1. Governance, risk and ethics

2. 2 Section A: Governance and responsibility Section B: Internal control and review Section C: Identifying and assessing risk Section D: Controlling risk Section E: Professional values and ethics Governance, risk and ethics

3. 3 Section C: Identifying and assessing risk C1. Risk and risk management process C2. Categories of risk C3. Identification, assessment and measurement of risk Designed to give you knowledge and application of:

4. 4  Define & compare (distinguish between) strategic and operational risks. [2]  Define & explain the sources and impacts of common business risks. [2]  Recognise & analyse the sector or industry specific nature of many business risks. [2] Study Guide C2: Categories of risk Learning Outcome

5. 5 Define & compare (distinguish between) strategic & operational risks risk that long-term, fundamental strategic business objectives will fail to be achieved Investors’ refusal to investUnproductive employees Slowdown production process Suppliers’ inability to supply quality materials Customers not buying required quantity of materials Better substitute available Refer to Test Yourself 1 on page 325 Continued…

6. 6 SR factors Type of industry / markets New products coming into market Competitors’ strategy Fluctuating prices of inputs Flexibility to adapt to changing technologies Political state of economy Capacity to operate in highly dynamic environment Continued…

7. 7 Inadequate / failed processes risk of loss resulting from PeopleSystems External events Refer to the example on page 324 Continued…

8. 8  Associated with long-term strategy  Identified by board  Should be managed by board  Take time to affect business  Organisation has time to respond  Short-term risks faced on day-to-day basis  Identified by managers  Should be managed by staff & managers  Immediately impact the business  Organisation has to take timely actions to mitigate risk Categories of risks Strategic Risks Operational Risks Continued…

9. 9 Recognise & analyse sector / industry specific nature of many business risks IndustryType of risk Oil company Market risk The risk that the prices of crude oil will increase Legal risk The risk that the government may not allow the digging of new oil wells and political instability will affect operations Environmental risk The oil wells may pollute the environment and hence there might be a ban on the operations Liquidity risk The company may face a risk since it exports oil and if the currency rates fluctuate then it may face a liquidity crunch Retailing company Technological risk The computer and billing systems may not work and hence the customer service will be affected Reputation risk Any bad publicity of the products may lead to a reduction in the number of customers Business probity risk Dishonest and fraudulent employees may report wrong sales to the company and make personal profits Credit risk Customers may default and the business will suffer Refer to page 334 Continued…

10. 10 IndustryType of risk Finance company Market risk The risk of the market instrument prices fluctuating against and adversely affecting the company’s performance Liquidity risk The bank may face a liquidity crunch if the investors back out Reputation risk The risk that customers might not invest in the company any more if they do not give them returns Credit risk The risk that the borrowers will default and hence it will face insolvency Chemical company Environmental risk The risk that the emissions from the factory may pollute the environment, giving the company a bad reputation that it is not socially responsible. Legal risk The political environment may lead to demand fluctuations e.g. production of certain chemicals such as uranium requires permission from the government Market risk The market risk is the risk that the raw material prices may fluctuate and increase the production costs. Health and safety risk Harmful emissions from the factory may have an adverse impact on the health of the employees and the community at large. The waste management may fail. Continued…

11. 11 RECAP  Define & compare (distinguish between) strategic and operational risks. [2]  Define & explain the sources and impacts of common business risks. [2]  Recognise & analyse the sector or industry specific nature of many business risks. [2]

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