Risk Management Processes in Non-Financial Companies in UAE - Case Study Example

Risk management processes in non-financial companies in UAE Name Institution Risk management processes in non-financial companies in UAE Introduction Besides financial institutions, the business management crisis at non-financial across the globe has demonstrated that the risk management practices and processes are vital for firms which intends to sustain its shareholders and customers’ patronage. The cases of MG Rover Group, WorldCom, Parmalat, Qwest Communications, Tyco and Computer Associates, proved that efficient risk management in non-banking companies cannot be ignored. In the past and before these major scandals, risk management practice was not observed as a key issue to the management and operations of the majority of organizations across the globe. In some companies, it was only relegated at the company headquarters while neglecting company branches and subsidiaries. In most of these cases, internal auditors and accounting department were directly or indirectly involved. However, internal auditors have been condemned and charged because to some extent they had the capability to prevent such risks. Therefore, this paper will review and summarize the article “Risk management practices and the role of internal audit: A UAE perspective on non-financial institutions”. Overview of the research UAE is one the one the countries which have undergone rapid growth in the recent years. The growth of UAE’s economy has attracted several foreign companies to invest in that country. Despite the flocking this market less research had been done on the level of risk management practices being undertaken by these companies. Hence, this article assessed and presented insights into the risk management practices with UAE including the role played by internal audit functions relating to risk management. Stephens (2015, p.4) research was pegged on 90 participants who all chief audit managers were operating at firms within the United Arab Emirates who had also been interviewed by Internal Audit Association of UAE in 2014. Stephens reduced biases to some extent by using respondents who were already had their details recorded by Internal Audit Association of UAE. However, the response accounted for just nearly 60 percent of internal audit managers from non-financial companies which who had their details at Internal Audit Association (Stephens, 2015, p.4). The seriousness of this research shows how it is crucial for moderns firms to have robust methods to determine, evaluate and efficiently react to risks and ever-changing trends of risk. Major Issues of Focus The research conducted by Stephens (2015, p.4) presented on this article was aimed at helping the UAE firms particularly the ones which belongs to non-financial industry to tackle some of the debated issues bordering on the risk management. Some of the major issues that article addressed include the level of maturity of the risk management practices in UAE firm, major drivers and problems in adopting the formal risk management plan, the practices regarding organization, risk governance and structure and approach, processes and components the companies has set for risk management (Stephens, 2015, p.8). With regards to internal audit, the article has carried our research and clearly portrayed the results on the roles carried out by the internal audit functions within the risk management. In addition, the article has also addressed the degree to which internal audit functions should be engaged in adopting the risk management practices and the problems internal audit functions undergoes which require to be tackled to efficiently carry out their roles regarding risk management (Stephens, 2015, p.8). The level of maturity of Risk management in UAE firms Stephens (2015, p.11) defined risk maturity as a blend of different aspects and a determiner of how successful the company manages risks across its businesses. The study revealed that companies which have mature risk management practices shows an effective risk culture, strong governance, processes, framework, tools, systems and methodology. The Chief audit officers were requested to give details of their analysis on the situation of risk management strategies within their relevant firms. One of the major findings from the research answers is that most of the firms is giving attention to the significance and necessity for the risk management. According to Stephens (2015, p.11), nearly 77 percent of the firms covered by the research had partially or fully adopted risk management strategies. Extra 14 percent of the firms were found to be considering setting up the formal risk management plans for future use and are still continuing. Just below a third of the firms have developed risk management strategies and are in place. The analysis done before based on the firms studied shockingly demonstrated that numerous firms which stated that they have a developed risk management strategies are yet to put them in place particularly vital processes and components anticipated in a strong risk management. In nearly 9 percent firms which have no formal strategies, there are no any intentions to adopt such strategy even in the near future (Stephens, 2015, p.11). More profitable companies with high revenues have the capability to adopt risk management. In a nutshell, there is a correlation between higher revenues and maturity risk management. However, the study by Stephens (201, p.11) noted that even some large firms with more than AED 1 billion in terms of revenues and more than 1,000 staff are disregarding risk management. A deep analysis of the results show that except for a few issues, a large number of AUE firms give a lot of significance to risk management. However, the majority of the companies studied, risk management is considered not mature but still evolving. Figure 1 summarizes the level of adoption of risk management practices in UAE. On the sector arena, the study noted that only few sectors participated. However, the research into risk maturity established that energy, aviation sectors and the government agencies looked to implement formal risk management. The differences in adoption are attributed to different degree of the regulatory supervision and different intensity of risks across the sectors. The level of adoption of risk management practices in different sectors has been summarized in figure 2 below. Figure 1: distribution in adoption of risk management in UAE organizations Sources: (Stephens, 2015, p.11) Figure 2: Risk management maturity based on sectors Source: (Stephens, 2015, p.12) Major issues which influence adoption of risk management Risk factors are one the issues which affect the operations of the firm and can even lead to closure. Companies where managers understand the need for risk management strategies have invested heavily to ensure smooth running of the organization. However, for effective adoption of the of risk management, the company is usually influenced by certain factors including support from senior management, boards knowledge of risk management enforcement, and the effort of Internal audit to execute risk management (Stephens, 2015, p.17. Boards normally ratify the strategies being executed by