Governance, Risk and Compliance Chapter 4 Governance, Risk and Compliance

Risk Risk is anything that threatens or limits the ability of an organisation to achieve its objectives. Businesses must be aware of the risks they face and have procedures and management strategies in place to guard against these risks so that the business can continue to function should any of these events occur.

Types of Risk Financial Risk Cash flow risk The biggest risk that most businesses face is cash flow risk. Cash flow risk is the risk of a business not being able to pay its debts when they are due. Credit Risk Credit risk is the risk companies face when they lend money to individuals or businesses. When a borrower does not pay back a loan or fails to make interest repayments this is called default and will leave the lending company with a loss.

Market Risk Risk of changes in tastes/technology Competition risk There is always the possibility that a new competitor will open next door or down the street and will attempt to take some of the business’ market share.

Economic Risk Business Cycle Risk Recessions and economic downturns such as the recent Global Financial Crisis can lead to a dramatic drop in sales and profits and make it harder to borrow funds. Interest rate risk Increases in interest rates will lead to higher loan repayments that could lead to cash flow risk. Currency risk Currency risk is the risk that movements in exchange rates will adversely affect businesses profits.

Hazard Risk They include natural disasters such as earthquakes, tsunamis, floods, hurricanes, global warming, wars, terrorist attacks, fires etc. Businesses must have insurance to protect themselves from these types of disasters as well as contingency plans so that business can be conducted if an event like this does Happen.

Operational Risk Losses can be sustained due to internal factors such as computer glitches, employee error, internal fraud and workplace accidents.

Political Risk Political risk is the risk of monetary loss to a business due to factors such as changes in government policy, a change in government or political unrest including riots, coups or civil war.

Risk Management Risk management begins with three basic questions: 1. What can go wrong? 2. What can we do to prevent it? 3. What will we do if it happens?

Evaluating and Prioritising Risk

Governance, Risk and Compliance Governance, Risk and Compliance, or “GRC” is a term used to describe the critical areas of responsibility of a company’s Board and management relating to: Governance – the systems and processes by which a business is directed and managed. Risk Management – implementing procedures and strategies to identify, analyse and guard against business risks. Compliance – ensuring a business meets all its legal and regulatory obligations.