporate discussions and are asked of their opinion about many issues that were addressed by the top management in the past. Risk managers are taking place among the company’s senior management and their decisions are integrated in many strategic planning processes. Risk managers should become great communicator and should work hard to develop this ability. In many companies, it has been seen that risk managers are asked to take the responsibility of dealing with the regulators as they are at the best position to explain the effects of regulatory change in a company and its positive effects. Risk managers are fully aware of the facts in explaining any new regulatory initiatives by the company. The peers respect the findings of risk managers and rust their judgment. Risk mangers fill the diverse functional role. These diverse roles are including taking care of Health and safety, insurance risk management and disaster planning specialist. Recently, we have seen that the role of risk managers has become crucial for the company. In the coming days we see that the risk managers will play a greater part in the strategic planning of the company (Regester & Larkin, 2008). Risk of risk management In risk management, many risks are involved which may occur while managing the risks. The reporting of the manager may not be as concise as required. It may lead to false information on risk issues in the report. This may lead to an incorrect policy for the risk control by the board of directors and the implementation may bring adverse effects. Following are the risks involved in risk management if the assessment of the risk issue in executed falsely. The governing body may not be able to meet its responsibilities. The project may lose its direction due to implementation of erroneous policy. Staff may not be fully equipped to deal with the risk issue. In case customers are involved they may receive inappropriate service. Finances may become insufficient due to high costs and high operational expenses. If risks are improperly assessed and prioritized, it results in wastage of time and resources in dealing with risks of losses that have zero chances of occurring. This may also result in diverting resources in a direction where they are wasted. The risk of risk management factors are centralized on the following four themes (Crouhy, Galai, & Mark, 2000). First, changes may occur in the size and nature of riskiness of the situation by holding an initial risk assessment. The reason lies in the fact as the people may change their own behavior after the initial assessment of the risk. This change will finally cause a change in the shape and nature of the risk factors according to the change in behavior. Second, the perception that risk management is present can lead to riskier behavior. The knowledge of the presence of risk management can help in perceiving the environment as safe and behaviors may be termed acceptable consequently even when they are not corrected. This arise the chance of an implicit explanation that the risky behavior would be automatically intercepted and stopped. Thirdly when risk and risk priorities are identified by people during a certain time period, these risks and risk priorities are deemed as the final risks being experienced by the organization as people have a tendency to view things as they are and not think beyond them. This thinking pattern by most of the stakeholders may bring shock when new risks are identified in the situation. These discounted and ignored risks may bring the undesirable effect of increasing the cost and shortage of resources if not dealt properly at the right time. Fourthly, in some cases the actions taken to manage a risk and reduce the likelihood of the events can trigger further the risk which could adversely affect the project (Marchetti, 2011). Recommendations To avoid operational risks, the company must follow a set of predefined system of rules and regulations. Mainell (2002) proposes the following steps: Awareness: The Company must highlight the importance of risk management among the staff members. This is can be done by establishing a separate department of risk management. The other staff members should be asked to oblige the members of risk department and work collectively for the better output and result of the company. Engineering: The key individuals should apply risk management technique to the most important project and large issues which may adversely affect the company. This application of risk management should be offered to the organization‘s attention and the staff members to have a better knowledge of the working and the effects of risk management. Comparative: After the awareness of the management of the risk factors, a comparative analysis and evaluation should be done through personal assessment. Embedded: When risk management system provides a detailed review of factor that influence the operational system of the company, a dynamic re aligning of the risk system can take place as the best practice will be shared among the peers. The best of industries follow the four levels to manage the operational risks. United Nations Economic Commission recommends managing risk by following the regulatory cooperation and standardization polices. The steps are: Identifying: Identifying the risk that may affect the performance of the company adversely Underlining: Underlining that risk management is an important tool for foreseeing any undesirable circumstances. Emphasizing: To achieve sustainable progress, the emphasis should be made on the role of eisk management. Recognizing: It is important in recognizing the need for regulatory authorities in the system for risk management. Their decisions help in the smooth functionality of the organization and to increase the performance. Taking in to account: International standards related to the management of risks should be considered whenever a new control policy for the risks is implemented, these are ISO 31000:2009, ISO 9001:2008 and ISO/IEC 27001:2005. Conclusion It is important to stress the risk management in regulatory frame wok in an organization to represent a more proactive approach to risk management and to make transparency as an essential element in the regulatory process. The recognition of a risk in a running business determines the key aspects of a business. Hence it is significant for any organization to perform a risk assessment and then make transparent system for removing all such discrepancies from the system. The management must take proper measures for assessing the probability of risks prevailing in the business, this can be done more precisely with the use of various risk management tools available in the market. References 1. Christoffersen, P. F., 2011. Elements of Financial Risk Management. s.l.:Academic Press. 2. Crouhy, M., Galai, D. & Mark, R., 2000. Risk Management. s.l.:McGraw Hill Professional. 3. Das, S., 2006. Risk Management: The Swaps & Financial Derivatives Library. s.l.:John Wiley & Sons. 4. Epstein, M. J. & Buhovac, A. R., 2006. The Reporting of Organzational Risks for internal and external decision making. Society of Management Accountants of Canada. 5. Frenkel, M., Hommel, U., Dufey, G. & Rudolf, M., 2005. Risk Management: Challenge and Opportunity. s.l.:Springer Science & Business Media. 6. Hassett, M. J. & Stewart, D., 2006. Probability for Risk Management. s.l.:ACTEX Publications. 7. Mainell, M., 2002. Industrial strengths: operational risk andbanks. [Online] Available at: http://www.zyen.com/Articles/External%20publications/Industrial%20Strengths%20Operational%20Risk%20and%20Banks.pdf [Accessed 13 November 2014]. 8. Mainell, M., 2002. Operational risk and bank. Industrial Strength. 9. Marchetti, A. M., 2011. Enterprise Risk Management Best Practices: From Assessment to Ongoing Compliance. s.l.:John Wiley & Sons. 10. Regester, M. & Larkin, J., 2008. Risk Issues and Crisis Management in Public Relations: A Casebook of Best Practice. s.l.:Kogan Page Publishers. 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