FACILITATOR Prof. Dr. Mohammad Majid Mahmood Art of Leadership & Motivation HRM – 760 Lecture - 25

Role of Leaders in Risk Management

3 What is Risk?  Risk arises from uncertainty; but all uncertainties do not carry risk.  Possibility of an unfavorable outcome of an uncertainty is risk.

4 Is Risk Management a development planning issue?  Planners are responsible for the protection of company assets.  Planners must work to improve shareholders’ value, which is not possible without taking some risks.  Not taking risks may be the biggest risk.

5 Why take risks?  Because you have to.  Because it brings rewards.

6 Risk Management Process  Risk Identification  Risk Assessment  Selection of risk management techniques  Implementation  Review

7 Risk Identification  Risk profile of a company  Formal listing of all potential risks.  External professional help  Risk is inevitable; however unfavorable consequences of risk can be controlled.

8 Classification of Risk  Production risk  Risk of inputs  Risk of outputs  Environmental risk  Political risk  Economic conditions risk

9 Risk Assessment Having listed all the potential risks, ask:  How likely is it for any of these risks to actually materialize?  What is the maximum possible loss that can arise from each of the listed situations?  Can you stand that loss?

10 Risk Management Techniques  Risk avoidance  Loss prevention and control Internal controls

11 Internal Control  All that a company does internally to protect its assets, ensure the proper conduct of its affairs and accuracy of its records.  Risk management is not just part of “protecting the assets of a company”, it is an essential feature of proper conduct of its affairs.

12 Objectives of Internal Control  That the company pays only what should be paid out  That all incomes, expenses, assets and liabilities are properly recorded  That the assets of the company are protected  That the company’s records are reliable

13 Tools of Internal Control  Defined Procedures  Controls Physical (cash in safe, maintenance) Managerial (e.g. budgets, limits, approvals, etc.) Supervision Checks  Selection of right personnel

14 Setting Internal Controls  Document all procedures  Train the staff  Ensure that the procedures are being followed.

15 Designing Procedures  Nature of work.  Extent of risk.  Cost of procedure.  Facilitate work, not hamper it.  Compliance with laws, regulations  Promote efficiency culture  Immediate notice of exceptions

16 Monitoring Internal Controls  The system should generate reports. Frequency of reports Adequacy of reports  Regular review of reports and action there-on. Follow up. Investigation of major lapses

17 Internal Audit  Includes checking, analyses, appraisals, recommendations, advice and information.  Regular or Need based.

18 The internal auditor  Detects errors and frauds  Helps management correct errors and minimize impact of frauds  Helps improve controls.

19 Advantages of Internal Audit  Keeps workers alert  Timely detection of errors & frauds  Enhances reliability of accounting and supporting records  Reduces external audit work

20 Types of Internal Audits  Regular, continuous internal audit  Need based investigation  Pre-disbursement and post-payment audits.

21 Risk Management Reporting  Audit Committee’s Report  Board’s Statement on Internal Controls

22 Audit Committee’s Report  List significance risks; how they are being identified, assessed and managed.  Report on effectiveness of the systems put in place to manage these risks  List of actions being taken to remedy significant weaknesses  Comment on need for greater monitoring of procedures

23 Board’s Statement on Internal Control Essentially it is about status of internal controls, e.g.  There is an ongoing process for identifying, evaluating and managing significant risks.  It is being regularly reviewed by the Board.  It is in accordance with Turnbull Guidance

24 Turnbull Report  Risk Assessment  Control Environment  Control Activities  Information and Communication  Monitoring

25 Risk Assessment  Clear objectives, clearly communicated to all concerned.  Significant risks assessed regularly Market risks Credit and liquidity risks Reputational risks, legal risks

26 Control Environment and Activities  Who controls? Are they independent?  Are controls/ authority/ responsibility/ accountability defined?  Does company culture permit controls?  Demonstration of will to control  Communication to all concerned  How are adjustments made when needed?

27 Information & Communication  Frequency and adequacy of reports generated by internal control system.  Who receives what report at what intervals?  How reliable are these reports?  What checks are in place to ensure reliability of these reports?

28 Monitoring

29 Conclusion Leaders have vital role in Risk Management.

1-30 FACILITATOR Prof. Dr. Mohammad Majid Mahmood