the company and the article claims that even when the top management has plans to implement but the board is reluctant, the process cannot be successful. The Board influences the vision, approves the budget and provides the guidance on who to implement risk management practices. Therefore, board sponsorship is one the determining aspects for maturity and success of the risk management. A research within UAE firms has shown that efforts of the internal audits to adopt are a contributing factor to its success. Stephens (2015, p.17) contended that the statement was supported by up to 67 percent of those who were interviewed. Internal audit in any company which does not practice risk management should take note that it is part of their responsibility to promote such efforts. The research also noted regulation is a driving factor to adoption of risk management. However, Stephens (2015, p.18) stated that since few sectors together with financial are highly regulated, regulation is not considered a major factor or a driving force which influences risk management implementation. Challenges for the risk management Companies face several risk management challenges from adoption or complete implementation. Management perception is rated as a major challenge which prevents managers from implementing tangible risk management strategies. In many times, companies that perform well have a perception that they are actually managing the risks (Stephens, 2015, p.14). The fact that some managers do not perceive the benefits of risk management in terms of efforts and costs, a third challenge noted by the research is the lack of sponsorship by the company executive board (Stephens, 2015, p.14). Normally, risk management success is highly achieved when there is board support. The board is required to distribute resources and allocate budget, assign ownership and offer oversight for managing risk. However, in this case, the result shows that major UAE companies find it hard to attain board support, hence derailing the adoption of the management risk practices. Lack of support from the executive or board is attributed to insufficient awareness, thus they require being trained on the significance of the risk management (Stephens, 2015, p.14). Chief audit officers must play a critical role in an attempt to educate and train the executive management and the board. In developed markets, regulatory requirements often force the firms to implement suitable management practices which prevent risks. However, the problems arise when the industry have no strict regulation over companies to adopt and demonstrate risk management practices. Internal audit roles in the risk management According to Stephens (2015, p.39), the increasing demands from the stakeholders and expectation from the executive management and boards are compelling the internal audit functions to reevaluate their roles within the companies and change their concentration to match with the objectives of the organization. The role of internal auditing is one area which has gained fame in reference to promoting effective and successful risk management strategy. Stephens (2015, p.39) claimed that in the model of three lines of the defense, internal audit is considered the third element after operational management and different risks and the compliance. This model can simply be described as people who manage the risks, people overseeing risks being at the second line, and people providing independent reassurance on the risks being at third line. This implies that internal audit’s role is to offer independence and objective assurance to the senior management and the board on efficiency of risk management, internal controls and governance as well as the way in which 1st, 2nd and 3rd defense line realize control objectives and risk management (Stephens, 2015, p.39). Internal audition function also performs third other roles. Internal audit serves as a vehicle in setting up the formal strategies for risk management. Internal audit facilitate in the adoption of the risk management strategies. According to Stephens, (2015, p.42) The study on the global roles of the internal audit has also found out that internal audit offer other advice or consulting services on the risk management processes. A comparison global research and that of UAE held that the roles of the internal audit in UAE have been done poorly on carrying out their management risk roles. An example is that, the study on the UAE firms has established that only 51 percent of the internal audit offer consulting services to the management in regards to managing risk. In addition, at the global arena, up to 48 percent of the internal audit roles were serving as catalyst whereas just 35 percent of internal audit play their role in UAE (Stephens, 2015, p.42). In most companies, Chief audit executives take the efforts of leading risk management endeavors as opposed to the chief risk officers. In the research conducted in UAE, there were 35 percent case of which Chief audit executives compared to 25 percent in which chief risk officers were leading the efforts of implementing risk management (Stephens, 2015, p.25). The global standard for the risk leadership is to have a committed senior executive to work as chief risk officer as opposed to chief audit executive doubling as the head risk executive too. However, it sometimes depends on different factors like the complexity and nature of risks, and the size of an organization. The processes of Risk management Often, the processes of Risk management means a combination of different activities and steps carried by the companies to determine, evaluate, mitigate, and occasionally provide report on the risks (Stephens, 2015, p.31). In the article, most respondents in UAE research outline the following as the most is used process risk management practice. 1. Risk recognition, evaluating and the prioritization. 2. Risk treatment. 3. The risk acceptances among oversight authority. 4. Cyclic reporting of the activities to the risk oversight authority. 5. Continuing updates on the risk risks assessment. Conclusion In the recent years, AUE has been riding on a major boom of business owing globalization business which has improved lately. In the process, the GDP of UAE has become one of the fastest rising economies in the world. As a result, companies have expanded into UAE markets hence increasing number of companies operating in the country. With many companies, risk management has become a major issue of discussion among experts. The situation has prompted research on the topic to ascertain the real situation in the market. Overall, the article has established that UAE firm has not matured in terms of risk management implementation. In most cases (80 percent) the organization are still in the process of identifying risk. Only 20 percent of the companies have implemented all the process of risks management. The paper therefore recommends the managers to put more efforts, increase budget and introduce technology to in risk management practices to increase the competitive advantages of their companies. References Stephens, M. (2015). Risk Management Practices and the Role of Internal Audit: A UAE perspective on non‑financial institutions. UAE Internal Audit Association Read More