Operational Risks Can Be Defined as Strategies - Essay Example

Operational risks Operational risks can be defined as strategies or processes that can lead to a company’s malfunction or loss making. They can either be internal or external. Many companies, both financial and non-financial face the problems that come about due to operational risks. For a company to effectively perform it must identify its operational risks so as to have suggestions on how to deal with them (Robert, 2000, pp.54-67). The following are the seven categories of operational risks as identified by the Basel Committee: 1) Internal fraud The Basel Committee has identified that internal fraud can be due to loss of data. In banks, there is a possibility for financial data to disappear. Financial information on loans given, repaid, capital, withdrawals and deposits made can be stolen by the employees or simply disappear due to poor technological procedures. The Basel Committee identifies that internal loss of data can occur due to poor risk management processes, new technological methods and upcoming business activities. Basel Committee identifies that a company is not able to have the right documentations in its accounts if it has loss of data. This means that its profit and loss margins will be under estimated. This is dangerous to the company as it will not reveal the real amount of capital used to carry out the activities (Basel, 2006, pp. 141-153). Case studies on non-financial organisations reveal that they are at a risk of internal fraud. This is so because they also use money or capital in purchasing their materials for their use. The case studies revel that non financial organisations mainly undergo the risk internal fraud by making misstatements on the financial statements. This does not indicate the true financial state of the organisations. The case study reveals that both financial and non-financial organisation can show fraud by looking at the growth in terms of their revenue and how it keeps changing. The margin of their growth of revenue is not very consistent. For a company to know where it lies in the financial market, the growth change in revenue is supposed to be a bit consistent. It is not supposed to have big margins. According to Erickson’s and other scholars, the audit sector is normally not able to detect fraud because of the lack of understanding of the organisational environments they are working on (Erickson, 2001, pp.166-193). 2) external fraud According to the studies made on Basel Committee, external fraud occurs is mainly done against the organisations. It undergoes external fraud due to misinformation from its clients in the insurance sector. It is very easy for clients to give the wrong details when they are seeking the insurance package. To avoid such problems, the management has put up certain rules to ensure that clients do not have the potential to use these chances to give the wrong information to the insurance sector. For instance, an insurer is limited to the number of claims he or she can make and the initial terms of the insurance policies do not last more than a year (Basel, 2006, pp. 141-153). In non-financial organisations, external fraud occurs when another organisation misstates its financial records. Most non-financial organisations are characterised by outsourcing auditing services. They ask other companies to calculate their use of capital and other resources and show the outcomes if they have made profits or losses. The auditors make mistakes in accounting due to omission of particular information so that their work can balance. Due to being in a hurry to have more customers, the auditing companies are bound to make mistakes in their calculations thus giving the wrong information on how the company is fairing on financially (Christopher, 2007, pp. 233-238). 3) employment practices and work place safety The Basel committee identifies that poor employment practises and work place safety can bring about operational risks. This is supported by the fact it sees the need to employ competent and well experienced expertise in risk management and managers who will give good resolutions on how to avoid fraud. More so, by having a safe environment for its workers is a way of avoiding unnecessary accidents within the organisation. This ensures that the organisation is free from law suits that can come from employees or clients due to poor conditions at the work place (Basel, 2006, pp. 141-153). Non-financial and financial organisations face operational risks by employing the wrong personnel. This is so because they usually waste the organisations’ resources because they do not have the right skills to produce goods by effectively using the raw materials (Stavros, 2007, pp.234-345). More so, lack of safety rules and safe set up of the work environment really brings up the operational risks. For instance in factories, it is very easy to have accidents if the machines are not set up in a way to avoid tripping on them. The lighting of both financial and non-financial organisation must be efficient to avoid people from not seeing where they are going. The lighting system needs to be up to date and effective. Generally, both sectors of organisations need to employ the necessary safety measures as directed by the labour laws under the employment rules and regulations of different companies by the government (Langfield, 2003, pp.120-134). 4) clients, products and business practices When an organisation is having very many clients and products to offer, it needs to have the best business practises to avoid the problem of slow service offering. The business practises have to be well defined in such a way that each department has the knowledge of what they are supposed to do, how they can do it and where (Torben, 2006, pp. 5-34). Like the Basel Committee, case studies show that both financial and non-financial organisation avoid operational problems by ensuring that they arrange their departments well and inform their clients where they can get services by having the customer care help desk. This ensures that services are given in an orderly manner. This is so because with Basel, they have a well documentation of the different managers of different departments and what they are expected to do within the organisation (Basel, 2006, pp. 141-153). There will be great confusion if all departments carry out the same activities within the financial institute. 5) damage to physical assets Damage to physical assets occurs due to poor operational methods. Sometimes it also happens due to accidents. In Basel, the physical assets can be the computers they use to store financial data and sometimes they get damaged due to technical problems or accidents like falling from the desks and so on (Basel, 2006, pp. 141-153). For this reason, to avoid such accidents, it is important to set up machineries in such a way that they will not be damaged. Fro instance using strong stands for computers and keeping them away from the door. In non-financial organisations, physical assets can be damaged due to accidents, for instance fro a company transporting finished goods, the mode of transport can cause accidents and the goods get damaged completely. Such operational risks are very hard to avoid. More risks that are hard to avoid are the natural causes such as earthquakes, floods, wars and draughts (Chris, 2004, pp. 54-67). 6) business disruption and system failures Business disruptions and system failure can be due to unavoidable technical problems. For instance, today both financial and non-financial have employed the use of computers in carrying out their processes. Such machines fail sometimes due to either poor installation or sometimes using out dated machines. For such reasons, the management needs to ensure it uses the current machine sin giving out services to its clients. Regular check ups of the machines are an appropriate way to ensure that failure of systems is reduced (Egon, 2002, pp.167-172). 7) execution, delivery and process management The management is responsible in setting up the ways in which services will be delivered and executed in an organisation. Such processes need constant check ups to reveal the weaknesses and strengths of the process management. For Basel, it has documented the services it delivers and stated who is in charge of the execution of the services (Basel, 2006, pp. 141-153). More so, it has documented the operational risks it is likely to encounter and come up with methodologies to avoid them. Case studies reveal that non-financial and financial organisations are likely to face operational risks if they do not identify how they can execute their services and maintain the process very well (John, 2007, pp. 120-134). References Basel Committee, 2006. The operational risks: international coverage of capital measurement and capital standards by the bank for international settlements press and communication. Pp. 141-153. Chris G., 2004. From the theoretical concept to practice: teaching of business sustainability, by Greenleaf publishers. Pp. 54-67. Christopher C., 2007. The operational risks in financial and non financial organisations: management accounting research, by Elsevier publishers. Pp. 233-238. Egon B. et all., 2002. Operational risks on information systems: an overview of the Dutch financial organisations services, journal on cost management, vol. 25, pp. 167-172. Erickson B., 2001. Why do Accountants Fail? The evidence of the non-financial organisations, journal by accounting research, vol. 38, pp. 166-193. John Z., 2007. The risks faced by organisations: the financial management of non-profit organisations, by Wiley inter-science publishers. Pp. 120-134. Langfield K., 2003. The operational risks of both financial and non-financial organisations: management accounting, published by McGraw-Hill, pp. 120-134. Robert A., 2000. Financial regulations and modernisation: collective journals of research on financial services, by Springer publishers. Pp. 54-65. Stavros A., 2007. Case studies on operational risks: assets and liability management, by Elsevier publishers. Pp. 234-345. Torben J., 2006. the risks faced by companies: strategic risk management processes, Copenhagen business school press. Pp. 5-34. Read More